Here’s why China is cracking down on big companies and what the future holds for the superpower

The past two years have been challenging for the world’s newest superpower, but then the decade has also not been as easy. 

Standing at the crossroads of a fast-ageing population, the new world order and its adamancy on keeping things guarded, China hasn’t been served well by its iron hand. The Chinese market lures most big companies who look at it as an ocean, untapped, huge and profitable, but it’s not all rosy once you get in. 

In 2020, China even slipped seven places on the ease of doing business index (85th rank) which did not go well with the business community. In the past few months, China seems to be on a damage control mode, while little is known as to the means it follows in all its endeavors. What has come across as glaring is its massive crackdown on large companies like Alibaba is that things are gloomy on that front. This crackdown on companies like Meituan, Alibaba and Ant group, Tencent, Didi among others, sent shivers down the spine of the business world, especially the stock market that saw billions being wiped off. 

Here is some background story to understand what really is happening

Earlier this year, China’s Fintech companies were on the radar of the government authorities. The whole avalanche was triggered after Alibaba’s Jack Ma spoke in October last year about the irregularities in the Chinese government’s way of functioning. His angst was driven by the blow received to the IPO for his company Ant which was aimed at a good $37 Billion. 

13 internet based Finance companies were pulled up by the administration and warned to adhere to strict regulations. This included companies like Tencent and Bytedance. The central bank of China held apprehensions that the mushrooming online finance companies led to violations of regulations like regulatory arbitrage, unfair competition and damaging consumer interest. The companies thus pulled up were asked to draft “business rectification” plans to comply with regulations, cut “improper” links between their payment tools and other financial products, break “monopolies” in holding data, and prevent risks in internet mutual aid businesses. They were expected to be more compliant with their issuance of asset-backed securities, and overseas listings. The other companies that faced the heat were Du Xiaoman Financial, which is backed by Baidu Inc., Meituan, Ping An-backed Lufax, 360 DigiTech, Trip.com, Xiaomi Corp. and JD.com’s JD Digits. It appears like Chinese Fintech companies had used shady tactics, including forcing vendors to exclusively use their platforms for transactions, which drew the flak of the government.

The avalanche that started with Fintech soon spread to Ride hailing companies, food delivery companies and then Edutech. The former two were offered a stern warning to offer guaranteed above average wages and relax delivery time limits. In order to compete with each other for fastest deliveries, the riders took dangerous routes and sped as fast as possible to reach more clients in the shortest time. Millions of Chinese depend on food delivery apps to deliver food to their workplace of homes. Next in line was the entertainment industry, which was told to watch the artists with “incorrect political positions” and shun those with effeminate styles!

 Now it’s no secret that China as a nation has been extremely ambitious when it comes to children’s education and training. Chinese parents, who were forced to have only one kid for all these years, wanted their child to perform the best in anything that he/she did, including education, sports and art forms. It would have been surprising had the education sector not jumped at the over ambitious parents’ demand. Chinese parents want their kids to get an early head-start in life so that they can develop their competitive spirit. As parents slog at work and are unable to spend quality time with kids, they try to compensate by giving them the best education and this is exactly what the edutech companies targeted- the guilt of the parents. Low income families were especially vulnerable with multi-year contracts being signed by these edutech companies for their kids. Weekend tutoring and after class hours tutoring is a massive industry in China. The govt’s new order asks for these companies to become not for profit and to stop weekend classes. With this one order, these companies’ stock plummeted making them absolute duds for investments. 

Market leader Didi Chuxing even faced govt. officials visiting its site for cyber-security and could face multi – billion dollar fine or suspension of its services, leaving the company in a limbo as of now. China has already banned crypto trading in 2019 itself. 

Jack Ma was the most vulnerable amidst this heat as his Alibaba was fined almost $2.8 Billion by anti-trust authorities for misusing its dominant market position and also for forbidding its merchants to place advertisements on rival apps. Chinese companies planning an IPO abroad now need to submit cyber-security reviews before their IPOs. 

Why is the Chinese government taking this stand? 

It came as a bolt from the blue for many, but experts and industry insiders were aware that something harsh like this was sure to come. 

In a bid to stay ahead of the world, China had perhaps betted heavily and gone easy on the massive and indiscriminate growth of its businesses. Turning a blind eye to the machinations of several companies as they grew beyond control in size and spread quickly across the country, the govt had to wake up to the alarming rate of growth. 

The world was already viewing this abnormally rapid growth with suspicion since China’s Communist ideology was being at stake in all this. The highly polarized distribution of wealth and the vast majority of the population that was put at a disadvantage due to the way certain businesses functioned was sure to invite such a crackdown. It was just a matter of time before the business behemoths came under the scanner. 

Potential Repercussions

As expected, the share market was the first to adversely react to this entire sudden crackdown. 

It was reminiscent of the 2015 scenario which saw a 45% selloff. 

The current tumble-down will not just impact Chinese companies but also have adverse effect across the world. 

Globally, investors and MNCs have suddenly become wary about China as a preferred investment destination. Domestic Chinese investors are selling off Hong Kong listed stocks. Several European nations like Germany and Netherlands are dependent on China for exports and countries like New Zealand and South Africa have their currencies exposed to the Chinese economy. With the nation’s currency suddenly weakening, the Central Banks could raise interest rates, further deteriorating the industrial scenario. 

Earlier this year, Xi Jinping reiterated that the country’s “empowerment, happiness and security” stands paramount. In doing so, China does not care as to who loses how much money and is treading the easy path of commanding solutions to deep rooted problems like eradicating corruption and poverty. But this crackdown has come at a huge cost. Foreign listed Chinese companies lost close to $400 million in these past few months, sending cold waves of fear down the spines of investors. What comes across as a new phenomenon is expected to stay for some more years, if one is to believe the govt. officials’ statements. The govt’s fears that domestic data is easily going into the hands of foreign companies, that Chinese companies are increasingly becoming dominant market players gaining monopoly and dictating terms of service and pricing and that foreign laws are increasingly gaining importance rather than Chinese laws, all went against the core Chinese Communist ideology. 

Although China knows and wants the private sector to contribute towards its dream of becoming the most powerful nation in the whole world, it is difficult to compromise on its core ideas of equitable distribution of wealth and centralized power. Pulling up monopolistic companies like Tencent that held exclusive music rights, for example, gives a strong signal that China will not tolerate power and wealth being centered around a chosen few. It may come at a cost of dwindling stocks or weakening investor confidence, but the results far outweigh the current struggles.  

Looking towards the future, what can one expect? 

The world is expecting that this new phenomenon will continue for few more years, considering Chinese regulations had somehow weakened in a bid to enhance growth and attract international investment in the past few decades. 

Sweeping actions like the ban on Didi’s new registrations and removing its app from the app-store show that the Chinese administration care two hoots for all the noise that companies would make and the brouhaha it would create amidst investors. 

There is a cascading impact on other companies as well, with a total loss of about 14% on the Nasdaq Golden Dragon index of 98 Chinese companies valued at $130 billion. Experts look at a sell off amounting to close to $1 Trillion since August this year, which is a rude shock to the Chinese dream harboured all along. By cracking down on aggregators and platforms, President Xi has also shown his eagerness to foster core Chinese technological leadership till 2025. For the time being, all the world can do is feel bad but just watch. 

Disclaimer: The opinions expressed in this article are solely mine and offer no financial advice in any manner. These are culmination of having read tens of articles on the recent developments. Please consult a legitimate financial advisor/consultant if you are seeking due diligence and research for any potential investments. The opinions expressed in this article are also from a neutral point of view and not intended to hurt any sentiments. 

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