Following on January 28's "DeepSeek and Chinese Security Laws: There Are No Secrets".
A quick note up front. Much of what the Chinese authorities do as a result of the 2014 - 2020 security laws the Americans also did under the Biden administration and perhaps earlier.
The difference in the two approaches is that the Chinese could act with impunity due to the laws whereas the American government/security organs had to have the assistance of the various companies and platforms as the censoring/manipulating was done in a surreptitious wink-and-a-nod manner.
Of the two, the Chinese methods at least have the grace of being more upfront and forthright: "We are censorious authoritarians and that's the way it is. Live with it."
From the University of Chicago, Booth School of Business' ProMarket, January 27, 2025:
How Political Speech Restrictions Spill Over Into Financial Analysis
A new study by Utpal Bhattacharya, Tse-Chun Lin, and Janghoon Shon finds that Hong Kong’s 2020 National Security Law led local financial analysts to self-censor their reports, particularly when covering poorly performing state-owned enterprises.
Following the introduction of Hong Kong’s National Security Law (NSL) in June 2020, local financial analysts began self-censoring their reports, particularly when covering poorly performing state-owned enterprises, according to new research by Utpal Bhattacharya, Tse-Chun Lin, and Janghoon Shon. The findings suggest that constraints on political speech can have far-reaching effects on financial discourse and market efficiency.
The new study examines how the NSL’s enactment influenced the behavior of equity analysts covering major companies listed on the Hong Kong Stock Exchange. Their analysis reveals that local analysts began providing more optimistic forecasts, using vaguer language, and taking longer to issue reports about underperforming firms after the law took effect—patterns that were especially pronounced when covering Chinese central state-owned enterprises (SOEs). SOE’s are legal entities that undertake commercial activities on behalf of the Chinese central government (as opposed to provincial or city governments).
The Law’s impact on financial speech
The NSL, which came into effect on June 30, 2020, prohibits acts of secession, subversion, terrorism, and collusion with foreign forces. While the law’s primary focus is political speech, the researchers find evidence that its effects spilled over into financial analysis, likely due to uncertainty about how broadly the law might be interpreted.
Using data from 2018 to 2022, the study examines over 6,000 analyst reports covering 38 major companies consistently listed in Hong Kong’s Hang Seng Index. The researchers compared the behavior of local analysts (identified by Chinese family names) with foreign analysts before and after the NSL’s implementation, focusing particularly on how they covered firms during periods of poor performance.
To identify potential self-censorship, the authors examined three key metrics: forecast errors in earnings predictions, the use of weak modal words in reports (such as “could,” “might,” and “perhaps”), and the time lag between earnings announcements and analyst reports. They also analyzed market reactions to analyst recommendations to assess whether investors adjusted their behavior in response to potential self-censorship.
The study controlled for various factors that could influence results, including changes in the teams of analysts that issued the reports, drastic changes to firm stock prices, and seasonal variation in firm performance.
Three key changes in analyst behavior
The study documents changes in analyst behavior across three dimensions:
First, local analysts’ earnings forecasts showed an upward bias after the NSL when covering underperforming firms. Compared to foreign analysts, local analysts’ forecast errors were 0.47 to 0.63 standard deviations higher for poorly performing companies after the law’s enactment. This effect was even stronger for central SOEs, where the difference in forecast errors between local and foreign analysts was 1.39 standard deviations, compared to just 0.26 standard deviations for non-SOEs.
Second, when writing about central SOEs with poor performance, local analysts doubled their use of weak modal words compared to foreign analysts after the NSL. This increase in ambiguous language suggests analysts may have been attempting to hedge their statements when discussing negative developments....
....MUCH MORE
