Analysts are now debating what “common prosperity” means when it comes to investing in Chinese stocks. A decade ago, the equivalent buzzword was “income redistribution reform”.
A key consequence of that policy, observers now generally agree, was reducing the influence of state-owned heavyweights such as China Mobile on the Chinese economy and making room for private sector firms to drive growth and innovation.
What happened next? China Mobile – hitherto one of China’s fastest-growing firms over the prior two decades, was pretty much reduced to ‘public utility’ status, with profit growth reduced to low single-digits.
Interestingly, a similar debate has been doing the rounds on social media as analysts now wonder whether this is again the Chinese government’s overriding objective for large internet firms. That is to transform them into companies that provide a utility-like service to the public, rather than focusing on the kind of earnings growth needed to satisfy stock market investors.
That notion got more traction after state planner the NDRC (National Development and Reform Commission) and 13 other government agencies said they will join hands to issue measures to boost growth in the services sector (on the grounds it has been particularly hard hit by the Covid-19 pandemic). First in the firing line: the joint statement said online food delivery platforms will be required to lower the fees they charge meal vendors and that the platforms will also need to grant “temporary preferential policies” such as lower commission fees for restaurants in rural areas affected by the pandemic.
The fees charged by delivery platforms are expected to be reduced by at least 5% under the new policy, which may translate into a 25% decline in revenue for large players such as Meituan and Ele.me, reported Jiemian, a news portal.
The policy announcement came at a time when analysts were suggesting that the central government’s crackdown on the internet sector, which has gone on for more than two years, was about to take a breather. That assessment turned out to be off the mark.
The share price of Meituan, the biggest food delivery platform, took an immediate dive when the news broke, falling more than 15% in a session. The Hong Kong-listed firm’s market value has dropped more than 50% in the past year to about $130 billion.
China’s restaurant industry has been going through a tough time. Besides a crop of more fortunate dining chain start-ups backed by private equity investors with a goal of becoming national brands, many restaurants have been suffering from rising operating costs. Amid a record climb in producer prices, heavyweights such as KFC are better able to absorb higher costs but most of the mom-and-pop stores have been struggling, Jiemian noted.
The restaurant industry, meanwhile, has emerged as a key segment of the Chinese economy, providing more than 10% of the country’s consumer spending in 2021. But business conditions are causing shrinkage: official data has shown that more than one million catering businesses were ‘deregistered’ last year, of which 400,000 were fast-food stores and 350,000 were milk-tea shops. If the sector continues to downsize, it will add to pressures on urban unemployment, a key concern for policymakers keen on maintaining social stability.
So it is hardly surprising that economic planners are now turning to food delivery platforms to give the catering sector a boost, given that the delivery brands have emerged as the most important channel for small restaurants to drive income growth amid the pandemic.
In recent years Meituan has also been hit by new social policies to raise income for its delivery riders. Now its income is also set to face renewed policy pressure as sacrifices a slice of its revenue pie to help millions of small restaurants that are connected to its platform.
It’s argued that in the long-term Meituan cannot thrive if the broader food and beverage industry is struggling. But its management’s gnawing fear must be that the company is edging ever closer to the ‘public utility’ category China Mobile metamorphosed into around 2010, the very same year that Meituan was launched as a scrappy start-up (for more on its colourful background see WiC498).
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