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Here are 2 possible theories which can explain China’s crackdown on ed-tech companies

The crackdown on ed-tech companies has been severe. The for-profit ed-tech companies have been clearly told that they can’t be in a for-profit business, says Vijayakumar.

July 30, 2021 / 04:06 PM IST

There is a good chance that foreign institutional money will flow into emerging markets like India and this could turn out to be a great time for India’s startup Unicorns to raise money, VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q) What is the Chinese crackdown on ed-tech companies all about? Can it spread to other sectors as well?

A)  The Chinese crackdown on tech companies has been going on for some time now. In November 2020, the much-fancied Ant Financial IPO was canceled 2 days before the event.

Jack Ma went missing for weeks. Even though this became a talking point in financial circles, it didn’t impact the markets and so the issue died down.

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Similarly, there have been moves against consumer tech giants like Tencent, Didi, and Meituan. Now, the severe crackdown on ed-tech companies has led to sharp market crashes in the tech segment triggering wild speculation and rumors.

There is a lot of mystery surrounding the Chinese government, the communist party, the bureaucracy, and their relationship with big business.

There are different theories that explain the crackdown.

One theory is that the party and the government is overly concerned about the rising power of the business class.

The fact that there are more dollar billionaires in communist China than in capitalist USA is a major concern for the communist party.

It is feared that the huge inequalities might trigger social tension and revolt. The crackdown on big business is to send the right socio-political message.

The second theory is that the crackdown is an anti-trust move like similar moves in the US and European Union. The US had moved against giants like Standard Oil and Microsoft in the past and modern-day tech giants like Facebook and Google in recent times. China is making similar anti- monopoly moves, it is claimed.

But, the crackdown on ed-tech companies has been severe. The for-profit ed-tech companies have been clearly told that they can’t be in a for-profit business.

Restrictions have been imposed on foreign investment in these companies. Western investors who have heavily invested in these ed-tech companies have panicked and sold resulting in massive crashes in their stock prices. This crisis is unlikely to have a contagion effect on other segments.

Q) Chinese govt crackdown on ed-tech companies unsettled equity markets in the last few days. What is leading to the panic among equity investors across the globe?

A) Equity markets, globally, have been impacted, but not severely. The primary reason for the nervousness in equity markets is that markets are overvalued and at high valuations, some triggers can cause sharp corrections.

Since investors are sitting on huge profits, there is some profit booking happening as a measure of abundant caution.

Q) Recently listed IPOs have also seen billion-dollar of outflows lately. Amid the restrictions placed by the govt. do you think the institutional money would flow into other emerging markets, including India which looks slightly more attractive destination?

A) There is a good chance that foreign institutional money will flow into emerging markets like India. This can turn out to be a great time for India’s startup Unicorns to raise money.

India is a well-regulated market and, therefore, an attractive destination. The imminent IPOs of Paytm, Policy Bazar, etc can easily attract a lot of funds. For Indian Unicorns, the Chinese crisis is an opportunity.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.

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