Will China’s massive tech industry crackdown stifle innovation?

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Didi Chuxing (Didi Global, Inc.), the world’s largest ridesharing company, was reprimanded when it opened on the New York Stock Exchange after regulators warned it had to tighten its data security concerns. Meituan, the massive shopping and coupon app in China, has been recently fined $ 533 million for “anti-competitive behavior”. Alibaba, owned by tech billionaire Jack Ma, was fined $ 2.8 billion for the same reasons. Antitrust regulators have sounded Tencent, Baidu (the Chinese alternative to Google), ByteDance (parent company of TikTok) and e-commerce company JD.com Inc.

Billion-dollar online private tutoring industry sank after Chinese government declared that out-of-school tutoring is now only non-profit. Then the online gaming industry was hit when the Chinese government said children are only allowed to play for a few hours a week on weekends as part of an update to the protection law. minors.

And Evergrande Corp, which had gotten away with years of excessive borrowing, was not bailed out by the Chinese government when it missed a large bond payment. Evergrande had incurred more than $ 300 billion in debt (some of which was not “on the books”) and missed some bond payments.

There are more examples of other industries being held back by state regulators, and authorities may not be finished yet. SupChina keeps a shopping list here.

In total, the government’s crackdown on the private sector has cost Chinese technology companies more than $ 1 trillion in stock market value and more than $ 100 billion in wealth for Chinese entrepreneurs.

In a speech on August 17, 2021 to the Central Committee for Financial and Economic Affairs, Secretary-General Xi Jinping noted that common prosperity is “essential to socialism”. Common prosperity has repeatedly appeared in the state-supported media and in Xi’s other speeches, including the hundredth anniversary of the founding of the Communist Party.

Common prosperity

To understand what’s going on, let’s go back to Jack Ma and November 2020. Ma disappeared when Ant Group Financial’s record initial public offering on the Shanghai and Hong Kong stock exchanges was turned down by the Chinese government. Ma later reappeared and is basically retired from much of public life. The group of ants is work now on the conversion into a financial holding company supervised by the central bank of China, which will be subject to new Chinese regulatory rules.

Some of these regulations are not a bad thing. Ant Group provided high-risk loans without assuming part of the risk. Evergrande had too much debt and had shady business practices. And the Chinese were concerned about data privacy, so the government enacted data privacy laws modeled on those of Europe.

However, unlike in Europe, the main drivers of the Chinese government’s repression are the consolidation of power and the maintenance of stability. As the the Wall Street newspaper summed up in its August 20 headline: “Jack Ma’s Costliest Business Lesson: China Has Only One Leader.” According to the article, Ma “lost the appreciation of the risks of phase shift [with Beijing], according to people who know him. The article points out that he has behaved too much like an “American entrepreneur” by ignoring warnings from regulators and the Chinese government.

Whether it’s billionaire tech giants, online tutoring CEOs, or big-name celebrities, the Chinese Communist Party will not tolerate competition for power and influence. Moreover, the CCP has always identified itself as socialist-Marxist-Leninist and denigrated Western capitalism. Jack Ma was the story of China’s entrepreneurial success story that benefited from China’s pivot to a more capitalist economic system when Chairman Deng Xiaoping seized power after Mao Zedong’s death in 1979. Deng had to address the economic crisis caused by the Great Leap Forward and the Cultural Revolution. Its policy of opening up and allowing “some people to get rich first” was seen as China’s transition to a more capitalist economy with the potential to become more democratic as well.

From Deng, China left from a developing country to an upper middle income country and the world’s second-largest economy. However, around 30-40% of the Chinese population is always considered poor.

Disruption to China’s private sector was somewhat expected for those who have followed Xi Jinping’s messages since taking office, though no one predicted the crackdown would be so extensive. Lingling Wei, longtime correspondent in China with the the Wall Street newspaperXi said on The Journal podcast that Xi Jinping’s actions are both surprising and unsurprising because the signs have been around for a long time. She says that unlike other Communist Party leaders who pretend to talk about Marxism, Communism and Socialism, with Xi Jinping it’s different:

As evidenced by the crackdown, he really does mean what he says now. He really wants to show he’s doing something more drastic, bigger.

The Journal’s podcast, “Xi Jinping rewrites the rules of China’s economy” To the Wall Street newspaper

The changes in the private sector are part of Xi Jinping’s campaign to curry favor with the middle class and the 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 strict regulations will stifle innovation. The Chinese government wants the private sector to work on projects that benefits the state, such as artificial intelligence, quantum computing, solar power, and manufacturing. The state, meanwhile, will take more control of data, such as cloud computing services.


The next time: Although the message seems new, in the next article we will examine the historical roots of common prosperity and what it means for the policies of the Chinese government today.


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