“Cogent reasons drive Beijing’s massive crackdown on Big Tech, but are unlikely to stifle China’s entrepreneurial “animal spirits” or derail China’s trajectory”
By Andrew K.P. Leung (International and Independent China Strategist. Chairman and CEO, Andrew Leung International Consultants and Investments Limited)
In November 2020, Alibaba’s Ant Financial halted its planned Shanghai and Hong Kong listings less than 48 hours before going public, following a last-minute summon of Jack Ma to meet with Beijing’s financial regulators.
Soon afterwards, a clampdown tsunami swept through much of the $4 trillion technology sector. Casualties include “tech stars” such as Tencent (internet conglomerate), Meituan (food delivery), Pinduoduo (e-commerce), Didi (ride-hailing app), Full Truck Alliance (freight logistics app), Kanzhun (recruitment), New Oriental Education and TAL Education (online private-tutoring).
According to Bloomberg, as of 7 July, Chinese tech giants had lost over $831 billion in value since February. (1)
Stephen Roach of Yale University and former chairman of Morgan Stanley Asia, lamented in Project Syndicate on 27 July about the stifling of China’s “animal spirits”. (2)
The Economist of 14th August thinks that President Xi Jinping’s assault on tech will change China’s trajectory (3).
So, why is Beijing doing it?
Some pundits suggest that up to now, China’s manufacturing high tech icons, such as Huawei and ZTE, appear to be spared. Does this mean a signal to mobilize the whole tech sector towards self-sufficiency in high-end semiconductor microchips, China’s tech Achilles heel?
This conjecture is somewhat off-the-mark. Closing down Didi’s ride-hailing apps, for example, will not turn it into ASML (Dutch proprietor of the world’s most advanced microchip lithographic machines) or TSMC (Taiwan Semiconductor Manufacturing Company, the world’s dominant semi-conductor producer).
Nor does Beijing want to downplay the importance of tech-driven consumer businesses, given its “Dual Circular Economy” strategy rebalancing over-dependence on manufacturing and exports with domestic consumption. China’s “Big Tech” giants have created the world’s largest e-commerce market, twice the size of the United States’. (4)
Are some rapidly-rising tech stars like Jack Ma of Alibaba and Pony Ma of Tencent Holdings too big for their boots?
The rapid rise of a variety of tech giants and “unicorns” appears to be blindsiding Beijing’s regulators, increasingly wary of their ability to elude regulatory rules, cannibalize related markets, gobble up smaller rivals, stifle competition, and exert an outsized social influence, not always benign, on a whole generation of tech-savvy youngsters.
They could also be mindful of America’ early antitrust laws and lessons of the last global financial crisis triggered by years of unbridled financial liberalism.
As for the education sector, China’s National College Entrance Examination (Gao Kao) has become a monolithic, career-defining obsession to tens of millions of pre-university kids and their families. Many parents scrape to hire private tuition to give their only child a head start for better universities.
This phenomenon widens social inequality in a country with one of the highest Gini Coefficients in the world. (A Gini Coefficient of Zero represents perfect equality and a Coefficient of One, perfect inequality). China’s Gini coefficient is around 0.47, compared to 0.41 of the United States. In a socialist country like China, inequality above 0.40 is potentially destabilizing.
It also exposes the misguided obsession with examination results, to the neglect of all-rounded character development, a key driver for a dynamic, innovation-driven society.
What is more, this exacerbates the already-onerous costs of raising a child, worsening the nation’s aging demographics and chances of realizing the China Dream.
Another dimension is the reliance on Western textbooks on learning the English language, with content often at variance with China as a socialist country. At a time of intensified ideological rivalry with the United States, a preference for local teaching material is understandable.
Putting the above in context is an “Outline of Implementation of Building China’s Law-based Governance 2021-25” issued by the State Council on 11 August, with specific reference to strengthening enforcement of anti-monopoly and “anti-unfair” competition laws. (5)
These diktats are central to President Xi’s “people-based governance”. Vital imperatives include the resolution of socio-economic, technological, financial and other challenges to the Party’s legitimacy, including societal safeguards, social justice, government responsiveness, fair competition, education quality, as well as technology, data, financial and national security.
Would Beijing’s tech crackdown change China’s trajectory, as The Economist claims? Or are China’s “animal spirits” being sacrificed, as Stephen Roach fears?
President Xi remains determined to drive China’s economy towards innovation and indigenous technology, with a robust pivot towards domestic consumption.
More than 8-9 million university students graduate annually, more than the numbers of the US and India combined. More than 40% are in Science, Technology, Engineering, and Mathematics (STEM). China is second only to the US in the number of scientific journal publications, while its leading universities are climbing up in global rankings.
China’s total research and development expenditures will grow by more than 7% annually with priority for key areas to enable China to become a global leader in science by 2035: Artificial Intelligence (AI), quantum computing, integrated circuits, brain sciences, genetics, biotechnology, clinical medicine, health care, and deep-earth, sea, space and polar research. (6)
As for productivity, the retiring age would ease gradually, with automation and rapid urbanization neutralizing any slag. A “2035 Vision” includes doubling the nation’s high-speed rail-lines, already more than two-thirds of the global total, to 70,000 km over the next 15 years. This will link all cities of over 500,000 citizens, with an expanded rail network by 200,000 km to connect all towns with over 200,000 inhabitants.
With a reformed hukou (household registration) system, the urbanization rate is to increase from 60.6% in 2019 to 65%, doubling China’s consumer middle class to 800 million by 2035. Over time, labor productivity growth is expected to outpace overall GDP growth. (7)
China’s tech giants are amongst the country’s most profitable businesses near the top of the Fortune 500 List (8). In 2021, Alibaba is ranked the fifth-largest AI company (9). The Boston Consulting Group accords Tencent the 26th position amongst the world’s top 50 most innovative enterprises. (10).
Beijing is not so foolhardy as to kill the goose that lays the golden eggs. The likes of Alibaba, Tencent, ByteDance (with TikTok), and other nimble business leaders are no strangers to sudden bouts of rule-tightening or relaxation. A period of adjustment and adaptation is inevitable. But to claim that this will change China’s long-term trajectory appears an over-exaggeration.
Author: Andrew K.P. Leung (International and Independent China Strategist. Chairman and CEO, Andrew Leung International Consultants and Investments Limited)
(The views expressed in this article belong only to the author and do not necessarily reflect the views of World Geostrategic Insights).
Image Credit: Chinadaily.com.cn
References
1. Down $831 Billion, China Tech Firm Selloff May Be Far From Over, Bloomberg, 7 July, 2021(accessed 14 August, 2021) $831 Billion Selloff in China Tech, Including Didi, May Not Be Over – Bloomberg (accessed on 15 August, 2021)
2. China’s Animal Spirits Deficit, Stephen Roach, Project Syndicate, 27 July, 2021 (accessed on 14 August, 2021) China’s Animal Spirits Deficit by Stephen S. Roach – Project Syndicate (project-syndicate.org) (accessed on 15 August, 2021)
3. Xi Jinping’s assault on tech will change China’s trajectory, The Economist, 14 August, 2021 (accessed on 14 August, 2021) Xi Jinping’s assault on tech will change China’s trajectory | The Economist (accessed on 15 August, 2021)
4. The 10 Largest E-commerce Markets in the World by Country, Business Com, 15 April, 2020 10 Largest E-commerce Markets in the World – business.com (accessed on 15 August, 2021)
5. China maps out new blueprint on building of rule of law government, State Council of the People’s Republic of China, 12 August, 2021China maps out new blueprint on building of rule of law government (www.gov.cn) 中共中央 国务院印发《法治政府建设实施纲要（2021－2025年）》_新华网 (xinhuanet.com) (accessed on 15 August, 2021)
6. China science: 7 sectors to get extra R&D funding, support as Beijing pushes for global leader status, South China Morning Post, 6 March, 2021 China science: 7 sectors to get extra R&D funding, support as Beijing pushes for global leader status | South China Morning Post (scmp.com) (accessed on 15 August, 2021)
7. China’s Low Growth – What does it mean for the World, Andrew K P Leung, The Global Analyst, India, April 2021. Analyst August-07 (andrewleunginternationalconsultants.com) (accessed on 15 August, 2021)
8. China’s state-owned banks and tech giants are the country’s most profitable companies, Fortune, 4 August, 2021 Fortune Global 500: China’s state-owned banks, tech giants are most profitable | Fortune (accessed on 15 August, 2021)
9. Top Performing Artificial Intelligence Companies of 2021, Datamation, 9 April, 2021 Top Performing Artificial Intelligence (AI) Companies of 2021 (datamation.com) (accessed on 15 August, 2021)
10. The 50 Most Innovative Companies Over Time, 2021 Ranking, The Boson Consulting Group Historical Rankings of the 50 Most Innovative Companies | BCG (accessed on 15 August, 2021)