Companies Behaving Badly Alarm Beijing: What to Watch in China

(Bloomberg) –Beijing is increasingly meting out punishment to companies whose behavior — past or present — is seen as somehow posing a threat to China. This is turning what were considered slam-dunk trades into a minefieldfor investors.

Didi is just the latest example. A successful company, a successful IPO — and then came Beijing’s displeasure in the shape of the app ban. The losers are the investors and other data-rich private firms eyeing the public market for funding.

The companies can be grouped into three distinct categories.

First, there are the firms that expanded with too much debt. These include financial giant Huarong and property developer Evergrande. Once considered too big to fail, the sheer size of their borrowing now represent a threat to financial stability. These firms typically grew fast in the years before 2017, when concern over mounting leverage spurred President Xi Jinping to launch a deleveraging campaign. Recent defaulters in this category include Unigroup, which once aspired to be China’s first semiconductor champion.

Second: the tech giants. Alibaba, Ant, Didi, Meituan — the list goes on. While they are typically highly successful, and represent the vanguard of China’s technological prowess, they also own vast amounts of sensitive user data. This, along with their dominant position in their field — from fintech to ride-hailing to food delivery — is increasingly seen as a risk to the Communist Party. In the past year, Xi has made gaining control of this data a priority.

Third: Private tutoring companies. These wildly profitable firms have been subjugated this year amid concern they represented a threat to socio-economic stability by increasing the cost of raising children. Shares of U.S.-listed firms such as Gaotu Techedu and Tal Education have plummeted this year as Beijing imposed increasingly punitive rules on the industry.

With Xi focusing on potential risks to Communist Party rule as it turns 100 years old, it’s unlikely he and his administration will ease off pressure any time soon. For investors, this makes buying Chinese assets more and more complicated as sure bets suddenly turn into investments rife with unpredictability.

The MSCI China Index is now down for the year, while the global gauge is up more than 12%.