The Biggest Private Companies In China Are In Chaos
China's biggest private companies are in chaos. It's all part of Beijing's plan
In the wake of China's anti-private enterprise campaign, many powerful Chinese corporations have seen their stock values plummet by more than $1.2 trillion. This has raised concerns about the future of innovation in the country, which is the world's second largest economy.
The ultimate goal of Beijing's aggressive bid for control, on the other hand, is not to wreak havoc. The Chinese government wants to make it clear to its corporate allies that accessing capitalist markets is acceptable — as long as it is done on the terms set by the ruling Chinese Communist Party.
Increasingly aggressive selling has taken place in recent months as Chinese authorities have imposed fines on companies, removed apps from app stores, and demanded that some companies completely overhaul their operations.
Hundreds of billions of dollars in market value have been wiped out in the last week alone, following the announcement of restrictions on China's for-profit education industry and its food delivery sector by government regulators.
According to Beijing, the efforts to rein in private enterprise are intended to protect the economy and the citizens of the country from the dangers of economic instability. They are also intended to address long-standing concerns about overwork, data privacy, and educational inequity, among other things.
As Alex Capri of the Hinrich Foundation put it, "Beijing's crackdown on private enterprise is ultimately about control." Capri is a research fellow at the foundation. "The top priority is to prevent private companies from engaging in behavior that encourages more independent and potentially non-conformist activities, which would undermine Beijing's state-centric model."
A major corporate shakeup
Corporate China has been rocked by Beijing's reforms.
The government began by focusing on technology, pulling the plug on Ant Group's initial public offering (IPO) in November. It was later decided that the company, which is best known for its Alipay payment app, should restructure its operations and transform into a financial holding company.
There has been no part of the technology industry that has escaped scrutiny. Alibaba (BABA) was fined a record-breaking $2.8 billion by regulators after they accused the e-commerce company of acting like a monopoly in the Chinese market. Other companies, including social media and gaming behemoth Tencent (TCEHY) and e-commerce platform Pinduoduo (PDD), have also been hauled before authorities who are looking into allegations of anticompetitive conduct.
Furthermore, Didi was banned from app stores earlier this month, just a few days after the ride-hailing company went public in the United States.
Regulators have also set their sights on other sectors of the economy. Other Chinese companies that are publicly traded in the United States have been singled out by authorities who are investigating them for data security violations. In a dramatic move, China banned education and private tutoring companies from making a profit or raising funds on stock exchanges on July 24. The ban will almost certainly force many major corporations to rethink their entire business model as a result of the new rules.
A research report published last week by Goldman Sachs analysts described the crackdown as "unprecedented in terms of its duration, intensity, scope, and the velocity with which new policy announcements are made." The strategy was described as a "rebalancing of socialism and capital markets."
According to the authors, "Chinese authorities are prioritizing social welfare and wealth redistribution over capital markets in areas that are deemed social necessities and public goods."
Merit to the crackdown
According to analysts, Beijing's decision to frame its unprecedented crackdown as a necessary public good is a wise one.
As an example, the regulatory crackdown on Didi and other internet companies in China was based on allegations that those companies mishandled sensitive data about their users in China, posing risks to personal privacy and the national cybersecurity of the country. Also causing concern in the country is the widespread data breaches, misuse of personal information, and corporate surveillance that have occurred in recent years.
A great deal of reform has also been prompted by inequalities within education and private learning. During the announcement of the government's restrictions on for-profit tutoring last week, officials claimed that the industry had been "hijacked" by capital and that this had "distorted the nature of educational opportunities."
The education system in the country is highly competitive and exam-oriented, which has led to concerns about student fatigue in recent years. Private tutoring agency, on the other hand, has exploded as urban middle-class families have attempted to give their children a leg up on the competition by preparing them intensively for exams — but such resources are prohibitively expensive.
As a result of growing concerns about income and educational disparities, said Sonja Opper, a professor at Bocconi University in Italy who specializes in China's economy and private sector, the government's emphasis on inequality is a "smart choice."
The country is also becoming increasingly concerned about unemployment — particularly the well-being of its young workers, who are becoming increasingly vocal in their dissatisfaction with a crushing culture of overwork.
A movement known as "lying flat" — or "tangping" in Chinese — has exploded in popularity among young people in recent years. Due to the diminishing rewards associated with achieving such goals, it encourages them to resist societal pressures to work hard, get married, have children, and buy property.
Chinese technology companies have been widely criticized for putting pressure on young people to work long hours and for promoting an overwork culture in the country. The term "996," which refers to the practice of working from 9 a.m. to 9 p.m. six days a week, has sparked particular outrage among urban young workers. It is said to be common among large technology companies and startups, as well as among small businesses.
The Chinese Communist Party, which is in power, appears to be concerned about the "lying flat" philosophy. In recent months, the term "tangping" has been heavily censored on Chinese social media, and the movement has been criticized by state-run media.
In a May editorial, the state-owned Guangming Daily stated that "the creative contribution of youths is indispensable for our country to achieve high-quality development." It characterized the "lying flat" movement as problematic, given that China is grappling with a labor shortage that could jeopardize the country's long-term economic objectives.
The risk of aggressive action
The tactics employed by Beijing are fraught with danger. Analysts are concerned that the crackdown could kill China's entrepreneurial spirit, which they say is a critical component of the country's economic liberalization and rapid growth. In addition to the $1.2 trillion in market value that Goldman Sachs estimates has been wiped off of prominent stocks, they say the crackdown could kill the country's entrepreneurial spirit.
Steve Tsang, director of the SOAS China Institute at London's SOAS University of London, believes that increased regulation will benefit the Chinese corporate world because some sectors are currently unregulated. "Some sectors are currently unregulated," he says. "However, the increased level of control sends a signal to private entrepreneurs that they must now pay closer attention to their actions and bring their businesses into compliance with Party guidelines or leadership," says the author.
Similar concerns were expressed by Opper, a professor at Bocconi University, who added that Beijing's decision to target specific companies may not be the "most effective policy response." She asserted that progressive taxation and education assistance for the poor could be more effective tools in the fight against inequality.
According to her, "China's government may well believe that more restrictive policies can be implemented now that the country has moved closer to the technological frontier." The entrepreneurial spirit — which had been successfully unleashed by leaders prior to [President] Xi Jinping — is highly unlikely to survive under a highly restrictive regulatory regime, according to the authors of the paper.
According to Tsang, the reforms really boil down to one thing: economic inequality. He warned that if left unchecked, economic inequality could undermine the legitimacy of the Communist Party.
In his opinion, "what Xi is attempting is not a crackdown on private businesses, but rather an increase in regulations (or party control) over private enterprises in order for them all to'serve the people' or follow the leadership of the Party."
