Market Report

China Thru Trains – All change

by Alexious Lee / Feb 14, 2019


Thousands of leading P2P, shared-economy and ride-hailing platforms face liquidity crunches in 2019-20. Increased government oversight, tougher KYC and AML rules, and higher capital-gains taxes for PE/VC investors could trigger a shift in allocations from primary markets to A shares.

Fallen unicorns
Institutional and household investors are set to lose billions of dollars of investments and savings as hundreds of P2P and shared-economy platforms shut down in 2019-20. Regulatory oversight will rise as Ofo (No.1 bike-sharing) and TOGO (No.1 car-sharing) could not repay Rmb2.0bn and Rmb4.5bn of user deposits.

Higher capital-gains tax or more disclosure
State Administration of Taxation clarified that general and limited partners (including HNWI) must adhere to the capital-gains tax rate of up to 35%. Exceptions that allowed for a flat 20% rate no longer apply. To safeguard investors, regulators are stepping up due diligence (KYC and AML) to combat outflow momentum, market volatility and pledged-share risk. Newly raised AUM for primary-market (VC/PE) funds already fell 80% YoY in 2H18 and 30-plus large-scale private fund managers faced compliance investigations in 4Q18.

Clear political signals benefit secondary market
Regulators are removing obstacles to allow public, private, institutional and special local-government funds to enter the stock market to bail out pledged-share risk. CBIRC recently encouraged insurers to invest up to 30% of their funds in A shares, and brokers/banks will allow pledged shares to be refinanced. Allowing SOEs to buy back shares (for employees) coupled with debt-equity swaps (Rmb500bn) means commercial banks can indirectly support the market.

Fund flows
Since 2010, funds have flowed away from the secondary market to invest in “new economy” opportunities via the primary market. The high-profile IPOs of, Alibaba and others between 2011 and 2014 were milestones in the history of Chinese and global financial markets. Hundreds of thousands of Chinese became millionaires, either by working for a startup, investing in them, or holding publicly-traded shares of internet-related equities from as early as 2010. The number of private fund managers (PFM) grew to 60,000 in 2018 (from 2,000 in 2011) with assets under management (AUM) in excess of Rmb12tn (US$1.5tn), from a mere Rmb10bn in 2011.

We see 2019 as a turning point
In contrast, stock-market-related AUM was much slower, with occasional outflows. The Shanghai Composite peaked at 5,166 in June 2015 and trended down to as low as the 2,460 level. Since 2014, institutions and private investors (especially HNW) have favoured primary-market investments (over stock market) and the combined AUM of venture-capital (VC) and private-equity (PE) related funds ballooned by 300% to Rmb7.09tn by end-2017, representing nearly 65% of the reported PFM’s AUM. We see 2019 as a turning point, when funds start to favour the secondary market.

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