China’s war against its corporate powerhouses

The Chinese government has unleashed havoc against some of the country’s largest corporations. It may backfire.


When Jack Ma, the founder of Chinese e-commerce powerhouse Alibaba, gave a speech in Shanghai in October 2020, he didn’t suspect that it would mark the beginning of his demise. Addressing an audience of corporate and government elites, Ma openly criticised the Chinese government for its handling of the economy. “Outdated supervision” of financial regulation, he claimed, was stifling innovation, while China’s financial regulators resembled an “old people’s club.” To add insult to injury, he called for change, criticising the government’s meddling with private corporations. “The game in the future is about innovation, not just regulatory skills,” he warned.

As it turned out, regulators had little patience for innovators like Ma. The speech would be his last public appearance for several months. The plucky entrepreneur even failed to appear in the final episode of his own talent show, ‘Africa’s Business Heroes,’ which supports aspiring African entrepreneurs. More ominously, his account on Twitter, the altar from where even Chinese entrepreneurs feel free to preach to an audience hungry for their wise words, went silent. Ma’s last tweet to his 655k followers was posted on October 10, 2020, a reminder of his precipitous fall from grace.

The fall of tech barons
Ma’s disappearance from the public eye was not an isolated incident. In November 2020, the much anticipated $37bn IPO of Ant Group, Alibaba’s sister company offering financial services, was cancelled over a “significant change” in regulation. As it would emerge, just a week after his controversial speech, Ma had met with Chinese regulators. Following the meeting, officials issued stricter rules for micro-lending companies, forcing Ant to overhaul its business. Another reason why Alibaba was targeted by authorities was its growing influence in the financial services market, including consumer credit, which surprised Chinese authorities. “In the case of Ant, Alibaba’s finance subsidiary, regulators were increasingly under the impression that they were losing out on oversight of financial flows within China. Alipay and WeChat were taking a near 100 percent market share in the space of payment services providers, so the Chinese government now wants to take back control,” said Kai von Carnap, an analyst at the Berlin-based think tank Mercator Institute for China Studies (MERICS). Last April, Alibaba received a fine of $2.8bn for monopoly abuses; by October 2021, its stock market value had nearly halved compared to the previous year. Although the crackdown would probably have happened anyway, Ma’s caustic words made things worse for him, said von Carnap. “Criticising them {regulators} in their faces lit the fuse that made them prove they were serious about institutional changes.”

Companies must be regulated more tightly and also play their part in creating a more ‘equal’ society

Alibaba is the most prominent victim of a silent war the Chinese state has been waging against its own soldiers in the economic war with the West: Chinese tech corporations. Another tech powerhouse, DiDi Chuxing, China’s dominant ride-hailing company, is under investigation for data security breaches. Analysts believe that the firm drew the ire of the government by listing on the New York Stock Exchange last June, before the Cyberspace Administration of China (CAC) had completed its data security review. Last August, Chinese authorities introduced regulation forbidding teenagers from playing video games for more than three hours a week, a measure that has hit the country’s $45bn video gaming industry; no new games have been approved by China’s gaming regulator since August. Tencent Holdings, a gaming behemoth, had lost around a third of its value by November, while its music branch was forbidden from signing exclusive deals.

Jack Ma, Founder of Alibaba
Jack Ma, Founder of Alibaba

At first glance, the clampdown could be interpreted as China-style antitrust action against digital powerhouses that had long overplayed their hand. “In Beijing’s eyes, more regulation on big tech is good for the country’s tech development, because small players will have more room to innovate,” said Linghao Bao, an analyst at Beijing-based consultancy Trivium China. For many years, big tech companies were allowed to skip regulatory oversight in order to grow exponentially, a goal the Chinese government saw as compatible with its own growth goals. These days are now over. “One common driver behind all these cases is that these companies offended regulators or pursued regulatory arbitrage and angered some major decision makers,” said Xiaomeng Lu, Director in Eurasia Group’s geo-technology practice, adding that Alibaba and Ant were punished for their aggressive ‘choose one from two’ strategy, which prevented affiliate merchants from collaborating with other platforms.

However, the clampdown goes far beyond what would be perceived as antitrust action in the West. Last summer, the Supreme Court outlawed the ‘996’ overtime policy that allows tech companies to employ people from 9am to 9pm, six days a week. In July, China wiped out the country’s $100bn edtech industry overnight by introducing new regulation forbidding companies from providing pupils with core tutoring services and banning IPOs and foreign investment into such firms.

The state takes over
Data, singled out last year as a major production asset, lies at the centre of China’s push to tighten its grip on the tech sector. The government already collects huge volumes of data through its social credit system, monitoring citizens via a network of algorithm-powered surveillance systems. It now wants access to data held by private companies, as evidenced by new regulations introduced earlier this year. One of them, the Personal Information Protection Law, requires firms to seek approval from state regulators to move data out of China. Another piece of legislation, the Data Security Law, focuses on the protection of ‘core data’ that affect national security. “There is a concern that data may be obtained and exploited by foreign adversaries, particularly by the US, endangering China’s national security. This is partly a result of the Snowden revelations, which were a big wake-up call for Beijing,” said Rebecca Arcesati, an analyst at MERICS, specialising in China’s digital and data policies. Companies that don’t comply with the new rules will face severe penalties. “The question is, how can global companies, such as Chinese wireless equipment vendors and digital platforms, guarantee that the data they collect overseas will not be shared with the Chinese state? China’s emerging data governance regime is making the answer clearer: they can’t,” Arcesati warned.

China has launched a campaign to achieve tech supremacy in key areas its government perceives as crucial for the country’s future

Foreign companies operating in China may find the new rules too strict or ambiguous, particularly those operating data centres. “For very profitable firms, such as Tesla, this {compliance burden} may not be a big deal. For smaller players that can’t afford the extra cost, this will add to their operational and financial stress operating in China,” Xiaomeng Lu said. Many of them already take a conservative approach to data compliance, due to a lack of understanding of local regulation. There is a risk that tighter regulation could put these firms at a disadvantage compared to Chinese competitors by making it more difficult for them to transfer data from China to other markets, Arcesati said, adding that there might be more pressure on companies to create China-specific solutions that will be incompatible with global ones. Last October, LinkedIn became the latest foreign social media platform to leave the country, citing a “significantly more challenging operating environment,” interpreted as a covert reference to censorship.

In November, Epic Games, a US company partly owned by Tencent, stopped accepting China-based registrations for Fortnite, a popular video game. “Investors did not take regulatory risk seriously when it came to China. They assumed it was a free for all, and so long as the economy grew the Party didn’t care who was getting rich and how,” said Shehzad Qazi, Managing Director at China Beige Book International, an independent provider of data on the Chinese economy, adding: “This turned out to be very naive and short-sighted. China remains very investable, but smart money will now seriously price in regulatory and broader political risk.”

The long arm of the Chinese state has also reached corporate board rooms. Large firms have long been required to run ‘party committees’ bringing together executives and party officials to discuss how corporate strategies align with state policies. The government is now pushing for direct board representation through the ‘golden share’ rule, which allows government agencies to take board seats with stakes of just one percent.

Earlier this year, a government fund purchased such a stake in ByteDance, the company behind the social media platform TikTok, along with a board seat. “The impact of golden share on companies is still quite limited at this point. The new board member of ByteDance is merely a former mid-level propaganda official,” Trivium’s Bao said. “This person is unlikely to meddle with corporate decisions at ByteDance.” However, some analysts note the novelty and far-reaching consequences of the measure. “You could interpret that as a more public and direct form of influence at these companies,” von Carnap from MERICS said.

Chinese tech companies have also been victims of increasing tension between the US and China. A series of delistings from US exchanges of several Chinese firms, overall worth over $2trn until mid-2021, will consolidate the ongoing decoupling of the two economies. Many Chinese companies, including Alibaba, are instead opting for a second listing in Hong Kong. NASDAQ Golden Dragon China Index, which tracks New York listed firms, had lost by November a third of its value since the beginning of the year. New rules issued by China’s cyberspace watchdog will make it harder for firms to list outside of China, while newly introduced US regulation also makes delisting easier for non-compliant foreign firms, following a scandal involving Luckin Coffee, a US-listed firm caught lying about its sales numbers. “In the past decades, overseas listings and the dependence on foreign financial centres was a pragmatic alternative for Chinese companies, given the recognised institutional barriers in China’s financial system,” said Max Zenglein, chief economist at MERICS and expert on China’s macroeconomic development, adding: “This trend {reshoring} was inevitably going to happen. An aspiring economic superpower wants its companies to list at home, not abroad.”

China has launched a campaign to achieve tech supremacy in key areas its government perceives as crucial for the country’s future, from AI to space technology. Surprisingly, the crackdown on consumer-orientated big tech chimes with that policy, according to Eurasia’s Xiaomeng Lu: “From Beijing’s perspective, knocking back on these platforms’ troublesome practices is well-aligned with its goal of tech supremacy – the government wants to steer companies towards ‘hard technology’ investment in semiconductors, AI and quantum computing, and move away from what they view as ‘low-end’ competition.” However, some think that the policy may backfire: “In the real world it is hard to separate online platforms from hi-tech manufacturing, so the crackdown will probably hurt the overall technology push,” said David Dollar, a former US Treasury emissary to China and senior fellow at the Brookings Institution’s John L. Thornton China Centre.

Prosperity for all
The purge of tech companies is symptomatic of a broader shift in the Chinese economy. Last August, the party’s financial and economic affairs committee declared that it was necessary to “regulate excessively high incomes” to ensure “common prosperity for all,” a term that has become a synonym for China’s new economic dogma, putting emphasis on fair distribution of wealth. In a speech made the same month, the country’s leader, Xi Jinping, delineated the basic tenets of the “common prosperity” policy, explaining that equality would become a priority by “rationally adjusting” excessive incomes. The timing of the speech, amid the crackdown on internet giants, sent the message that the era of “growth-at-all-costs” expansion for digital behemoths was over.

For many years, big tech companies were allowed to skip regulatory oversight in order to grow exponentially

Although the Chinese government hasn’t fleshed out the details of the new policy, it is expected that large corporations will face higher taxation, pressure to make donations and strong antitrust action. Many Chinese corporations and entrepreneurs rushed to embrace the doctrine, donating billions for the common good. Alibaba has pledged to donate $15.5bn to help reduce poverty. But the damage has been enormous, wiping out over $1.5trn of stock market value from China’s biggest tech groups by mid-2021. “Chinese entrepreneurs have benefited greatly {from China’s growth}, but in the wake of their success several societal problems have been created,” said Shehzad Qazi from China Beige Book International, adding: “Now these companies must be regulated more tightly and also play their part in creating a more ‘equal’ society.”

A key part of the new policy is expected to be higher spending on healthcare and social security, a radical shift for a country that, although nominally Communist, lacks a Western-style welfare state. “China has very little redistribution through its taxes and expenditures, so policies such as a property tax and unification of rural and urban social services could help develop the middle class,” Dollar said, adding: “This would enable China to move away from its over-reliance on investment and develop a more sustainable growth path.” The drift towards a more egalitarian economic policy marks the abandonment of market reforms introduced in the ’70s by Deng Xiaoping that encouraged profit-making, encapsulated by the motto “Making money and getting rich is glorious.” Tech corporations, the poster children of China’s economic miracle, may be the first, but not last, victims of a return to purist Communist dogma. “Since 2013, there has been a systematic reversal by the Party to the extent that private profits are no longer morally justified and getting super-rich is morally wrong, paving the ground for the recent introduction of the ‘common prosperity’ policy” said Zhiwu Chen, who teaches finance at Hong Kong University.

There is a concern that data may be obtained and exploited by foreign adversaries, particularly by the US, endangering China’s national security

However, many question the efficacy of the policy. “China’s leaders seem prepared to accept a marked short-term slowdown in growth as a price for greater financial stability over the long-term,” said Eswar Prasad, an expert on Chinese trade and financial policies who teaches at Cornell University, adding: “The government’s moves to simultaneously increase state control of the economy and the lack of clarity about its intentions towards private enterprise could intensify volatility and act as a drag on growth in the long-term.” Tighter control may lead to lower profits, added Chen: “The common prosperity policy is cutting private incentives to invest and start businesses, which will slow down economic growth and hurt the housing market down the road.”

Evergrande housing complex
Evergrande housing complex

A real estate crisis
A crucial part of the new economic policy is reining in debt-fuelled property investment and speculation. Currently, real estate accounts for around 30 percent of the country’s economy, which the government aims to bring closer to single-digit numbers.

In 2021, China had 65 million empty homes, many concentrated in ‘ghost towns’; the country’s imminent demographic crisis, with senior citizens projected to account for 40 percent of the population by 2050, means that many of these houses will remain empty forever. Logan Wright, Director at Rhodium Group, a research provider, expects the property sector’s underperformance to continue well into 2022, affecting the country’s growth rates.

The sector’s crisis came to the fore last September when Evergrande, one of the country’s largest property developers, missed a series of bond coupon payments. The company, burdened with more than $300bn of liabilities, has become a symbol of an economic model the government is now rejecting, after decades of unchecked growth. Investors hoped that the central bank would bail out Evergrande, fearing a spillover across the real estate sector. However, government officials publicly criticised the company for poor management and excessive risk-taking, marking the shift in the way large corporations are treated by the state. Regulators have introduced measures to tackle property speculation. The most important one is a planned property tax, expected to deflate the real estate sector. “They are now addressing the real elephant in the room by going after highly leveraged real estate developers. The concern over financial risk trumps their concern over lower economic growth,” said Zenglein from MERICS, adding: “The Evergrande fallout is the result of deliberate measures taken by regulators to rein in risky business practices and it sends a powerful message.

Evergrande’s crisis did not come as a surprise, allowing the government to prepare and take necessary steps to contain the situation if necessary.” The firm’s size and links to other developers have raised concerns over a property price collapse that could lead to a financial crisis. Markets may be temporarily over-reacting, said Prasad from Cornell University, but the danger will persist: “Fears that a bankruptcy filing might signal a broader unravelling of the Chinese financial system could precipitate capital outflows, put downward pressure on the currency, and cause at least temporary turmoil in foreign exchange markets.” More companies may also follow a similar path, according to Zhiwu Chen from Hong Kong University, clipping China’s economic prospects. “While official interventions will prevent large-scale crises from happening, the costs from past excessive debt-fuelled investing and business expansion in China will be gradually spread across Japanese-style ‘lost decades,’ with the negative consequences manifested gradually, instead of a crisis.”

Revolution 2.0
To explain China’s authoritarian drift, many scholars turn to a dark page of the country’s history: the Cultural Revolution, an upheaval that cost the lives of an estimated 1.5 million people from 1966 to 1976. In an attempt to consolidate his power within the Communist party and avert criticism over economic mishaps, Mao Zedong unleashed a violent youth movement that paused the country’s economic and technological development. Many scientists were arrested, imprisoned or executed. Universities stayed closed for several years and entrance exams were cancelled.

Xi Jinping, President of China

However, basic education expanded, particularly in the countryside, with the proportion of children who had completed primary education doubling within a few years. Analysts point to the legacy of this tumultuous period as a lodestar guiding the current leader of the country, Xi Jinping. Like Mao, Xi sees himself as a modern helmsman turning the ship of Chinese society to the familiar waters of egalitarianism, making the wellbeing of the great unwashed living in the countryside the state’s priority, following decades of unbridled economic growth.

In government affairs, Xi is also borrowing a page from Mao’s little red book. Defying the unwritten rule that requires the country’s leadership to pass the torch to a new generation every decade, he is preparing to renew his Presidency for a third five-year term next year, after abolishing the two-term limit and purging hostile party officials. In a bid to win the hearts and minds of low-rank party members, he often presents himself as an empathetic leader focused on the problems of ordinary citizens, such as unaffordable housing. “The rich and the poor in some countries are polarised with the collapse of the middle class leading to social disintegration, political polarisation and rampant populism – the lessons are profound!” Xi said in his speech last August.

However, the parallels with Mao end there. “Xi has some stylistic similarities with Mao, and his authority within the party appears to be strong relative to Xi’s predecessors, but he does not dominate the Party anywhere near the extent that Mao did,” said Andrew Walder, an expert on Chinese history at Stanford University. Unlike Mao, a radical Marxist who according to Walder opposed the idea that the Communist party’s main task was to bring economic growth, Xi believes that a large private sector is essential for economic development, but only under the tight control of the Communist party. “Xi is essentially a nationalist who deploys Marxist and Maoist symbolism, which is primarily an exercise in nostalgia about the Party’s former revolutionary past. Mao was a radical who was anti-bureaucratic. Xi simply wants to tighten up the Party’s bureaucratic control to ensure that it continues in power,” said Walder.

Despite Xi’s ambitions, China may have reached a point where economic development requires less, rather than more, state control. Even before the pandemic, growth rates were hovering around six percent (see Fig 1) and are expected to drop further, a major downgrade from the double-digit rates of past decades. The clampdown on fast-growing tech companies has also taken its toll.

In the third quarter of the year, (see Fig 2) China’s growth slipped to an underwhelming 4.9 percent, with lockdowns and a problematic vaccination campaign threatening recovery. Private debt is also rising, a sign that China now faces the problems of a mature, middle-income economy.

China’s ratio of household debt to disposable income reached a record high of 130.9 percent in 2020. So far, the country’s response to these challenges has been a mix of aggressive nationalism abroad and tighter control at home. However, aiming for a combination of economic growth and national assertion, China may get neither. “Everything nowadays has become a matter of national security, because of Xi Jinping’s all-encompassing definition of what constitutes national security,” said Arcesati from MERICS, adding: “That balance will be difficult to strike.”