In the modern era China faces many dilemmas associated with state intervention and regulation of its enterprises. Ironically, one of the biggest emanates from a policy introduced many decades ago to combat population growth. Their hitherto one child policy.
In May of this year census data indicated that the world’s most populous country recorded the slowest population growth since the early 1960s creating a more rapidly ageing population.
Census data is extremely sensitive in China because it shapes government policies from fiscal outlays to family planning rules. Final figures are only published when there is ‘agreement’ across all government departments!
The current low fertility rate puts the number of children born in China at 1.3 on average, which is lower than the US and, wait for it, lower than in Japan.
This ageing aspect carries many implications for the coming decades, especially so for creating a sufficiently large labour force to support the country’s economy and the elderly. And as we will discover later China’s shifting demographics carries implications for education and technology companies too.
China’s population problem explained….
Having eliminated the much hated one child policy, the authorities are now considering removing the expanded two-child policy. They believe this will add impetus to population growth, however, critics report that even this is not sufficient to avoid problems. A key issue it seems is entrenched costs in the private education sector.
Source: Bloomberg 06/08/2021
The cost of private tutoring to advance a child’s education is seen as a possible deterrent to having more than one child. Ironically, with less children per family, private education has flourished because it is more affordable when only paying for one child.
Private education in China is currently a hugely profitable industry attracting revenues of over $100bn. However, this sector looks set to shrink, dramatically in the coming months and years.
To allow more children access to good quality education, and to ease parents’ concerns about having more than one child, drastic new regulations are being implemented. Aimed at the private education sector they include –
- a blanket ban on companies teaching core subjects
- erecting barriers for raising capital
- stopping listings on stock exchanges worldwide.
- foreign investment is now deemed unacceptable.
All the above shows just how serious the authorities are about curbing private education and placing more emphasis onto state provision. The key aim here is to avoid impediments to population growth based on costly education.
This recent shift in focus resulted in education companies stock prices plummeting last month, effectively wiping out their revenue opportunities.
Chart 2: Chinese Education Stocks – Price Change from 18th to 16th August 2021
Investors in the education stocks now face many uncertainties. Investment bank JP Morgan stated, “It’s unclear what level of restructuring the companies should undergo with a new regime and, in our view, this makes these stocks virtually uninvestable.”
In terms of the practical implications, there are many. Hundreds of thousands of teachers and staff whose jobs have effectively been deleted from the market must await their fate. If the government intervenes and reallocates them to state funded education, livelihoods will be preserved, but no one knows yet what the outcome will be. Moreover, private tutoring will still be sought out by parents, which may drive up prices for teaching non-core subjects.
Meanwhile, state intervention is also happening in the technology sector…..
This is being felt most acutely in the video games segment whose products are enjoyed by millions of children and adults alike. This week, the Economic Information Daily, a Chinese state-run newspaper, released an article stating that ‘the gaming industry is Spiritual Opium that has grown into an industry worth hundreds of billions,” and ‘No industry, no sport, can be allowed to develop in a way that will destroy a generation’.
The publication of this article resulted in a sell-off of China’s largest social media and video game firm Tencent. The company’s share plummeted nearly 10% on the morning of the 3rd of August, wiping $60 billion from its value! European and US game developers also took a hit, with Activision Blizzard and EA shares dragged down by 3.8% and 2.8% respectively.
Source: Morningstar 06/08/2021
The most interesting aspect of the intervention though is what happened after the publication went to print. Initially, Economic Information Daily’s article singled out Tencent’s most popular mobile video game, Honor of Kings (not misspelled) saying, ‘this generation of children are unhealthily addicted to video games.’ It then became apparent that wording used in the print version had been toned down in the online version. Clearly, even this wasn’t sufficient for the state authorities because the entire article was subsequently deleted and removed from the paper’s website.
Perhaps the authorities noticed that Tencent had imposed restrictions; children restricted to 1 hour of game time per day and all in app purchases banned. Or perhaps the state noticed how much of an impact this would have on profits! Video gaming profits are driven to a large extent by rapid population growth, a strong feature in China historically, but as mentioned is this is now looking less assured. Rolling back on intervention, when a greater need is uppermost, shows the Chinese state can also be pragmatic. In this case the profit motive wins. However, this holds true provided investors and company management know exactly who is in control!
Concluding Thoughts
Large profits driven by capitalism are acceptable if Chinese companies know their place in society. For example, they must avoid overstepping any state dictated centralised aims such as tackling slowing population growth.
Policy changes and government sponsored newspaper articles are released in China without warning, making investing challenging. A roller coaster at times.
Technology and education stocks represent prime examples of political risk from investing in China’s stock market, requiring careful consideration and good local knowledge.
Chinese politics is intertwined with manipulation of the private sector and its citizens, dictating what is taught and by whom.
