Published on 29 Apr 2022

Singapore firms undeterred by Chinese rule-book changes

Asst Prof Ru Hong says that while foreign firms in China may seem to have a lot of advantages and benefits like tax incentives on paper, it is a different story in practice

With Chinese authorities tightening rules across sectors in recent years, the regulatory climate may have become a more prominent aspect of doing business in the world's second-largest economy - and companies from Singapore, its largest foreign direct investor, are not immune from uncertainty.

From talks with clients, Ang Lip Kian, partner at Morrison & Foerster (MoFo), tells The Business Times that policy tightening "has been increasingly top of mind for business leaders from across the region" - especially as regulatory decisions in China "would have a greater impact on Singapore's business sentiment", compared with policy changes in other markets.

But China is "not a cowboy town", according to real estate veteran Goh Toh Sim, who has done business in China for more than 2 decades. He says that the measures being rolled out have clear policy objectives and are not arbitrary.

Indeed, the Singapore Business Federation has not received any feedback from members over regulatory developments in China, says executive director Annie Wang.

Rather, companies are concerned about Chinese border restrictions, and are keen to resume work trips to China, which "continues to be an important market for Singapore businesses", she adds.New rule book

Over-leveraging in the property sector has been a longtime priority for Chinese regulators.

As consumer technology platform giants emerged, the sector came under anti-trust scrutiny. The stock market also saw the suspension of Alibaba finance arm Ant Group's planned initial public offering in 2020, and the shock unwinding of ride-hailing firm Didi Chuxing's New York listing last year.

In 2021, China also imposed stricter curbs on the video game industry, and banned for-profit tuition for a wide swathe of students.

With all these developments, Goh, chairman of the manager of logistics-focused EC World Reit, goes so far as to doubt that Chinese real estate players will be allowed to list "for a long while", given interventions in the residential segment.

Lim Chung Chun, CEO of wealth management firm iFast Corp, says the financial technology (fintech) sector is expected to keep facing regulatory changes, in line with reforms that began in 2018.

Noting that tuition, online gaming, consumer platforms and real estate "have all borne the brunt of escalating regulatory reform" in the past year, Shanghai-based MoFo partner Li Ruomu says foreign entities in these sectors, or activities such as mergers and acquisitions, "will face important questions and consideration" from regulators.

"As legal advisers, we will be keeping a particularly close eye on heightened regulatory interest around data security, anti-monopoly reviews, restrictions on the use of human genetic data and the foreign listings of Chinese companies for our own clients," she says.

Still, Singapore firms seem unfazed by the regulatory risk involved in doing business in China, especially when weighed against the rewards of its growing market.

Education technology firm Acktec Technologies expanded into China in 2020 and was exploring opportunities for both its children and adult learning business arms.

In the wake of last year's tuition clampdown, its CEO Rayvan Ho tells BT that Acktec's Chinese business is now focusing on adult worker training - especially in the agriculture, electric car manufacturing, and food and beverage sectors.

He rules out a retreat from the Chinese market for now, saying: "There is so much regulation now by the Chinese government... but definitely the market still moves, because there is a need and demand from the domestic market."

iFast does not deal in securities in China and was not affected by recent guidelines on fintech data protection from the People's Bank of China, but "we think that the regulatory changes point towards standardisation of financial instruments, which is particularly beneficial to mutual funds", says Lim from iFast.

Such funds are a core product for iFast's nascent mainland China business, which is loss-making but saw revenue grow by 37.3 per cent year on year in FY2021. Reported assets under administration came to 2.33 billion yuan (S$489.1 million) as at end-2021.Untouched sectors

Suan Teck Kin, research head at UOB, notes that "most of the Singapore companies are in the manufacturing sector", which has the largest foreign direct investment (FDI) inflows in China.

This sector has been largely unaffected, according to an unfazed Khoo Boo Hor, CEO of precision plastic parts manufacturer Sunningdale Tech, who says: "The tightening is on software. We are producing parts or hardware."

Meanwhile, scrutiny over the property market has been directed mainly at the residential segment.

Real estate firm Savills' China research head James Macdonald notes that Singapore developers exposed to the residential market "tend to focus on leading first and second-tier cities whose residential markets have held up a lot better than those of the lower-tier cities".

Singaporean investors also prefer the commercial and industrial segments, where regulations "tend to be much lighter", he adds.

Goh agrees that the office sector, retail malls and logistics sector have not seen the same cycles of tightening and relaxing of regulations as, "in general, they (the regulators) still leave it to the markets".

The warehouse and logistics segment continues to be attractive for foreign developers, and business parks also look good, he notes.

Meanwhile Temasek-linked CapitaLand is a prominent foreign real estate player in China, with home projects among its developments.

But a spokesperson referred BT to remarks from CapitaLand Investment CEO Lee Chee Koon, who said in February this year that the challenges in the Chinese market "will present interesting investment themes". No elaboration has been given so far.

Lee, who expects more industry measures to be introduced until at least the end of 2022, has also said that the wave of tighter real estate financing rules even offers foreign firms "a more even playing field".

The CapitaLand Group's development arm went on to announce in April that it has bagged prime residential sites in Wuhan and Chengdu for 3.49 billion yuan in all, with plans to build 1,581 units.

UOB's Suan acknowledges the impact of regulatory actions on business costs in areas such as minimum wages, but says that, in general, "if you are not in a monopolistic position - I don't think many Singapore companies are, mostly local companies - you will not be affected directly" by rule changes.Risk and reward

Foreign businesses may be wary about the warmth of their welcome in China, given the lengthy trade war with the United States that began back in 2018, as well as policies like the Made in China 2025 plan, meant to boost high-tech domestic production.

Last year, 59 per cent of US businesses polled by the US-China Business Council said they were less optimistic about the business climate than 3 years before, and 44 per cent named domestic innovation policies a protectionist challenge.

"If you look on the policy side, on paper, foreign firms in China actually have a lot of advantages and benefits like tax incentives," says Ru Hong, an assistant professor at Nanyang Business School who studies the Chinese economy.

"In practice, it's a different story. Domestic firms have all these connections and they know the market better... It doesn't make sense for the Chinese government to hammer domestic firms but, at the same time, help the foreign firms."

But other watchers told BT that Singapore is helped by close trade ties with China and a role as a gateway to South-east Asia, as well as government-to-government (G2G) partnerships, including in sensitive fields such as digitalisation.

"Usually, for those for those places with G2G (projects), Singaporeans coming in usually will be given more priority," says Chia Hock Lai, co-chairman of the Blockchain Association Singapore, who names Shenzhen, Suzhou and Chongqing as some key markets.

Singapore companies have also already weathered the trade war and found few ill effects on them.

"All this stuff doesn't really impact us. Maybe our customers, because we supply parts to original equipment manufacturers and multinationals - maybe it's more on that," says Sunningdale's Khoo. He adds that "so far we don't have any problems manufacturing" in China.

TSMP Law Corp joint managing partner Stefanie Yuen Thio also notes that the challenges lie more in China's Covid-19 stance than in its regulatory climate.

"Singapore is a big trading partner of China and our countries remain good friends. While companies from the US and more recently Europe are pulling out of China because of geopolitical tensions, we are not seeing this from Singapore businesses," she said.

Granted, the crackdown climate still poses significant drawbacks, such as business uncertainty.

"If you crack down too hard in a very short time period, too aggressively, it will hurt the private sector," says Prof Ru, noting that companies "must be super confused" as well by regulatory uncertainty and the prospect of policy flip-flops.

While the Chinese government pledged in mid-March to take a "standardised, transparent and predictable" approach, Ru stresses that "it is very important to keep the policy consistent over time".

Similarly, Savills' Macdonald tells BT that "increased regulatory oversight is unlikely to have run its course, although there has been a pause at the moment as authorities look to stabilise the market".

Some 66.7 per cent of analysts polled by the Monetary Authority of Singapore (MAS) named a slowdown in China as a key risk to the Singapore economy in end-2021 - up from 30 per cent last September, when the MAS report had noted that weaker Chinese growth could stem, "for instance, from recent regulatory developments".

UOB's Suan adds: "If you look at the equity market performance in China, it has been very poor. I think this regulatory overhang is still there. The investors are still worried about what else is coming."

But Lim from iFast, says: "We are comfortable with the fact that shorter-term changes do not impact how we see the business transforming in the longer term."

Adds Acktec's Ho: "There are still opportunities in China in the demand in the domestic market, and there's still growth in tech.

"The scale of growth might have slowed down a lot because of these measures, but in general, there are still pockets of opportunity to work with Chinese companies."

Noting that Singapore takes a more liberal approach than China to technologies such as video games and cryptocurrencies, Chia identifies another silver lining: "We are seeing a net outflow of this kind of companies... Now there are a lot of Chinese blockchain companies in Singapore, and some of them are pretty large in size."

Source: The Business Times