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China internet : a little bump in the road

Examining the implications of the newly government-issued draft anti-monopoly guidelines on China's online economy.
20. Nov 2020
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    Key takeaways

    • On 10 November, the Chinese government issued draft anti-monopoly guidelines for the online economy, which resulted in share price volatility of Chinese internet companies
    • Despite the short term uncertainties, the industry’s medium to long-term structural drivers, including the digitalisation of the economy and supportive government policies, remain intact
    • The trend of increasing digitalisation is a clear benefit for Chinese internet companies, as evidenced by the record-breaking Singles’ Day sales figures of 2020
    • More investment in “new infrastructure” including 5G networks, AI and data centers is an area of focus under China’s 14th Five-Year Plan

    Antitrust guidelines: roadblock or speed bump?

    On 10 November, the Chinese government issued draft anti-monopoly guidelines for the online economy, aimed at preventing platforms from dominating the market and at protecting fair competition. Anti-competitive practices highlighted in the guidelines include but are not limited to inducing vendors to using only one platform, engaging in differentiated pricing with the help of behavioral big data collected from customers and charging unreasonably low prices for products/services to drive out competition. In the days following the announcement, an industry heavyweight has said the new rules would have a limited impact on its key businesses of games, social and entertainment. But as the government is still soliciting industry input, the guidelines lack details around implementation and impact on major players remains unclear.

    Uncertainty is the kryptonite of stock market performance, and so the Hang Seng Tech Index, which is made up of the 30 largest technology companies listed in Hong Kong – majority of which are China-based companies, experienced a double-digit percentage drop over the course of two trading days following the antitrust announcement. If history is any guide though, Chinese internet stocks tend to rebound shortly after overreacting to news of fresh regulations. In 2019 for example, shares of online gaming companies initially fell after the announcement of new anti-addiction measures – which imposed a daily time limit on online gaming for youngsters – but those stocks recovered promptly after. Indeed, by the end of the week of the antitrust regulations announcement, the Hang Seng Tech Index had already rebounded from the low point of the sell-off that took place earlier in the week.

    Fig. 1: Hang Seng Tech Index (6-16 Nov 2020)

    Fig. 1: Hang Seng Tech Index (6-16 Nov 2020)

    Source: Bloomberg, data as of November 2020

    For illustrative purposes only. Investment involves risks. Past performance is not indicative of future performance.

    While the guidelines may continue to present an overhang on the share prices of Chinese internet companies in the short term, we believe that the aim of the government’s regulations is to promote healthy long-term growth of the industry. Meanwhile, the industry’s medium to long-term structural drivers – a global economic recovery, digitalisation of the economy and supportive government policies – remain intact.

    A potential vaccine = a potential return to normalcy

    The recent promising announcements of COVID-19 vaccine candidates should be good reason to expect a speedier recovery of the global economy. Early testing data shows the vaccines are potentially more than 94% effective. A return to normalcy by the end of 2021 no longer seems like a pipe dream. As restrictions get lifted and the world economy gets back on track, the global population will have more spending power to deploy on internet-based activities.

    While the prospect of potential vaccines are encouraging, China has not been nearly as hard hit by COVID-19 when compared with other major economies, as the country has been relatively successful in containing the coronavirus outbreak very early on. As a result, China is undergoing a faster recovery than the rest of the world and remains the only major economy projected by the IMF to see positive GDP growth in 2020. The country’s recovering domestic demand should continue to benefit China’s internet companies and help accelerate the industry’s growth drivers.

    Fig. 2: China’s real GDP growth (%)

    Fig. 2: China’s real GDP growth (%)

    Source: NBS, IMF, data as of October 2020

    For illustrative purposes only. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets.

    An irreversible transition to digital

    The long-term structural growth of China’s online economy is an immutable fact. With or without COVID, the traditional economy is transitioning towards a digital economy. In the last decade, online retail sales as a percentage of total retail sales in China has increased by 9 times, from a mere 3% in 2010 to a forecasted 28% in 2020. Not only has the digital economy been gaining a bigger share of the pie, the pie itself has also grown a lot bigger – all the while as online shopping has been gaining ground, total retail sales have also increased almost three times since 2010.

    Fig. 3: China’s online sales as a % of overall

    Fig. 3: China’s online sales as a % of overall

    Source: Goldman Sachs Research, data as of September 2020

    For illustrative purposes only. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets.

    The trend of increasing digitalisation is a clear benefit for Chinese internet companies, as evidenced by the record-breaking Singles’ Day sales figures of 2020. What started off as a celebration of singledom in China, Singles’ Day on 11 November has morphed into an annual online shopping frenzy driven by attractive discounts, somewhat akin to the US’s Black Friday and Cyber Monday or Amazon’s Prime Day. For two of the top internet companies in China, the combined sales of Singles’ Day shopping festival, which was extended to 11 days in 2020, was USD 115 billion, representing a significant increase from the previous year. As China emerges from the pandemic, the record sales from the shopping festival suggest that China’s consumption recovery is on track. For a fair comparison, let’s look at the sales numbers in 2019 – Amazon then recorded global Prime Day sales of USD 7.2 billion while the top two Chinese e-commerce platforms brought in USD 69.1 billion on Singles’ Day in 2019.

    Fig. 4: Singles’ Day sales of top two Chinese e-commerce platforms*

    Fig. 4: Singles’ Day sales of top two Chinese e-commerce platforms*

    Source: Statista, data as of November 2020
    *2020’s shopping festival was extended to cover an 11-day period (1-11 November)

    For illustrative purposes only.

    China policy: betting its future on tech

    Despite the recent move to rein in tech giants, the Chinese government has been providing support for and placing strategic focus on internet related sectors. Fiscal policy support post Covid, for instance, featured “new infrastructure” which consists of next generation IT, including 5G and AI, and new digital commerce. To accelerate its bid for global leadership in key technologies, China will invest an estimated RMB 10 trillion (USD 1.4 trillion) over six years to 2025, through the roll-out of everything from 5G wireless networks to data centers that can power AI and Internet of Things (IoT).

    Technological innovation, as well as high quality growth and domestic demand, were featured in China’s latest economic blueprint, the 14th Five-Year Plan (2021-2025). The pursuit of self-reliance in innovation and technology will be a pillar strategy for national development in the next five to 15 years. Digitalisation of the economy – more investment in “new infrastructure” including 5G networks, AI and data centers – was also an area of development under the five-year plan. While details of the plan are still lacking, we believe the dual circulation policy, which places a strategic focus on strengthening self-dependence while still deepening efforts to open up the economy, will be prioritised. For internet companies, it remains to be seen how the potential implementation of the antitrust guidelines for online platforms will be carried while balancing China’s tech ambitions. All in all, China is determined to have the capability not just to maintain but to innovate on network infrastructure that drives the future of the internet.

    Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.