China strengthens small and medium-sized enterprises.

On 5 March 2021, the Government of China (rated A1 stable by Moody’s) said it will encourage internet companies to reduce commissions to an appropriate level for merchants that transact on these internet companies’ platforms. “The government did not specify the level of potential commission reduction in its directive,” writes Moody’s in its report, “and is likely to gauge its effectiveness in terms of expanding market access.”

The instruction aims to boost migration of goods sales and services to online platforms and forms an integral part of the government’s economic development. This shift of business to online platforms has multiple consequences, including the security of business and the stability of social relationships in China. A social credit system can only function effectively if as many, if not all, transactions by citizens as possible are recorded in real time.

Moody’s sees that Internet companies have strong buffers against near-term challenges: “Most have strong financial profiles and good access to funding, which will help them navigate near-term business fluctuations.”

However, the immediate effects are initially negative, as Moody’s writes: “This directive is credit negative for internet companies because it could stall revenue growth and earnings growth. Companies such as Alibaba Group Holding Limited (A1 stable), JD.com, Inc. (Baa1 stable), Vipshop Holdings Limited (Baa1 stable) and Meituan (Baa3 stable) derive a substantial portion of revenue from merchant commissions, which are fees they charge merchants that transact market products and services on internet platforms.”

A team from Moody’s Investors Service has been digging deep into the consequences: Ying Wang, VP-Senior Analyst, Lina Choi, Senior Vice President, Chi Kit Edward Lam, Associate Analyst, Clement Wong, Associate Managing Director: “We project that rated Chinese internet companies will grow revenue 15%-20% and EBITDA 10%-15% in 2021, largely similar to the growth rates in 2020 despite the economic recovery in China this year.”

An increasing number of merchants will provide goods and services, especially smaller merchants that have been previously prohibited by high commission charges and the market for online retail and services will broaden over time, stimulate merchant growth and support sector growth in the long term, expects Moody’s.