China Pathfinder: Q4 2021 Update

China moved farther from market economy norms in the fourth quarter of 2021. The real estate sector continued to dominate the headlines as Evergrande, the country’s largest property developer, finally defaulted, along with peers Kaisa, Sinic Holdings, Fantasia, and Modern Land. Meanwhile, the government’s regulatory crackdown intensified, culminating in ride-hailing giant Didi’s forced delisting from the New York Stock Exchange. The move may herald a broader unwinding of foreign listings, particularly for data-heavy Chinese companies.

While VC flows to China’s tech startups showed a recovery from a low in 2020, the main targets for this investment were hardware technology sectors favored by Beijing. With expectations for a slowdown in 2022 mounting, China’s leaders dropped their fiscal restraint and promised new stimulus at their year-end Central Economic Work Conference (CEWC).

The bottom-line assessment for Q4 shows Chinese authorities were active in four of the six economic clusters that make up the China Pathfinder analytical framework: financial system development, competition policy, innovation, and portfolio investment openness. There were fewer developments in the direct investment and trade clusters. In assessing whether China’s economic system moved toward or away from market economy norms in this quarter, our analysis shows a primarily negative shift.

This issue of the China Pathfinder Quarterly Update highlights Didi’s forced delisting. Didi’s story warns private companies in data-heavy industries that running afoul with regulators will result in severe penalties, regardless of the company’s size. Beijing’s intervention in the Didi listing resets risk assumptions. It is no longer theoretical that the state might sacrifice economic dynamism in pursuit of what it perceives to be greater national security. Now, the question is how often and how far down the value-added ladder authorities will use these tactics.