Bankers and lawyers expect unprecedented regulatory crackdowns in China to be extended into 2022, Reuters reported on Dec. 21. This trend aligns with Xi Jinping’s plan to fortify state control over the private sector when he enters a historic third term as China’s Communist Party (CCP) leader.

The year 2021 has been marked by Beijing’s series of blows to the private sector, ranging from punishing antitrust violations, banning private tuition groups, restraining property developers’ debt binge, and disabling offshore listings.

According to analysts, those actions are likely to continue in the next year, with particular targets on data protection and deals involved in national security risks. At the same time, the government aims at stronger dictation over private companies.

“Investors have been forced to consider a series of new regulatory risks over the last year, and those fears are not going to disappear any time soon,” said Logan Wright, director of China markets research at Rhodium Group.

“We’ve also seen some bureaucratic institutions successfully expanding their purviews in recent months, which broadens the range of potential regulatory concerns for investors next year,” he added.

In November, China promoted the status of the antitrust unit of the State Administration for Market Regulation to the deputy-ministerial level, giving it more access to resources for probing deals.

A signal for coming measures is a planned new prohibition of brokerages offering offshore trading services to mainland clients due to data security and capital outflow concerns, reported last week by Reuters.

Moreover, according to Reuters’ sources, Beijing, which used to take minority stakes in private news outlets, now does the same in firms possessing large amounts of key data.

Alex Roberts, a Shanghai-based counsel at Linklaters, said regulators would also make more thorough investigations into big technology enterprises’ network security and expect a more extensive overlap of data and antitrust regulators’ supervisory objectives.

“The tightening controls are unprecedented in the years since Deng Xiaoping gradually opened the economy,” said Andrew Collier, managing director of Hong Kong-based Orient Capital Research.

Regulatory instability and consequences

China is about to enter a critical year with CCP leader Xi Jinping almost guaranteed to lengthen his reign over the third term. The moves mentioned above align with Xi’s economic agenda, which focuses on strengthening party control over the private sector and more “equal” wealth distribution.

“I don’t think the regulatory structure is yet complete. It will take a couple years to work out,” said Collier.

Facing regulatory instability, investors, especially private equity and venture funds, have kept a cautious attitude in allocating their money, leading to more protracted due diligence and tougher valuation negotiations, Reuters cited bankers.

Consequently, sectors regarded as favored by the government, such as semiconductors, new energy-related technology, and supporting areas of China’s carbon reduction goals, have become new destinations for many investors, according to Reuters.

Nevertheless, dealmakers expect clarity on China’s newly proposed offshore listing mechanism that will necessitate data screening from the state’s cybersecurity and securities watchdogs.

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