October 17, 2021

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Goldman Sees Limited Long-Term Damage From China’s Crackdowns

(Bloomberg) — China’s recent regulatory tightening will cause limited damage to the country’s long-term economic growth and investment prospects, although financial markets will likely remain volatile in the short term, according to Goldman Sachs Group Inc.

The crackdown on sectors from technology to after-school tutoring was intended to make the economy more equitable and productive in the long term, rather than to target private companies broadly, the investment bank said in a report Monday, citing views from a number of experts including its China economist, Hui Shan, and Fred Hu, founder of Primavera Capital Ltd.

Shan said the government intends to regulate specific actions such as anti-competitive behavior and data collection that infringes privacy and national security. Authorities are placing more emphasis on technological innovation than before, but the focus has shifted to “hard tech” industries, such as semiconductor, aerospace equipment and special materials, from “soft tech” sectors, like internet companies, she said.

An analysis of China’s five-year economic development plan suggests other key sectors will also be promoted, according to Shan: green manufacturing in the chemical and paper-making industries, sports and building management services, internet security systems and domestic consumer brands.

Goldman analysts argue that China remains investable because regulations are not likely to “structurally impair companies’ earnings,” according to the report. The strategists prefer exposure to sectors aligned with China’s national development goals, including hard tech and green energy sectors.

Primavera’s Hu said China’s regulatory goals to rein in tech businesses are similar to what other countries are doing. The key difference is that “China has taken a far stronger, and arguably, more heavy-handed approach to regulation and enforcement, which has clearly had a devastating impact on investor sentiment and markets in the short term,” he said.

George Magnus of Oxford University and Jude Blanchette of the Center for Strategic and International Studies, who were also cited in the Goldman report, see stronger political motivations for the regulatory moves and are more concerned about the economy’s long-term growth and investing implications.

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