China is on a regulatory warpath against its own private technology firms. The market value of leading companies listed in Hong Kong and in New York, such as Tencent, Meituan and Alibaba, has fallen by 20 to 40 per cent since February. The crackdown has entailed stricter regulation, tougher oversight with respect to overseas listings, investigations over the use of data, and direct involvement in the operations of several firms.
China’s economic take off over the last decades would never have happened without the productivity and dynamism of its leading businesses, and so how we think about the country’s role in the global financial system is critically dependent on what happens to its private sector and the economy.
In his recent New Statesman essay marking the 100th anniversary of the Chinese Communist Party (CCP), Adam Tooze concludes that China will shape the future. This is undoubtedly true considering its size and central role as the biggest trading nation and hub of global supply chains. Until Xi Jinping came to power in 2012, the CCP was successful in adapting its version of a “socialist market economy” by blending market mechanisms with state control and opening up to the rest of the world, in ways that the former USSR never did or could.
Yet, the narrative of China’s “inevitable rise”, to which many subscribe, lacks perspective. The CCP leadership is not a group of economic magicians, and China’s economic development from a poor to a middle-income country today cannot be extrapolated as if by spreadsheet.
Many of the policies and programmes that Beijing has enacted since the 1980s can only be done once, such as labour transfer from agriculture to higher productivity manufacturing, full primary and secondary school enrolment, creating the world’s largest private residential housing market, and joining the World Trade Organisation. Other policies, such as economic privatisation and a liberal reform agenda are politically forbidden, while programmes of wealth and income redistribution, progressive tax and social welfare reform, and institutional reform appear improbable under the existing Leninist system.
China also faces strengthening social and economic headwinds. These include the adjustment of balance sheets to an over-reliance on (bad) debt in the last 10 to 15 years to drive growth, a rapidly ageing population, chronic shortcomings in educational attainment among working age people – it’s estimated that less than a third have secondary school or higher qualifications – and political repression. These red flags are likely to impede productivity growth and keep China in the fabled middle income trap.
As the world’s biggest CO2 emitter, China also has a key role in countering climate change, but that doesn’t mean that its climate policies and targets are realistic or aligned with global standards and expectations. As Elizabeth Economy of the Council on Foreign Relations has said, Xi Jiinping has approved ambitious climate goals but several initiatives have significant design and implementation weaknesses that raise questions about their efficacy. There also remain questions over coal capacity plans at home and the export of coal plants through the One Belt and One Road initiative.
Owing to the adversarial relations with the West, China also faces its harshest external environment since the Mao era, but is still heavily reliant on imported technologies and know-how, not least from the US. Excluding Huawei, China’s efforts to develop foundational technologies and build its own integrated circuits, aircraft and auto industries, for example, are deficient. China imports around 80 per cent of its semiconductors and spends more on them each year than on crude oil. Its plans to build a passenger plane to rival those produced by Boeing and Airbus are behind schedule and the plane depends on foreign components to fly. Even in sectors where it has progressed, such as solar panels, electric vehicles, and high-speed trains, outcomes have included chronic over-capacity, loss-making firms (China State Railways Group has high debt and is still haemorrhaging money, while almost 500 electric vehicle producers are fighting over a market of about 1.5 million vehicles), and the requirement of foreign technology transfers in joint ventures.
If, during the 1990s, China could not fully exploit the most benign external environment for technology collaboration and exchange, how will it meet the same self-reliance goals in more adversarial conditions in years to come? China has money and determination, but not even these can substitute for shortcomings in technological capacity, innovation and governance practices.
This is why the recent crackdown on tech, finance, data and digital platforms has geopolitical significance. Though the slump in their share prices says little about immediate economic prospects, the market capitalisation of firms gives us a relatively unbiased view about how markets view the earnings and broader commercial prospects of companies at the cutting edge of economic and technological change. Only the technology conglomerate Tencent and the e-commerce giant Alibaba feature in the same league as American firms such as Amazon that dominate the most valuable global companies; both have fared badly this year because of the crackdown. The combined market capitalisation of both firms has dropped from almost $2trn to just over $1trn since the start of 2021.
The question is why, if China’s tech and data platforms are crucial to shaping China’s and the CCP’s future, is the government bringing them to heel?
In recent weeks, Chinese politicians and regulators have broadened the campaign that began in November 2020 when they prevented at short notice the world’s largest ever capital raising programme by Ant Financial, an offshoot of Alibaba, and deposed its celebrity founder, Jack Ma. They have launched data and cyber security investigations into firms that have issued shares overseas, and vowed to make such listings harder or prohibit them. Sectors that have been affected include finance, AI, private tutoring, ride-hailing, food delivery and distribution, logistics, video-streaming, and gaming. Others such as healthcare and real estate may be next.
The government has claimed it is acting to protect the economy from anti-competitive practices, financial instability or data abuse. Officials have also spoken about Xi’s social goals agenda, also known as “common prosperity”, to clamp down on markets and services deemed to have little economic purpose and that exacerbate inequalities. This programme is designed to improve people’s sense of “gain, happiness and security”.
Yet, these initiatives reflect China’s political concerns about the overlap between data, financial and commercial security and national security. In the 14th Five Year Plan (2021-2025), approved earlier this year, a chapter on national security was included for the first time. In the digital economy, enhanced by the speed and capacity of computing and 5G communication systems, data collection, storage and access have become a “hot potato” for governments, including China, obsessed with digital sovereignty. There is clearly a thin line between true national security interests and the simple desire for control. China’s CCP, which craves control in the absence of the rule of law and freedom of information, clearly is in a different space from other countries where both are held in higher esteem.
The consequences are serious. Investors will suffer as growth-oriented tech companies such as Didi, China’s largest ride-hailing company, or Meituan, a shopping platform, are regulated like dull utility firms. The crackdown is also a reminder of the arbitrary nature of decision-making in Xi’s China, where party interests are at stake, and of the shift away from market mechanisms and liberalising reform towards administrative controls, and from private enterprise to the primacy of the state and the party.
In a speech in 2020, Ma warned that the government could end up stifling innovation if it got the regulatory balance wrong. In its subsequent actions, the government seems to be exacerbating the contradiction between market freedom and political control. There can only be one winner, but this poses a big threat to China’s economic aspirations.
China will surely shape the future, but we do not know exactly how. Consequently, we must strike the right balance between not being complacent about China’s threat to liberal values, standards, and beliefs, and not meekly accepting Beijing’s “inevitable rise” narrative. Nothing is pre-ordained, and China’s influence on the world in the 2020s and beyond may turn out to be quite different from the way it is often told.
George Magnus is a research associate at Oxford University’s China Centre and at SOAS, a former UBS Chief Economist, and author of “Red Flags: Why Xi’s China is in Jeopardy”