From two property policies a day to a 180-degree turn in financial regulation — how did policy change get so fast?

Constantly changing policy is also changing what people expect of the future.

On February 1, 2018, people who wanted to move money into Yu'e Bao found that from then on they would have to grab a slot at 9 a.m. every day.

On May 16, more than 300,000 people filled in forms to register their residency in Tianjin. Four adjustments over the next 96 hours made their plans uncertain again.

On November 7, daigou resellers breathed a sigh of relief when a Ministry of Commerce spokesperson said e-commerce retail imports would continue to be regulated as personal items. A month earlier, over the National Day holiday, Pudong Airport had started cracking down on daigou.

On November 29, film and TV studios around the country began receiving notices telling them to make up three years of unpaid taxes. Over the following month they paid 11.5 billion yuan in back taxes — more than the whole industry earns in profit in a year.

On January 29 this year, at least 46 A-share companies announced they had swung to a loss for 2018. A day later, the detailed rules for the STAR Market came out.

All these changes, large and small, close to some people and distant from others, happened over the past year, and behind every one of them lies the same cause: a change in policy.

In China, the visible hand has never handed control of the market entirely to the invisible one. But in recent years the interventions have come more often and reached further. Their effects have seeped into every detail of the Chinese economy.

The market that hand faces, though, has changed beyond recognition in 20 years. In 1999, China's GDP had just reached 9 trillion yuan; the A-share market had 949 listed companies, worth 2.5 trillion yuan in all.

There was no UnionPay yet and no China Banking Regulatory Commission, and domestic credit across the country came to 11.7 trillion yuan. That year Starbucks opened its first store in Beijing and did not want an equity stake, doubting how much Chinese people would spend; Pony Ma, Jack Ma and the whole internet industry were not thought to amount to much.

By the end of 2018, China's GDP had reached 90 trillion yuan and its debt 199 trillion yuan. The 3,563 companies listed on the A-share market were worth 48.67 trillion yuan combined. The two biggest internet companies were each worth more than the largest central state-owned enterprise, and both had been placed on the list of firms considered too big to fail.

Facing a market this large, growth this slow and a shift in the population's age structure already under way, regulating has become harder and harder. Over the past year we have also seen more frequent adjustments, and turns closer to a full 180 degrees. That holds for tax, which touches every person and every company; for property, which soaks up 80 percent of what households have left over; and for the financial markets that drive the whole economy.

450 rounds of regulation in a year, and a property policy that lasted 4 hours

For the past fifteen years, China's property regulation has swung back and forth between keeping the market from overheating and keeping it from going cold. In the view of Xia Lei, deputy head of the Evergrande Research Institute, it keeps switching between "stimulate — tighten — stimulate again — tighten again."

By the count of the Centaline Property Research Center, 450 property regulation measures were issued in 2018, a record, an average of two every working day. Of those, 135 purchase restrictions came in the first half of the year alone, along with 176 mortgage restrictions, and 51 cities plus the whole of Hainan restricted resale.

The last time the central government relaxed purchase and mortgage limits on any scale began in March 2015, when the central bank and the Ministry of Finance lowered the ceiling on down payments for second homes so that people could borrow more. At the end of that year the central government also set the task of clearing the property market's inventory.

Some cities had started loosening earlier. In 2014, 46 of them scrapped purchase restrictions or lowered the bar. In mid-2015, Xi'an offered residency for a whole family to anyone who bought a home. These policy changes, on top of demolition compensation that enlarged people's purchasing power, sent home prices in some second- and third-tier cities up quickly.

Take Hangzhou. In May 2010, its home prices briefly passed Beijing's and Shanghai's to become the highest in the country, at about 22,066 yuan per square meter.

Higher down payments, higher mortgage rates and other purchase restrictions followed close behind, and stayed in place until 2014. As a result, Hangzhou's home prices fell more or less continuously from 2011 to 2015. In December 2014 the city even posted the steepest year-on-year drop among the 70 large and mid-sized cities the National Bureau of Statistics tracks: 10.3%.

Prices only steadied in 2014, after the city lifted the ban on buyers from elsewhere and let buyers borrow more — and then rose across the board in 2016, pushed up by the G20 summit.

Local governments loosened mainly because the tough purchase limits introduced around 2010 had held prices down for years. People with money to spend could not buy a home, and people who already owned one would not buy another because prices were not rising. Weaker demand in turn sapped developers' appetite for buying land and building on it, which set governments back on everything from land-sale revenue to growth targets.

That, in turn, was the motive for relaxing the limits: land sales bring local governments the equivalent of 40 percent or more of their fiscal revenue every year.

"Without pressure from the central government, local governments working under the so-called city-specific principle have no reason of their own to hold the property market down. Loose monetary policy has handed the public and businesses plenty of ammunition to invest with," the Zhejiang Daily Media Group's property research institute wrote in a report on the Hangzhou market.

Once prices in Hangzhou, Nanjing, Hefei, Xi'an and other cities rose one after another, new restrictions arrived. Around September 22, 2016, 50 cities issued regulatory measures. On September 30 the Ministry of Housing and Urban-Rural Development announced that 16 hot cities had imposed purchase and resale restrictions — the "September 30 policy" that opened a new round.

Beyond resale and mortgage limits, property regulation has in practice become a planned economy. The head of a property sales agency in Hangzhou once told QDaily: "From the moment you buy the land, your highest price and your lowest price are the government's call. Then, once a developer has the land, the government decides how soon you have to develop it and bring it to market. Even the price you sell at when you launch is the government's call."

The government capped only new-home prices, though. Second-hand homes in the same areas were still priced by the market, and the gap between the two pushed even more money into property, because buyers felt that getting a unit was the same as making money. Some projects sold out within a single day even after asking buyers for a 17-million-yuan deposit just to register interest.

Round after round, China's property market kept growing larger, each round of regulation bit less, and the cycles kept getting shorter. By our calculation, the tight-control cycle that ran from October 2016 to April 2017 was nearly half as long as the year-plus average before it.

But the central government did not let go of the property market. Some second- and third-tier cities picked their moment to launch talent-recruitment policies instead; once the new arrivals registered, they became local buying power.

The most dramatic and most argued-over of these was Tianjin's "Haihe Talent" plan. At 12:30 p.m. on May 16, Tianjin announced it: no minimum years of work or social insurance contributions, residency for anyone under 40 with a bachelor's degree, and a process simple enough to complete on a phone.

The 300,000 people who then rushed to register clearly went far beyond what the policy had expected. Within 80 hours of its release, Tianjin's talent policy changed four times over, the bar rising again and again to hold back the crowd. Talent policies elsewhere worked much the same way: Xi'an gained 500,000 people in half a year, and Wuhan registered 142,000 college graduates in a single year, a sixfold increase.

Then there is Yanjiao in Hebei, long known as a sleeper town for Beijing commuters. On July 11, 2018 it published a Notice on Talent Introduction and Residency Registration, lowering the bar for holders of associate degrees. But the policy was deleted 4 hours after it went up, making it the fastest-vanishing regulatory measure of 2018.

At the end of 2018, China's property regulation shifted from a single central standard to policy set city by city, and local governments once again had reason to loosen. On December 26, for instance, Hengyang issued a Notice on Suspending the Implementation of the "Notice on Regulating the Sale Prices of Newly Built Commercial Housing in the Urban Area", lifting the price cap on new homes.

Less than 24 hours later, Hengyang withdrew it.

With tax, the change was mostly in how hard it was enforced

Reversals in tax policy showed up mainly in enforcement: personal income tax on the partners in venture capital firms, changes to the tax rate and the assessed income base for film and TV studios, and the transfer of social insurance collection from social insurance departments to the tax authorities.

China's top rate of personal income tax is 35%, but around 2015, while the state was encouraging mass entrepreneurship and the growth of private equity and venture capital, some local governments were allowed to tax the partners in venture firms at a preferential 20%. Beijing, Shanghai, Shenzhen and other places all did.

This may have helped push the number of yuan-denominated venture and private equity funds up 379.7% in 2015, and the money they raised up 249.5%. In May 2017 the Ministry of Finance and the State Taxation Administration issued new rules allowing investment in science and technology innovation to be deducted from tax. Figures from Zero2IPO Research show that by 2017 yuan-denominated funds in China's equity investment market held 937.7 billion yuan, three times the 2015 level.

But as the yuan fell further in 2018 and trade friction made growth less certain, the number of new funds and the money they raised dropped sharply. In the first half of 2018, China's equity investment market raised about 380 billion yuan, down 55.8% from a year earlier. Some yuan funds are pulling out of the Chinese market.

Which also means the tax authorities have fewer subjects left to tax.

In August 2018, Yicai quoted a local tax official saying that for years his locality had taxed at 20% the income from partnership firms' share transfers when it was distributed to individual partners, "but this was stopped by our superiors this year, and we are waiting for the State Taxation Administration to sort it out."

The State Taxation Administration's line was: "In recent years some local governments, in order to develop the local economy and attract investment firms, have set policies on their own, going beyond existing policy and breaching Article 3 of the Tax Collection and Administration Law (any decision by any department, unit or individual that conflicts with tax laws or administrative regulations is void; tax authorities must not carry it out and should report it to higher tax authorities). This should be corrected."

In January this year, though, the State Council decided after all to keep the 20% preferential rate for venture capital partners.

The film and TV business was adjusted too. Like venture capital, it had enjoyed subsidies and favorable terms on tax and office space in earlier years. But from 2018, several places that had promised those terms revised their policies: raising rates, changing how assessed income is calculated, and clawing back past taxes.

QDaily has worked through the numbers before. Under the audit-based method circulating online — going back over the past three years' income, taking 70% of it and taxing that as personal service income — a studio with 1 million yuan of total income between 2016 and 2018 would have its actual income put at 80% of that, and 70% of that would be taxed at 40%. After deducting what it had already paid, the studio would owe another 192,000 yuan, 20% of everything it had earned in three years.

And unlike the venture firms, which the State Council eventually let off, the film industry's self-inspection and back taxes have run from the second half of last year until now. As of January 23 this year, people working in film and television had declared 11.7 billion yuan in tax, of which 11.5 billion had already been collected — more than either film or television companies earned in net profit in all of 2018.

Social insurance collection, which touches nearly everyone in China who works, also changed several times between 2018 and 2019.

In March 2018 the social insurance and tax departments jointly announced that from January 1, 2019 the tax authorities would collect the "five insurances" — pension, medical, unemployment and the rest — while housing provident funds would still be collected city by city.

Three months after the announcement, Heilongjiang, whose social insurance fund is badly short, published a document saying tax authorities would pursue companies for unpaid contributions. Jiang Junlu, a partner at King & Wood Mallesons, said that although the document's force reached no further than Heilongjiang, it already showed how strict the tax authorities meant to be about social insurance.

In September 2018, however, the social insurance bureau, the Ministry of Finance, the State Taxation Administration and the Ministry of Human Resources and Social Security held a joint press conference to say that reforming the collection system would not, on the whole, add to companies' burden: "Until the reform of social insurance collection agencies is complete, every locality must keep its existing collection policy unchanged," and "collecting companies' historical arrears in a concentrated push on one's own initiative is strictly forbidden."

Localities also enforced the transfer differently. Beijing, Jilin and Shanxi handed the tax authorities only the collection of basic pension and medical insurance for residents; contributions for company employees stayed with the social insurance departments.

According to the 2018 China Corporate Social Insurance White Paper, only 27% of companies were fully compliant on the required contribution base, and 31.7% paid at the minimum standard. Using data on basic pension insurance for urban employees, CICC calculated that the actual contribution rate in 2017 was 21.6%, below the national standard of 28%, and that the actual base was 77% of the previous year's average social wage.

"Paying contributions on the required base would have a wide effect, raising the total social insurance cost for enrolled companies by 14%. Going by the white paper, 73% of companies would be affected," CICC chief economist Liang Hong wrote in a report.

Zhong Ruiqing, executive director of the Institute of Economic Law at Zhejiang University, argues that the change in collection created a kind of uncertainty. "The regulators never actually explained what it meant. People wonder whether it marks a change of direction — whether, once social insurance effectively becomes a kind of tax, it will be enforced as rigidly as personal income tax. It is exactly this shift in policy and expectation that has made small and mid-sized companies feel they are finished."

On how strictly China collects tax, he had told QDaily that the logic follows both the tax law and the targets handed down by the tax bureau, by higher levels of government or by the local government.

"Say the government has met its collection target. Then it reads the law very loosely, and turns a blind eye to some taxes. Anything that could be collected or not, it may let go. The yardstick changes. But when it can't meet the target, it squeezes for all it is worth — anything that could be paid or not, you pay," Zhong said.

Economists and public finance scholars generally hold that when the economy is booming, tax revenue should grow faster than household income, so the government takes in more. And more revenue means more household income moving to the government, which holds down demand. When the economy is weak, household income falls, but tax revenue should fall faster still. With rates unchanged, revenue moves automatically with the cycle, damping overheating and over-cooling alike.

That is not what you see in China. In the end, collection is aimed at a target. So in a downturn tax is collected strictly by the law and more of it comes in; in an upswing enforcement slackens and less comes in.

As for the financial industry that drives growth, regulation turned 180 degrees there too

For historical reasons, China's financing system is rooted in collateralized bank lending. But as asset-light new industries have flourished, direct financing has become more urgent.

In May 2012 the China Securities Regulatory Commission (CSRC) convened the first "Brokerage Innovation Conference." Afterwards it issued the Measures for the Administration of the Client Asset Management Business of Securities Companies and the Interim Provisions on the Administration of Subsidiaries of Securities Investment Fund Management Companies, gradually opening asset management to brokerages, funds, fund subsidiaries, futures firms and insurers. That greatly widened the range of asset management products a bank wealth management product could nest inside. By nesting inside other products, bank wealth management money could reach assets it had found hard to invest in before, and its range widened.

Banks were already the largest source of money in the whole market. As these rules came out, bank money could flow into every kind of asset.

And with interest rate liberalization under way at the time, commercial banks' traditional lending business was under real pressure, so wealth management naturally drew more of their attention.

As the chart shows, in 2010 banks sold only a few hundred wealth management products a month to the public, raising money and putting it into various assets. From the second half of 2011 the number of products they issued each month began to climb steeply, moving up a step every year.

It peaked just before April 2018, when the New Asset Management Regulation came in to restrict such products: more than 17,000 products issued in a single month. The outstanding balance raised grew from 4.57 trillion yuan at the end of 2011 to 29.54 trillion yuan at the end of 2017.

As the pile grew, a contradiction stood out. There was more money, but good assets worth buying were not easy to find.

So the wealth management money began flowing into listed companies' mergers and acquisitions.

Because A-share listed companies disclose relatively full, public and transparent information, they sit on the high ground of credit in China's capital and financial markets. That position made them a small but crucial fulcrum for the whole capital market and gave them great value as financing platforms. A-shares are also reasonably liquid, which makes it easier for investors to get out.

For banks, then, the clear appeal of doing M&A around listed companies was that listed companies and their controlling shareholders had an exit through the listed platform, plus an implicit — never stated — guarantee of repayment, so sending wealth management money to listed companies was a good way to secure the returns investors had been promised.

For listed companies, stronger financing power created stronger demands for capital operations, financing and strategic positioning — put plainly, they needed money to buy assets and keep the high-growth story going.

Tsinghua Holdings was the star of the leveraged buyout era of 2013-2015. Founded in September 2003 with 2.5 billion yuan of registered capital, it bought one semiconductor company after another from 2013 on, including Spreadtrum, RDA Microelectronics and H3C. It came to hold more than a dozen listed platforms at home and abroad — Unisplendour, Tongfang, Unigroup Guoxin, Tus-Sound, Huakong SEG, Tus International and Unisplendour Xueda among them — worth close to 200 billion yuan together, and used them as a base to buy targets in semiconductors, education, energy and environmental protection, and biohealth.

From 2013, wealth management money and listed companies found each other, and a wave of M&A arrived.

In 2013 there were 5,470 M&A deals in China, worth 392 billion US dollars; by 2015 the number had nearly doubled to 9,892, worth as much as 799.3 billion US dollars. What they bought ran from domestic to foreign, from Hong Kong-listed to US-listed, from Chinese concept stocks to overseas companies, from Nasdaq-listed companies to NYSE-listed ones.

In a market where the share price rose the moment a deal was announced, subscribing to the matching private placement and booking a large paper profit when trading resumed quickly became a widely used strategy. Take Wanda's 11.6-billion-yuan restructuring last summer, from which Wang Jianlin took 2.7 billion yuan in cash.

Subscribers, meanwhile, began piling on leverage. One of the most extreme cases: Zhao Wei put up 60 million yuan of her own and borrowed 3 billion to buy 29% of the listed company Wanjia Culture.

As deal sizes shot up, even the way companies were valued changed — from valuing earnings, to valuing revenue that made no profit, to valuing users who happened to pass by, and finally to valuing the size of a story or a dream.

From 2013 to the first half of 2016, what had happened during the dot-com bubble happened again across Chinese mobile gaming, internet finance, film and television, electric vehicles and every other industry. A big bubble plus a guarantee of repayment carried an obvious danger.

After three and a half years of deal-making and rising leverage, regulation turned 180 degrees.

In February 2017 the CSRC issued new refinancing rules. Under them, a listed company applying for a secondary offering, a rights issue or a private placement had to wait, in principle, at least 18 months from the day the previous round of money arrived to the day its board resolved on the new one. Given that refinancing usually spends 4 to 6 months under review, these forms of equity financing could in effect be used only once every two years.

For a listed company applying for a private placement, the number of shares proposed could not exceed 20% of total share capital before the offering. In other words, a placement could not raise more than 20% of the company's market value. That severely limited the practice of using a large placement to transform a business.

In May 2017 came new rules on share reductions, of a piece with February's refinancing rules, meant to stop investors from rushing in and rushing out.

But the new rules brought new problems.

Freight volume shows it clearly: from 2017 it rebounded fast year on year, at one point growing 21% in a single month, with growth for the full year approaching 2010 and 2011 levels — and in 2010 China's GDP was still growing 10.6% a year.

Export figures show the same thing: exports bottomed out in 2015 and returned to growth in 2017.

Retail sales, after falling from 2015 through the first half of 2017, entered a steady phase, and consumption's contribution to GDP kept rising.

All these important indicators pointed to signs of recovery in the Chinese economy in 2017. But the small-company lending that had been driving the recovery became harder to get, because policy had changed.

So in 2018 the debt ratios of small and mid-sized companies did not fall the way the policy had intended. What appeared instead was the strange reality of a crisis of margin calls on pledged shares and debt growth picking up speed again.

Along with it came still greater difficulty in financing. An investor who buys a company's bonds has only one route to a return: the borrower repaying principal and interest on time.

The result was that yields on high-credit bonds, mostly from upstream raw material producers and state-owned firms, kept falling, while the yields small and mid-sized companies had to offer — companies that run more efficiently and are tied more directly to people's livelihoods and spending power — kept rising.

By the end of 2018 the manufacturing PMI showed that more than half of industrial firms had gone from expanding to contracting. Growth in their profits kept sliding, and monthly year-on-year growth in retail sales of consumer goods hit a new low. The central bank, the China Banking and Insurance Regulatory Commission and the CSRC turned policy 180 degrees again, trying to let small and micro companies and private firms borrow at lower cost once more.

On October 12, 2018, the CSRC again allowed matching funds raised in a deal to be used to top up working capital and repay debt at the listed company and the target assets; and, starting in Shenzhen, several local State-owned Assets Supervision and Administration Commissions began spending money to relieve listed companies' debt and pledge crises.

By December 13, 2018, Yi Gang, governor of the People's Bank of China, said in a speech at Tsinghua University that shadow banking is a necessary supplement to the financial markets, and that as long as it operates lawfully it can be an effective part of the system.

Then on December 19 the central bank rolled out new targeted lending for the credit needs of small, micro and private companies, at rates as low as 3.15%, a third below the benchmark three-year lending rate. Another major adjustment.

In the end, the adjustments are changing what people expect of the future

It is not hard to find reasonable intentions behind these policy changes.

According to an SEC report, the United States issued an average of 3.37 trillion US dollars of securities a year from 2010 to 2016, about 22.81 trillion yuan, or roughly 18% of US GDP in 2016. By comparison, in 2018 bond financing plus equity financing by China's non-financial companies came to 2.84 trillion yuan, 3.2% of China's GDP over the same period.

How much a company can raise decides how fast it can grow, and Chinese companies' needs were not being met. Opening up the asset management industry in the first place was an attempt to solve that with administrative force.

But China is no longer what it was 20 years ago. Its GDP has grown tenfold, retail sales twelvefold, debt seventeenfold, and the size of its listed companies nineteenfold. Over those years this enormous market has developed complicated habits of consumption and of using capital, and intervening in it is no longer easy.

What followed was the run of unexpected problems described above, and then the new problems that appeared as administrative force went on trying to resolve them. Add the trade dispute nobody saw coming, and the problems arrived faster — so the policies meant to fix them arrived faster too.

But everything people do rests on some expectation. A ball comes at you and you put out a hand, because catching it is a biological expectation. You type without looking at the keyboard because muscle memory tells you which key produces which letter. You wait for the bus every day because the bus that comes day after day has given you the expectation that a bus will always come.

Finance and consumption work exactly the same way. You put money in the bank expecting it not to disappear; you buy a wealth management product expecting it to earn; you take on debt to buy a home instead of renting because you expect the deal will not, at worst, turn out too badly.

So it is for individuals, and so it is for companies. Every act of consumption and finance rests on what people expect of the future.

Whether it is a policy adjustment large or small, or the government stepping into the market with cash to rescue it, all of it carries the unstated purpose of guiding what individuals and companies expect of investment and consumption. That was true when the US Federal Reserve moved to rescue housing that had been swept up in financial products in 2008, and when the 2015 A-share rescue set out to buy shares in solid listed companies.

But if the ball did not fly along a parabola, if the letters on the keyboard kept moving, if the bus did not necessarily run every day, your expectations would change. And your behavior would change with them.

In property, tax and finance, individuals and companies face different changes in expectation, but the same situation: the change is coming faster. In the end, behavior in the market has changed too. Chinese people, who had grown used to spending more, have started worrying more about their future. Since the end of 2017, the savings deposit ratio of Chinese urban households has risen from 40% to 44% at the end of 2018. More saving and less borrowing naturally means less spending. And one person spending less is another person's income falling, and people whose income has fallen do not usually choose to spend more either. Round it goes.

Charts by Feng Xiuxia, Zheng Shuya, Gong Fangyi

Cover image by Tang Yunlu