China’s misguided crackdown on business
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A list of Chinese technology companies that have fallen foul of regulators would look almost identical to a list of tech success stories. Ant Group, the payments company spun out of ecommerce giant Alibaba, was forced to cancel the listing of its shares in Shanghai last year. Regulators pulled Didi Chuxing, the ride-hailing app, from app stores shortly after its New York initial public offering, citing national security concerns over its handling of data. Meituan, a food delivery app backed by Tencent, is facing an antitrust probe as well as questions over its treatment of drivers.
Fears of a broader crackdown on private enterprise are now mounting. The announcement that education companies would be barred from making a profit threatens to wipe out the $100bn private education market. A ban on such businesses using variable interest entities (VIEs), a popular measure for allowing foreign investors to get around Chinese restrictions, triggered a broader sell-off in China-related stocks — though this eased somewhat after Beijing’s securities regulator held a call seeking to reassure international investors on Wednesday night.
The crackdown partly reflects the same problems elsewhere that have led to calls for tighter regulation or the break-up of big tech companies. A roster of businesses in the US that have been in trouble with the regulators would likewise feature the country’s success stories, from Uber’s travails over the treatment of workers to Facebook’s attitude to consumer privacy. Concerns over the rise of private tutoring, too, mirror similar worries in the west over social mobility and the relentless pressure on children for exam success. There is nothing unusual about China’s concern over the effects of business success on wider society.
But while the “techlash” is now a familiar story, there are important differences. Among the most fundamental is that, unlike in the US, China’s homegrown tech titans often relied on foreign backers in their early stages. Those investors now, in turn, need to use VIEs or US listings to gain a return on their investment.
In future, innovative companies will have to pay foreign investors a higher premium to compensate for the uncertainty over regulation or even whether an overnight announcement from the government could wipe out the value of their investment altogether. Officials are pushing Hong Kong as an alternative, and potentially safer, location for listings but investors will now treat any such assurances with scepticism.
The question is whether the Chinese government simply does not care about appetites to invest and has calculated that international finance is no longer helpful to development, or is actively trying to dissuade companies from listing overseas. Chinese national security concerns are not limited to control over data but also America’s dominance, through the dollar, of the world’s financial system. Tolerating regulatory uncertainty in exchange for a higher return is one thing; investing against the wishes of a Chinese government that shows signs of wanting its economy to “decouple” from the US is another.
Ultimately, this is the most important difference. China’s crackdown is designed in part to demonstrate the state’s control over the economy, in contrast to US and European regulation which generally aims to protect consumers or ensure that markets function better. The crackdown on entrepreneurs has not been limited to Big Tech — Sun Dawu, the founder of one of the country’s most successful agricultural groups, was sentenced to 18 years in prison on Wednesday, following clashes with the authorities. Corporate success will inevitably be followed by scrutiny, but viewing success as a threat to be contained could cost China dearly.