Author: Martin Miszerak, Renmin University
In May 2022, Chinese Vice Premier Liu He signaled the government’s intention to end its campaign of “regulatory rectification” – a series of regulations imposed on the education, ride-sharing and technology sectors. He is Chinese President Xi Jinping’s top economic adviser – so his message must have been endorsed by Xi, who appears to have finally realized the damage the year-long crackdown has done to investor sentiment.
The Heng Seng index fell 23.7% between December 2020 and mid-May 2022, a result partly explained by regulatory repression. While the worst appears to be over, the deeper issues caused by the campaign remain unresolved.
One 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 is drastically reduced and private companies are “liable to lose what’s left of their business.” independence and become mere appendages”. of State’.
Yet recent research contradicts this view, as the Chinese economy is increasingly penetrated by the private sector. During the period 2015-2021, the number of Chinese private 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 enterprises – only increased by 40 percent. hundred.
Another interpretation is that wealth inequality is the target of Chinese technological repression. Tech company founders are now among China’s wealthiest citizens, a statistic Xi could see as an “excess of capitalism” and an obstacle 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. The majority of China’s top 100 billionaires seem untouched by the “common prosperity” imperative.
The most likely explanation for the campaign is that it is an assault on China’s entrepreneurial private sector. Companies targeted include taxi platform DiDi, Alibaba subsidiary Ant Financial, entertainment streaming service Tencent, food delivery platform Meituan and e-commerce company JD.com.
Professor of International Management Yansheng Huang’s “Varieties of Capitalism” framework suggests that these companies eschew the business opportunities of state-owned relationships, relying instead on the entrepreneurial genius of their founders and international investors. This distance from the state is disrupted by the repression by which the Chinese Communist Party works to tighten political control over corporate cash flows.
China’s large private companies have grown through joint ventures with “special investors” – namely state-owned companies – over the past 20 years. The period 2000-2019 saw a fivefold increase in these joint ventures. In 2019, 358 of the 542 largest private companies were directly linked to public companies, while 73 had indirect links.
The universe of China’s largest companies resembles a maze in which “large private owners are deeply tied to the state and large public owners have close ties with private owners”. This maze is exemplified by the East Hope Group conglomerate – a business group that operates 236 businesses, including 15 “special investor” joint ventures.
Although prominently displayed, the details of these connections are vague and believed to be beneficial to large private companies. While true, such connections involve state-owned enterprises claiming private cash flows in return for exclusive market opportunities.
These “special deals” involve “access money” – a form of “profit sharing with Chinese characteristics” in which private companies pay for growth opportunities by sharing capital with state-owned companies, whose executives likely pay opaque rents to senior Party officials.
A large private company may choose to be ‘disconnected’ from the state when its business model and access to private capital removes the need to pay ‘access money’. This is the case with advanced technology platforms targeted by repression, 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 IPO prospectus, is an interesting case. Few state-affiliated investors participated in DiDi’s early fundraising rounds, as its founders have always sought to raise capital from global names such as Apple, Temasek and Alibaba. Softbank, Tencent and Uber were the major shareholders of DiDi after the initial public offering – a very different world than East Hope Group.
It is not surprising that these companies have infuriated the CCP. Former Alibaba Group Executive Chairman Jack Ma’s criticism of China’s regulatory and financial system may have sparked the furor, 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’s still unclear how DiDi’s case will play out, but there’s a lot to be learned by looking back at Jack Ma’s experience with Ant Financial. Although Ant Group may be cleared to proceed with its much-delayed public offering on the Hong Kong stock exchange, the company has paid a steep price. Regulators are pushing for a corporate restructuring in which Ant Financial will hire SOE partners to run what were once private business units. The future of Chinese entrepreneurial capitalism looks decidedly bleak.
Martin Miszerak is a visiting lecturer at the Renmin Business School of Renmin University in Beijing.
