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China’s largest private companies are in chaos.  It’s all part of Beijing’s plan

Editor’s Note: A version of this story appeared in CNN’s Meanwhile in China newsletter, a thrice-weekly update exploring what you need to know about the country’s rise and its impact on the world. Register here.


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China’s crackdown on private enterprise has wiped out more than $ 1.2 trillion in market value for many powerful Chinese companies and stoked fears about the future of innovation in the world’s second-largest economy.

But the end goal of Beijing’s aggressive attempt at control is not to create chaos. The government wants to make its business champions understand that exploiting capitalist markets is fine, as long as it is on the terms of the ruling Chinese Communist Party.

Massive sales have accelerated in recent months as Chinese authorities impose fines on businesses, ban apps in stores and demand that some businesses completely reorganize their businesses.

Hundreds of billions of dollars in market value have been wiped out in the last week alone, after regulators announced restrictions on China’s for-profit education industry and its food delivery sector .

According to Beijing, efforts to curb private enterprise are aimed at protecting the country’s economy and citizens from instability. They also aim to address long-standing issues around overwork, data privacy and inequalities in education.

“At the end of the day, Beijing’s crackdown on private companies is all about control,” said Alex Capri, researcher at the Hinrich Foundation. “The main priority is to prevent behaviors among private companies that could lead to more independent and potentially non-conformist activities, which undermines the Beijing state-centric model.”

Chinese companies have been shaken by Beijing’s reforms.

The government initially focused on technology, abruptly pulling out an IPO for Ant Group in November. The company, best known for its Alipay payment app, was later ordered to restructure its operations and become a financial holding company.

No part of the tech industry has been spared. Alibaba (BABA) was hit with a record fine of $ 2.8 billion after regulators accused the e-commerce company of behaving like a monopoly. Other companies, including social media and gaming giant Tencent (TCEHY) and e-commerce platform Pinduoduo (PDD), have also been taken to law enforcement investigating suspected anti-competitive behavior.

And early last month, Didi was banned from app stores shortly after the rideshare company went public in the United States.

Regulators have also set their sights on other industries. Other Chinese companies listed in the United States have been singled out by authorities investigating data security concerns. On July 24, China banned private education and tutoring companies from making profits or raising funds in the stock markets – dramatic new rules that will almost certainly force many large companies to rethink their entire set. business model.

The crackdown is “unprecedented in terms of the length, intensity, scope and speed of new political announcements,” Goldman Sachs analysts wrote in a research report last week that called the strategy “rebalancing the economy. socialism and capital markets ”.

“The Chinese authorities give priority to social welfare and the redistribution of wealth over capital markets in areas considered to be social necessities and public goods,” they added.

Andy Wong / AP

A woman on her electric scooter films a large video screen outside a shopping mall showing Chinese President Xi Jinping speaking at an event commemorating the 100th anniversary of the Chinese Communist Party in Tiananmen Square in Beijing, on Thursday July 1, 2021.

Beijing’s decision to present its unprecedented crackdown as a necessary public good has merit, analysts say.

The regulatory crackdown on Didi and other internet companies, for example, has focused on allegations that these companies mismanaged sensitive data about their users in China, posing risks to privacy and national cybersecurity. There has also been a public outcry in the country over widespread data breaches, abuse of personal information and corporate surveillance.

Inequalities in education and private learning have also prompted many reforms. When the government announced its restrictions on for-profit tutoring last week, it claimed the industry had been “hijacked” by capital and this had “distorted the nature of education.”

The country’s education system is highly competitive and exam-driven, raising concerns about student fatigue. Private lessons, meanwhile, have flourished as middle-class urban families have tried to give their children a head start by preparing them extensively for exams – but such resources are expensive.

The government’s focus on inequality is a “smart choice,” said Sonja Opper, a professor at Bocconi University in Italy who studies the Chinese economy and the private sector, given concerns over income disparities and education.

The country is also increasingly concerned about unemployment, including the well-being of its young workers, a growing number of whom complains of an overwhelming culture of overwork.

A movement called “Lie flat” – “tangping” in Chinese – has become extremely popular among young people. He calls on them to reject societal pressures to work hard, get married, have children or buy property because of the diminishing rewards of achieving such goals.

Chinese tech companies have been widely accused of forcing young people to work long hours and glorifying the culture of overwork. “996”, which refers to the practice of working from 9 a.m. to 9 p.m. six days a week, aroused particular anger among young workers and would be common among large tech companies and startups.

The “bed-flat” philosophy seems to have worried the ruling Chinese Communist Party. The word “tangping” has been heavily censored on Chinese social media in recent months, and state media have criticized the move.

“The creative contribution of young people is essential for our country to achieve high-quality development,” the state-owned Guangming Daily wrote in an editorial in May. He called the “flat bed” movement problematic as China faces a labor shortage that could hurt its long-term economic goals.

that of Beijing tactics carry a lot of risk. Aside from the $ 1.2 trillion market value that Goldman Sachs says has been wiped out of high profile stocks, analysts also fear the crackdown could kill China’s entrepreneurship – a vital part of the economic liberalization and rapid growth of the country.

“Increased regulation can bring some benefits to Chinese business as some sectors are very unregulated,” said Steve Tsang, director of the SOAS China Institute at SOAS University in London. “But the increase in scrutiny is also a signal to private entrepreneurs that they now need to monitor their dealings more carefully and align their businesses with Party guidelines or leadership.”

Opper, of Bocconi University, cited similar concerns, adding that Beijing’s decision to target specific companies may not be “the most effective policy response.” She suggested that progressive taxation and support for education for the poor could better tackle inequalities.

“The Chinese government might well think that more restrictive policies can be introduced, now that the country has moved closer to the technological frontier,” she said. “But it is highly unlikely that the entrepreneurial spirit – so unleashed by leaders before [President] Xi Jinping – survives under a very restrictive regulatory regime. ”

The reforms really come down to one thing, according to Tsang, who warned that economic inequalities could damage the legitimacy of the Communist Party if left unchecked.

“I think Xi is trying not to crack down on private companies but to improve the regulations (or Party control) over private companies so that they” serve all the people “or follow the leadership of the Party,” a- he added.

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