China’s crackdown on private companies in 2021 has cut the market value of some of the country’s largest companies by more than $ 1 trillion.
Beijing’s tighter grip on the economy came as officials stressed the importance of prioritizing “quality” growth that benefits the general population over maximizing gross domestic product.
The “shared prosperity” is targeting sectors that range from real estate and education to technology and entertainment, and is driving the share price of big names like Alibaba Group, Tencent Holdings, Didi Chuxing Technology Co, and New Oriental Education and Technology Group and slows down the personal influence of company giants like Jack Ma and Pony Ma.
The crackdown has left many companies and investors nervously wondering about the future of growth and innovation in China.
“For companies, this means that their job is no longer to make money, but to contribute to social goods,” Trey McArver, an analyst at Trivium China, told Al Jazeera. “Where companies don’t do that, they are confronted with rapid regulatory measures.”
Kyle Jaros, associate professor of global affairs at Notre Dame University, told Al Jazeera that the Chinese Communist Party has made it clear that “the party state can dictate terms and conditions, not the other way around.”
âThis meant downsizing people like Alibaba’s Jack Ma, forcing the private sector to show obedience – like Tencent’s Pony Ma and Xiaomi’s Lei Jun – and demonstrating that the party state has the right to set both technical and moral standards . “Parameters for doing business,” said Jaros.
In August 2020, Beijing introduced the âthree red linesâ policy to prevent over-indebted private developers from borrowing.
On the grounds that âthere are houses to live in, not to speculateâ, politicians tried to cool the real estate market, which had expanded rapidly over the past decade amid rampant speculative buying.
The credit restrictions have been cited as the main driver behind the liquidity crisis, which resulted in two of China’s largest private property developers – Evergrande Group and Kaisa – defaulting on their loans. New regulations were introduced in October banning smaller Chinese cities from building skyscrapers higher than 250 meters.
“The regulatory raids are part of a wider paradigm shift that has taken place in Beijing’s approach to its economic policies and management,” Shehzad Qazi, managing director of China Beige Book International, told Al Jazeera.
“This also includes recognizing that China’s old debt-driven, investment-intensive growth model has run off the rails.”
In November 2020, Chinese regulators suspended a planned $ 37 billion IPO of Jack Ma’s Ant Group.
Beijing said it suspended the largest public offering in history to protect investors, but many analysts believe Ma’s public criticism of China’s financial regulators and state banks sparked the move.
Andrew Collier, founder and chief executive officer of Orient Capital Research, told the New York Times that the suspension may have served to protect state banks that have paid Ant Group fees to help them lend to customers at the expense of their own profitability to forgive.
“My personal view is that the banks were looking for an excuse to nip this in the bud and also give them enough time to try to get their own online businesses going,” said Collier.
In February of this year, Beijing announced new anti-monopoly rules for technology companies. This included taking measures to ensure that companies were not using algorithms that might encourage excessive spending or disrupt public order. Alibaba, Tencent and Baidu are among the tech giants that have been fined for allegedly monopoly practices.
In April, regulators imposed a $ 2.8 billion antitrust fine on Alibaba.
Beijing has also expressed its opposition to tech companies seeking foreign IPOs. In July, days after ride hailing giant Didi launched its $ 4.4 billion IPO,
New regulations require companies with data of more than one million users to obtain government approval before they can be listed abroad, and allow regulators to block entries for national security reasons.
In August, Beijing banned under 18s from playing video games for more than three hours a week to prevent gambling addiction.
In September, Beijing banned cryptocurrency transactions and mining. Banks, institutions, and online payment companies were prohibited from conducting transactions in cryptocurrencies, and fund managers were prohibited from investing in cryptocurrencies as assets.
The Chinese government has also built its own state-backed cloud system that competes in the private sector with Alibaba, Huawei and Tencent. In the city of Tianjin, locally controlled companies were asked to migrate their data from private-sector operators to the state-supported cloud.
“The new paradigm prioritizes national security concerns, particularly those related to data, and draws more attention to socio-economic trends such as inequality, which can cause instability and threaten Party control,” said Qazi.
In July, China announced restrictions on private education aimed at easing pressure on school children and reducing the cost of tutoring for parents.
Beijing ordered that private tutoring companies be registered as non-profit and not be allowed to offer subjects that are already taught in schools.
In addition, companies are prohibited from raising capital abroad and giving lessons on weekends and public holidays. The crackdown turned the $ 120 billion industry on its head, with New Oriental Education and Technology, China’s largest private tutoring company, dropping the market value of its US-listed stocks by $ 7.4 billion.
In August, Beijing ordered broadcasters not to work with entertainers who represented “false political positions” and “feminine” styles that it considered unpatriotic. Beijing also regulated the sale of fan merchandise for controversial artists and banned online platforms from publishing popularity lists.
Along the road
The pursuit of “common prosperity” could mean that in the long term, China will move from the capitalism of the “wild west” to a more consumer-oriented economy that aims to promote socialist values. While the days of unbridled economic expansion may be over, analysts believe that companies that can adapt will thrive.
McArver predicts that companies that contribute to the good of society, such as health and education, will find a largely favorable operating environment, while companies involved in the development of core technologies will also do well.
“Successful business people in China have always understood that they are successful when their business is meshed with broader policy initiatives,” said McArver.
âThat will continue to be the case. Business people will move away from sectors that Beijing sees as unproductive and towards those that Beijing supports, such as environmental protection and advanced manufacturing. “
Qazi said innovation is “guided by the party’s priorities”.
“Companies in sectors that the state is prioritizing, such as high-tech manufacturing, where China is trying to reduce reliance on foreign countries, will thrive,” he said.
However, the harsher environment could force some companies to postpone expansion or look elsewhere for opportunities.
“Some firms may decide that a more scrutinized regulatory environment and greater pressure to pursue partisan social and political missions will affect their bottom line,” Jaros said. “As a result, they can limit their scope for innovation, restrict or redirect investment, or in some cases look for more open markets outside of China.”