In May 2022, Chinese Vice Premier Liu He indicated the government’s intention to end its “regulatory rectification” campaign, a series of regulations imposed on the education, ride-sharing and technology sectors.
He is the top economic adviser to Chinese President Xi Jinping, so his message must have been approved by Xi, who seems finally to have realized the damage the year-long crackdown has done to investor confidence.
The Heng Seng index fell 23.7% between December 2020 and mid-May 2022, a result that is partly explained by regulatory repression. While the worst seems to be over, the deeper problems caused by the campaign remain unresolved.
An interpretation of the regulatory crackdown is that the campaign is part of Xi’s strategy to steer China toward a Maoist model of governance in which the private sector shrinks significantly and private companies “are likely to lose what remains of their independence and become mere appendages of the government.” condition”.
However, recent research contradicts this view, as China’s economy is increasingly penetrated by the private sector. In the period 2015-2021, the number of private Chinese Fortune 500 companies tripled from 9 to 32, while the number of all Chinese Fortune 500 companies, including state-owned enterprises (SOEs) and mixed-ownership companies, increased only 40%. .
Another interpretation is that wealth inequality is the target of China’s technological crackdown. Tech company founders are now among China’s wealthiest citizens, a statistic Xi could see as “excess capitalism” and a barrier to “common prosperity.”
But expropriating the combined wealth of China’s top tech entrepreneurs would have no impact on the country’s huge income inequality. Most of the best in China 100 billionaires they do not seem affected by the imperative of “common prosperity”.
The most likely explanation for the campaign is that it is an assault on China’s private business sector. Target companies include taxi platform DiDi, Alibaba affiliate Ant Financial, entertainment streaming service Tencent, food delivery platform Meituan and e-commerce company JD.com.
Professor Yansheng Huang International Management”varieties of capitalism” suggests that these companies eschew business opportunities from state connections and rely instead on the entrepreneurial genius of their founders and international investors.
This distance from the state is interrupted by the crackdown through which the Chinese Communist Party is moving to consolidate political control over corporate cash flows.
China’s large private companies have grown through joint ventures with “special investors,” that is, state-owned companies, over the past 20 years. The period 2000-2019 witnessed a fivefold increase in such joint ventures. In 2019, 358 of the 542 largest private companies were directly connected to state companies, while 73 had indirect connections.
The universe of the largest companies in China looks like a maze in which “big private owners are deeply connected to the state and big state owners have deep ties to private owners”. This labyrinth is exemplified by the East Hope Group conglomerate, a corporate group that operates 236 companies, including 15 “special investor” joint ventures.
Although well evidenced, the details of these connections are vague and are supposed to be beneficial to large private companies. While true, such connections mean that state-owned companies claim private cash flows in exchange for market opportunities of their own.
These “special offers” imply “access the money”: a form of ‘Chinese-characteristic profit sharing’ in which private companies pay for growth opportunities by sharing capital with state-owned companies, whose leaders are likely to pay opaque rents to senior Party officials.
A large private company may choose to be ‘decoupled’ from the state when its business model and access to private capital eliminate the need to pay ‘access money’. This is the case for the main technology platforms targeted by the crackdown, whose digital platforms can generate revenue by registering more users and selling services without the need for “special investors”.
DiDi’s extremely lean and transparent corporate structure, as shown in the company’s initial public offering prospectus, it’s an interesting case. Few state-affiliated investors participated in DiDi’s previous fundraising rounds, as its founders have always sought to raise capital from world-famous names like Apple, Temasek and Alibaba.
Softbank, Tencent and Uber were the main shareholders in DiDi after the initial public offering round, a very different world from East Hope Group.
Not surprisingly, these companies have infuriated the CCP. Former Alibaba Group CEO Jack Ma’s criticism of China’s financial and regulatory system may have triggered this fury, but the underlying reasons run much deeper.
While these companies raised billions of dollars without paying “access money” and kept their distance from the Communist Party, the demand for profit sharing eventually materialized in a government-led regulatory crackdown.
It is not clear how the case of didi will unfold (the company was fined 8 billion yuan (US$1.18 billion) by a Chinese regulator last week for violating data security laws), but much can be learned by looking back at the Jack Ma’s experience with Ant Financial.
Although Ant Group could be allowed to continue with its very late IPO on the Hong Kong Stock Exchange, the company has paid a heavy price. Regulators are pushing for a corporate restructuring in which Ant Financial will take on SOE partners to manage what were once privately owned business units.
The future of corporate capitalism in China looks decidedly bleak.
Martin Miszerak is Visiting Professor at Renmin Business School, Renmin University, Beijing.
East Article was first published by the East Asia Forum, which is based on the Crawford School of Public Policy within College of Asia and the Pacific in the Australian National University. It is republished under a Creative Commons license.