As Xi Jinping’s widening tech crackdown generates global headlines, the Chinese president risks making Jack Ma’s point.
Talk, as they say, is cheap. Alibaba Holdings founder Ma, China’s best-known entrepreneur, may have a more nuanced take on this age-old maxim in the months since his now-infamous October 24 Shanghai speech.
At the time, Ma’s fintech giant Ant Group was days away from pulling off history’s biggest initial public offering (IPO). That US$37 billion listing planned in Shanghai and Hong Kong had Wall Street looking on with envy.
But Ma’s blunt critiques of mainland regulators and banks put everything on ice. Saying China’s banking system is run by “old men” who “still have a pawnshop mentality,” he accused regulators of not understanding the internet.
But is Xi, by way of the drama surrounding Ma and the fast-growing dragnet Beijing is throwing over other tech giants, demonstrating precisely what Ma complained of?
Particularly as regulators telegraph Ant-like curbs on the financial divisions of 13 tech growth stars including Tencent Holdings, ByteDance, JD.com, Meituan and Didi Chuxing.
Xi boosters say, “No:” China’s president is simply doing the prudent thing by placing a regulatory framework over a sector that could spin out of control. But it’s worth considering how this tech clampdown can get lost in translation abroad.
Case for a clampdown
Generally speaking, it’s wise for China to do a better job than, say, the US in everything from how tech companies collect, analyze and store user data.
Look no further than Washington’s Federal Trade Commission struggling to rein in behemoths like Facebook running roughshod over the world’s biggest economy. This includes CEO Mark Zuckerberg’s hopes of issuing the company’s own cryptocurrency.
It falls to US President Joe Biden to find a balance between making up for years of inadequate antitrust enforcement and not suffocating Big Tech’s animal spirits.
As such, the conventional wisdom goes, Xi is right to nip that problem in the proverbial bud. And, it follows, to ensure that fintech industry shenanigans don’t raise China’s overall risk profile.
“While the regulatory tightening weighed on market sentiment and affected activity growth to some extent, a retrospective shows those moves effectively reduced systemic risks by fixing key loopholes and tamed the debt cycle, which essentially sustained rather than undermined long-term productivity over the longer run,” says analyst Robin Xing at Morgan Stanley.
Xi’s anti-monopoly putsch, of course, reaches much wider, including curbing excesses in corporate and household debt. The recent “will-they-or-won’t-they” default drama surrounding China Huarong Asset Management, the nation’s largest distressed debt manager, pushed the credit-risk story back on to center stage.
To Xing and his fellow Morgan Stanley analysts, China’s previous clampdowns suggest the end justifies the means. Those episodes include a 2013-2015 anti-corruption drive, a 2016-2017 effort to rein in conglomerates and 2018 moves against industries including online gaming.
In general, Xing argues, each effort increased uncertainty and market volatility but overall put China on a more productive and sustainable path. “In this context, we do not believe the regulatory tightening this time will derail the economic growth trend,” Xing argues.
Analyst Kelvin Ho at Fitch Ratings offers a similar good-outweighs-the-bad argument.
“China’s stronger push for anti-trust regulation in the internet sector will be costly to internet companies, albeit temporarily, as they may incur significant fines, reducing net cash positions and slowing down the pace of deleveraging,” he says.
However, Ho notes, the “credit strength of major Chinese internet companies should remain solid as they have abundant liquidity to fund the penalties, and high profitability and cash generation to help restore liquidity headroom.”
Xi’s men may have loved hearing that Charlie Munger, Warren Buffett’s longtime No. 2 at Berkshire Hathaway, is an Alibaba bull. Last month, Munger’s new investment fund disclosed a $37 million bet on the e-commerce colossus founded by the most famous businessman China ever produced.
And Ma has indeed resurfaced in ways that comfort some investors. Case in point: He recently detailed Ant’s pivotal role in working with the People’s Bank of China to create and popularize a digital yuan.
Killing golden geese?
Yet Xi’s move against Ma and peers risk making a mountain out of an anthill.
As all China bulls know, the biggest mainland internet companies got that way because the Communist Party let them. Smart, energetic and charismatic as he is, Ma was only able to build China’s answer to Amazon because Chinese leaders Jiang Zemin, Hu Jintao and now Xi allowed him to.
Alibaba’s government-endorsed monopoly empowered him to spread his wings into financial services. With Ant, though, Ma risked flying closer and closer to the sun in Beijing power circles. It’s hard to separate the timing of Ma’s Ant getting burnt – and peers, potentially – and his October 24 comments.
Clearly, Chinese regulators knew what Ma was planning when he said, “today’s financial system is the legacy of the Industrial Age. We must set up a new one for the next generation and young people. We must reform the current system.”
In reality, Beijing’s financial watchdogs had been looking for an opportunity to curb Ma’s fintech ambitions. Ma’s rhetorical broadside gave them their chance. As Reuters and others reported at the time, they got the green light in short order to do just that from Vice Premier Liu He, a trusted Xi adviser.
Mark Tanner, founder of Shanghai-based advisory China Skinny, speaks for many when he wonders if, “the golden days are over for China’s big tech firms.”
The worry is the chilling effect. Those who haven’t yet been targeted, Tanner says, are now “toning down their expansion strategies” to fit the new era Xi is devising.
But what exactly is this new era all about?
No one can say for sure. Team Xi isn’t explaining, creating an unhelpful ambiguity and paranoia. Efforts to bring Ma to heel and just about every globally known Chinese tech name have an ad-hoc, “making-this-up-as-we-go-along” quality that’s ill-suited to Xi’s bigger goals on wooing more foreign capital.
China’s rapid growth is indeed a siren call, but it’s no longer everything. Georgetown University’s Lizhi Liu notes that Xi’s government is struggling with the age-old “trade-off between innovation and regulation.”
How much regulation is enough, or too little, is hard for any government to calibrate.
Competing narratives
Xi’s crackdown, though, could backfire. There’s been considerable grousing in global investment circles about Xi’s heavy-handed suppression of views at odds with the Communist Party. And a related dearth of transparency.
To be sure, Xi’s government gets the vital economic role internet companies can play. Late last month, the People’s Daily ran a commentary arguing that recent policy “does not mean that the state’s supportive attitude toward the development of the platform economy has changed, but that development and regulation are of equal importance.”
The worry, says analyst Ernan Cui of Gavekal Research, is how recent events warp incentives for an industry that should be boldly disrupting an economy that hopes to grow the private sector. “Internet platforms who can show that they are contributing to government priorities will likely be treated better by regulators.”
But even this “will impose a financial cost,” Cui says. Last month, Tencent moved to raise $7.7 billion in a vaguely worded plan for “sustainable social value innovation” involving areas such as science and education.
When food delivery giant Meituan raised $10 billion from investors last month, it took pains to publicize plans to develop technologies like autonomous vehicles, a top Xi policy priority.
“While the large firms have been making public displays of compliance,” Cui says, “many of the internet platforms I interviewed seem to be underestimating of the extent of the government’s regulatory push, instead viewing the current wave of antitrust cases as a temporary storm to be weathered.”
As incentives shift accordingly, it’s not certain that the foreign investors that Xi is keen to pull China’s way will be well served.
Xi’s party has very clearly staked its legitimacy on heady growth, raising living standards and moving the economy upmarket via digitalization. Yet it’s important how Beijing does this.
Xiamen University professor Zhao Yanqing, for example, favors nationalizing the data of big tech giants. His rationale: the benefits that Alibaba, Tencent and peers get from Beijing blocking Facebook and Google should be shared with society.
“Only by establishing public ownership for platforms can we ‘tame’ capital,” Zhao argues.
Yet, counters Georgetown’s Liu, nationalizing information flows could end up hobbling China’s innovators. “If you take away the data, the companies will lose their incentive and their ability to innovate,” she says.
You also run into trust issues, potentially. In recent years, China scored a place for the yuan in the International Monetary Fund’s reserve currency basket. Mainland stocks were included in top indexes like MSCI and government bonds in global benchmarks like FTSE Russell.
China is indeed making progress in addressing the runaway credit growth of recent years and trimmed leverage. “Good days have gone,” says analyst Shujin Chen at Jefferies. “We reiterate that China has shifted from encouraging personal consumption lending to curbing rapid increases in residential leverage.”
Tech in a black box
Yet rather than increase transparency or lighten up on press freedom and internet curbs, Xi has gone the other way.
On his watch since 2012, Asia’s biggest economy has become more and more of a black box. These are not the actions of the confident, outward-facing government Team Xi likes to project.
In the absence of clear directives and plans, investors and overseas governments have no choice but to engage in Kremlinology – with Chinese characteristics. The opacity leaves global investment minds to run wild.
Is Xi’s Ant crackdown purely about risk, or is it more about putting Ma in his place?
Is Beijing just looking out for legacy giants like Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China, all worried that fintech will make them irrelevant?
Does Xi’s party worry Big Tech might wield more control over the masses?
Perhaps not on all accounts. Yet as a curious world wonders what the real narrative is in Beijing, much is indeed getting lost in translation.
It’s time Xi’s government used a bull market in clarity to put the unwitting Sinologists in the finance sector out of business. Beijing’s actions in the 191 days since Ma made his spectacularly costly speech continue to generate more questions than answers.