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AUG. 20, 2021

Rapid Growth and Gross Inequality

Over the last two months, we have been hearing lots of news from China, mainly related to its tech giants and the government crackdown on after-school education companies.

Those who have been following the news flow coming from the country and the moves of the Chinese Communist Party over the last year were not surprised when the government unveiled the latest regulatory crackdowns.

Already in June, visiting an after-school club for elementary students, Xi Jinping hinted at a change in the regulatory policy, recognizing the enormous pressure students and their parents are exposed to within the educational system, and the effect it has on their mental health.
As for the crackdown on the gig economy, the working conditions of gig workers over the past two years fueled growing discontent and social unrest. In one extreme case, a delivery driver set himself on fire in protest over unpaid wages from, Alibaba’s food delivery platform. This resulted in the announcement at the end of July of new impositions for delivery companies: workers need to have a salary above the minimum wage, insurance and less strict delivery deadlines.

The graph on the left represents the performance of the top 10 holdings of the MSCI China Index from June 30 to today. The average performance of these names is -24%, versus an overall performance for the index of -19%. Many of these names are directly or indirectly impacted by the changing policies, in particular Meituan, a Chinese shopping platform with a growing food delivery business.

The focus, in managing a Chinese portfolio at the moment, needs to be on fully understanding the ultimate goal of the government and which additional sectors or industries might be affected in the future. The emphasis, in the latest government communications, has been on common prosperity, and subsequently, on curbing social inequality. In this sense, most of the local managers we have spoken to, expect the next crackdowns to be in the healthcare space, in the luxury goods space, and in residential real estate. We remain cautious, waiting for a clear bottom, to enter a market that is becoming oversold.

We thank you for the continued support.

The FAM team