China’s crackdown on private enterprise in 2021 knocked more than $1 trillion off the market value of some of the country’s largest companies.
Beijing’s tightening grip on the economy came as officials stressed the importance of prioritising “high-quality” growth that benefits the general population over maximising gross domestic product.
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The “common prosperity” drive targeted sectors ranging from real estate and education to technology and entertainment, tanking the stock price of household names such as Alibaba Group, Tencent Holdings, Didi Chuxing Technology Co, and New Oriental Education and Technology Group, and reining in the personal influence of corporate bigwigs such as Jack Ma and Pony Ma.
The crackdown has left many businesses and investors wondering nervously about the future of growth and innovation in China.
“For companies, this means that their job is no longer to make money, but instead to contribute to societal goods,” Trey McArver, an analyst at Trivium China, told Al Jazeera. “Where companies are not seen doing that, they will face swift regulatory action.”
Kyle Jaros, associate professor of global affairs at the University of Notre Dame, told Al Jazeera the Chinese Communist Party had made it clear the “party-state can dictate terms to business, not the other way around.”
“This has meant cutting people such as Alibaba’s Jack Ma down to size, forcing the private sector to demonstrate obeisance – as with Tencent’s Pony Ma and Xiaomi’s Lei Jun – and demonstrating that the party-state has the right to set both technical standards and moral parameters for business activity,” Jaros said.
In August 2020, Beijing introduced the “three red lines” policy to prevent overleveraged private developers from taking on new loans.
With the rationale that “houses are for living, not for speculation,” the policy sought to cool the property market, which had expanded rapidly over the last decade amid rampant speculative buying.
The lending curbs have been cited as a primary driver of the liquidity crisis that led to two of China’s largest private developers – Evergrande Group and Kaisa – defaulting on their loans. In October, new regulations were rolled out to prohibit smaller Chinese cities from building skyscrapers taller than 250 metres.
“The regulatory crackdowns are part of a broader paradigm shift that has taken place in how Beijing is approaching its economic policy and management,” Shehzad Qazi, managing director of China Beige Book International, told Al Jazeera.
“This includes acknowledging that China’s old debt-fueled, investment-heavy growth model has run out of road.”
In November 2020, Chinese regulators suspended a planned $37bn initial public offering by Jack Ma’s Ant Group.
Beijing said it suspended what would have been the biggest IPO in history to protect investors, but many analysts believe Ma’s public criticism of China’s financial regulators and state banks triggered the move.
Andrew Collier, founder and managing director of Orient Capital Research, told the New York Times the suspension may have been to protect state banks that paid Ant Group fees to help them extend credit to customers at a cost to their own profitability.
“My personal view is that the banks were looking for an excuse to nip this in the bud and also give them adequate time to try to get their own online operations up to speed,” Collier said.
In February this year, Beijing revealed new anti-monopoly rules for tech companies. These included measures to ensure companies do not use algorithms that encourage users to spend excessively or in a way that might disrupt public order. Alibaba, Tencent and Baidu are among the tech giants that have been issued fines over allegedly monopolistic practices.
In April, regulators slapped Alibaba with a $2.8bn antitrust fine, and ordered Ant Group to restructure itself with supervision from China’s central bank.
Beijing has also expressed disapproval of tech companies seeking foreign IPOs. In July, days after ride-hailing giant Didi launched its $4.4bn IPO in the United States, Chinese regulators banned the company from app stores.
New rules require companies with data on more than one million users to seek regulatory approval before they can list overseas and allow regulators to block listings on national security grounds.
In August, Beijing banned under-18s from playing video games for more than three hours each week to prevent gaming addiction.
In September, Beijing prohibited cryptocurrency transactions and mining. Banks, institutions and online payment firms were banned from carrying out transactions with cryptocurrencies, and fund managers were prohibited from investing in cryptocurrencies as assets.
The Chinese government has also built its own state-backed cloud system, which competes with Alibaba, Huawei, and Tencent in the private sector. In the city of Tianjin, municipally controlled companies were asked to migrate their data from private sector operators to the state-backed cloud.
“The new paradigm prioritises national security concerns, especially as far as data is concerned, and brings increased attention to socioeconomic trends, such as inequality that can cause instability and threaten the Party’s control,” Qazi said.
In July, China unveiled restrictions on private education that it said were aimed at relieving pressure on school children and reducing the cost burden of tutoring for parents.
Beijing ordered private tutoring companies to be registered as non-profits and to refrain from offering subjects already taught in schools.
The companies have also been barred from raising capital overseas and from giving lessons on weekends and holidays. The clampdown upended the $120bn industry, with New Oriental Education and Technology, China’s largest private tutoring firm, seeing the market value of its US-listed shares fall by $7.4bn.
In August, to curb what authorities have described as “chaotic” celebrity fan culture, Beijing ordered broadcasters not to work with entertainers who had “incorrect political positions” and “effeminate” styles, which it deemed unpatriotic. Beijing also regulated the sale of fan merchandise for controversial performers and barred online platforms from publishing popularity lists.
The road ahead
The push for “common prosperity” could mean that in the long run, China will transition away from “wild west” capitalism and towards a more consumption-driven economy aimed at promoting socialist values. Although the period of freewheeling economic expansion may be over, analysts believe businesses that can adapt will succeed.
McArver predicts that companies that contribute to the societal good, such as those providing healthcare and education, will find a largely favourable operating environment, while companies helping to develop core technologies will also do well.
“Successful businessmen in China have always understood that they prosper when their business dovetails with broader policy initiatives,” McArver said.
“That will continue to be the case. Businessmen will pivot away from sectors that Beijing sees as unproductive and towards those that Beijing supports, such as environmental protection and advanced manufacturing.”
Qazi said innovation would be “guided by the priorities of the Party”.
“Companies in sectors the state is prioritising, such as high-tech manufacturing, where China seeks to lessen foreign dependence, will thrive,” he said.
However, the stricter environment could compel some companies to put off expansion or look elsewhere for opportunities.
“Some firms may decide that a more controlling regulatory environment and greater pressure to pursue party-assigned social and political missions will cut into their bottom lines,” Jaros said. “As a result, they may limit their scope for innovation, curtail or redirect investments, or in some cases, look for more open markets outside China.”