Updated: Sep 7, 2021
In this article, I share my thoughts on the Chinese government's crackdown on Chinese tech companies. I am a bilingual and bicultural money manager for those following my blogs and investment strategies in the last few years. I have native fluency in Mandarin and Cantonese and speak some Japanese and Chinese sign language. For decades, I was educated and trained within both the United States and Chinese economic and educational systems. I've also lived in both countries. To this day, I continue to observe, analyze, and uncover the economic impact the U.S. and China bring to global financial returns.
Before 2020, most countries expected the U.S. Government to put Chinese tech companies back in line with regulations. Who would have thought it is the Chinese government themselves throwing the knockout punch? Is China out of their mind? Let me share my investigation of some facts and circumstances surrounding the Chinese tech company's crackdown.
1. China Gaming Crackdown
China tightened playing restrictions for those under 18, who can now only play 1 hour each day between Friday and Sunday. It is terrible news for companies that generate income from games, tournaments, and merchandising from youth. According to a report by Tencent Holdings, China has about 400 million e-sports consumers, 70 percent of whom are under 35. It also said there were 26 million new e-sports consumers last year, despite the coronavirus pandemic. I believe that this new policy will make an army of the new generation stay focused on work, study, physical exercise, and time to have a conversation with family and friends. Still, it is not fun but they will live. Realistically, what revenue difference does it make to allow kids to play 3 hours instead of 10 hours per week? It can be a long-term positive social effect, but how these reforms can affect the country's GDP growth rate in the future remains unknown.
2. Common Prosperity
President Xi stated that all these regulations introduce "common prosperity." What is "common prosperity?" Common prosperity, 共同富裕, was first mentioned in the 1950s by Mao Ze Dong. Here is my version of understanding. It is not a concept of get rid of the rich to help the poor. It is an ideology that allows some people to get rich first. Once they are rich, they must commit to supporting the underserved populations. To the one and only Red Capitalism country in this world, this means that high incomes, wealthy individuals, and companies must give back to society and redistribute their wealth. In the past ten years, China has had a light Tech policy (Data Privacy, Cyber security, antitrust laws, data mining, etc.). China tech companies have ballooned their wealth. It created ten new Billionaires on the world's wealthiest list and hundreds of tech IPOs listed on the US Stock Exchange. Jack Ma thought this was a dragon who couldn't blow fire. Now he knows. According to Wall Street Journal, Alibaba pledged $15.5 Billion to support government initiatives for social equality soon after President Xi mentioned common prosperity. I believe other Tech Giants such as NetEase, Tencent, Baidu and Bilibili will quickly follow. This idea is very taboo in western culture. Imagine our government ordering Amazon, Google, Apple, and Facebook to increase philanthropy and focus on the commonwealth for all, and they implement the plan within a week. I am curious how China can maintain its target as a 100% modernization by 2050 while more restrictions exist, or is it part of plan?
3. China Education Crackdown
China issued a new Family Education Facilitation Law covering compulsory parenting classes. I grew up in the Chinese education system. Parents spent tons of money to sign their kids up with different tutoring after an 8-10 hour school day from Monday to Saturday. According to China's national education association's press release, Chinese parents spend an average of $17,400 a year on extracurricular tutoring for their children. Some spend up to $43,500 a year on extracurricular tutoring. Recalling from my experiences in the Chinese education system, the study time started from 8:00 am to 2:00 am during the high school years. Sunday was a half-day off. The central conversation I had with my parents was surrounding grades, awards, private tutoring, and scheduling mandatory mealtimes. It's a huge culture shock China crackdown on private tutoring. But if you really think about the underlying circumstance, China's $120 billion private tutoring industry suffered as China sought to create a fair playing field in education for all economic levels. It is also a path to encourage a three-child policy to manage a supporting capital demand for their aging population.
However, on the other end of emerging markets, India's education-tech sector is booming perfectly. According to the data firm Venture Intelligence, in 2020, more than 4,500 ed-tech start-ups in India are providing an estimated 6 million Indian students remote learning platforms and centralized entrance exams. India is a country very much focused on high-quality education. The impact of COVID for India is also the beginning of a massive transformation for Indian youth to access high-quality online education platforms. As Simon Sinek stated, there is an advantage in disadvantage. One needs to look in the right place.
In conclusion, I went over my thoughts on the recent technology crackdown in China. I expect volatility but also opportunities in the Chinese tech sector. I have monitored the Chinese market for two decades; it is equally scary and resilient. For example, in September 2008, China surpassed Japan to become the largest holder of U.S. debt—or treasuries. In August 2010, China became the world's second-largest economy, and then in March 2018, Trump tariffs targeted China.
Here is a lesson I learned; the Chinese government almost always takes the riskiest steps to reform. The Chinese government has an ambitious growth target; you will continue to see more reforms released by China to build the foundations of their version of a balanced economy. Stay calm when you are in the middle of a roller coaster ride because all rides eventually reach the destination point. Don't jump off the rides just because your heart is beating fast during the ride. Don't you know how a roller coaster ride works? Don't get on the ride if you have existing health conditions. Again, China has immense growth potential, but it is not for everyone. Our portfolios focus on long-term investment. We allocate assets in different areas of the market, which are diversified in different leadership styles and investment cycles. We are also very committed to investing within the risk tolerance level of each of our clients.
I hope you will find this article helpful.
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