Will China’s Huge Tech Sector Crackdown Stifle Innovation?Part I: How will the Common Prosperity program really play out in the private sector?
Didi Chuxing (Didi Global, Inc.), the largest ride-hailing company in the world, was reprimanded when it opened on the New York Stock Exchange after regulators warned it needed to shore up its data security issues. Meituan, China’s massive shopping and coupon app, was recently fined $533 million for “anticompetitive behavior.” Alibaba, owned by tech billionaire Jack Ma, had to pay a $2.8 billion fine for the same reasons. Antitrust regulators dinged Tencent, Baidu (China’s Google alternative), ByteDance (parent company for TikTok), and ecommerce company JD.com Inc.
The billion-dollar online private tutoring industry sank after the Chinese government declared that after-school tutoring is now non-profit only. Then the online gaming industry was hit when the Chinese government declared children are only allowed to play for a few hours per week on the weekends as part of an update to the Minors Protection Law.
And Evergrande Corp, which had gotten away with years of excessive borrowing, was not bailed out by the Chinese government when it missed a major bond payment. Evergrande had incurred over $300 billion in debt (some of which was not “on the books”) and missed some bond payments.
There are more examples of other industries getting reined in by State regulators, and authorities may not be done yet. SupChina keeps a running list here.
In all, the government’s crackdown on the private sector has cost Chinese tech companies over $1 trillion in stock market value, and over $100 billion of wealth for Chinese entrepreneurs.
In an August 17, 2021, speech with the Central Committee for Financial and Economic Affairs, General Secretary Xi Jinping said that common prosperity is “essential to socialism.” Common prosperity has appeared several times in state-backed media and in Xi’s other speeches, including the hundredth anniversary of the founding of the Communist Party.
To understand what’s going on, let’s go back to Jack Ma and November 2020. Ma disappeared when Ant Group Financial’s record-breaking initial public offering on the Shanghai and Hong Kong stock exchanges was denied by the Chinese government. Ma later re-appeared and is essentially retired from much of public life. Ant Group is now working on converting to a financial holding company overseen by China’s central bank, which will be subject to China’s new regulatory rules.
Some of these regulations are not a bad thing. Ant Group was giving out high-risk loans without taking on some of the risk. Evergrande had too much debt and conducted shady business practices. And Chinese people were concerned about data privacy, so the government enacted data privacy laws that were modeled after Europe’s.
However, unlike Europe, the main drivers behind the Chinese government’s crackdown are consolidating power and maintaining stability. As the Wall Street Journal summarized in its August 20 headline: “Jack Ma’s Costliest Business Lesson: China Has Only One Leader.” According to the article, Ma “lost an appreciation for the risks of falling out of step [with Beijing], according to people who know him.” The article points out that he behaved too much like an “American entrepreneur” by ignoring warnings from regulators and the Chinese government.
Whether it’s billionaire tech giants or online tutoring CEOs or big-name celebrities, the Chinese Communist Party will not tolerate competition for power and influence. Additionally, the CCP has always self-identified as socialist-Marxist-Leninist and disparaged Western capitalism. Jack Ma was China’s entrepreneurial “rags-to-riches” success story who benefitted from China’s pivot to a more capitalist economic system when President Deng Xiaoping took power after Mao Zedong’s death in 1979. Deng had to address the economic crisis caused by the Great Leap Forward and Cultural Revolution. His policy of opening up and allowing “some people to get rich first” was seen as China transitioning to a more capitalistic economy with the potential of also becoming more democratic.
Since Deng, China has gone from a developing country to an upper-middle income country and the second largest economy in the world. However, some 30-40% of China’s population is still considered poor.
The disruptions to China’s private sector were somewhat expected for those that have kept up with Xi Jinping’s messaging since he took office, although no one predicted the crackdown would be this extensive. Lingling Wei, longtime China correspondent with the Wall Street Journal, said on The Journal podcast that Xi Jinping’s actions are both surprising and not surprising because the signs have been there for a long time. She says that unlike other Communist Party leaders who pay lip service to Marxism, communism, and socialism, with Xi Jinping, it is different:
As evidenced by the crackdown, he really means what he says now. He really wants to show that he’s doing something more drastic, big.The Journal podcast, “Xi Jinping Is Rewriting the Rules of China’s Economy” at Wall Street Journal
The changes to the private sector are part of Xi Jinping’s campaign to ingratiate himself with the middle class and poor in China by promoting “common prosperity.” One question is how exactly this will play out in the private sector, and the bigger question is whether these heavy-handed regulations will stifle innovation. The Chinese government wants the private sector to work on projects that benefit the state, such as artificial intelligence, quantum computing, solar energy, and manufacturing. The state, on the other hand, will take more control of data, such as cloud computing services.
Next time: Although the messaging seems new, in the next article, we’ll look at the historical roots of common prosperity and what that means for the Chinese government’s policies today.