TOKYO – SoftBank billionaire Masayoshi Son is as confused as anyone about what’s going on in Xi Jinping’s China.

In recent years, Son’s US$100 billion Vision Fund has gone big on Asia’s biggest economy. As of the end of July, 23% of that war chest was invested in Chinese companies.

But Son has been skittish about President Xi’s intensifying crackdown on mainland tech giants, from Ant Group to Didi Global to Tencent Holdings. He has now pivoted to a defensive posture on China. “It’s because we would like to wait and see a while,” he says.

SoftBank, he admits, is “facing tough challenges when it comes to investments in China.” He adds: “That’s something we’d like to be careful about, and be cautious.”

Son is not alone.

Other global investors are turning equally cautious – or more so. Cathie Wood’s Ark Investment Management, Wall Street’s most-watched stock picker of the moment, is pulling out of China altogether.

Others point out that Xi’s erratic policymaking is damaging the perception that China, the world’s second-biggest economy, is ready for the global prime time.

“These are the very issues why people don’t invest in emerging markets in the first place: lack of transparency and political risk,” says Perth Tolle, founder of Life + Liberty Indexes.

Reining in the stars

Son is the first to admit he hopes this is more a question of “when” than “if,” as Xi shifts from an open-for-business stance to a “Fortress China” defensive crouch.

Son’s confusion matters for two reasons. One, SoftBank’s initial Vision Fund – and a second one now making the rounds – is the globe’s most important venture capital outfit. Two, Son arguably discovered a superstar of e-commerce that Xi’s government has spent the last nine months appearing to undermine.

The superstar in question, of course, is Jack Ma.

In 2000, Ma was an obscure English teacher in Hangzhou. The $20 million Son handed Ma to create Alibaba Group was worth $50 billion by 2014 when the e-commerce colossus listed on the New York Stock Exchange. At the time, it was history’s biggest initial public offering.

It was also a coming-out party of sorts for Chinese tech, heralding the emergence of a future-facing capitalist China.

Global investment darling Jack Ma is the most prominent victim of Beijing’s ongoing crackdown on big tech. Photo: AFP / Philippe Lopez

Xi has spent the last nine months undoing much of that progress.

First, regulators canceled a November IPO by Ma’s Ant Group. It would have topped Saudi Aramco’s ginormous 2019 IPO, giving China “biggest-listing-ever” bragging rights again.

Even better was Ant’s $37 billion IPO set to take place in Shanghai and Hong Kong, highlighting China’s arrival as a financial mecca.

Since then, Xi has expanded his disorienting clampdown on private enterprise.

In early July, regulators went after ride-sharing giant Didi only days after a buzzy IPO in New York. Next, it was the $100 billion private education sector. And now, Tencent, whose gaming businesses face “spiritual opium” swipes from state media.

What explains Xi’s thinking?

A common theory is that Ma’s October 24 speech in Shanghai, where he chided Beijing regulators as clueless and state banks as having a “pawnshop mentality,” enraged Xi’s Chinese Communist Party. The political empire struck back, the thinking goes, to remind Ma and his ilk who’s boss.

Another theory is that Beijing is determined to rein in tech companies before they become too powerful. That means emplacing prudent financial and other frameworks upon firms that, under the “tech” guise, may have been underregulated.  

The Great Wall gambit

China expert Louis Gave of Gavekal Research offers one of the more intriguing theories behind Xi’s Fortress China gambit: US trade warriors are pushing Beijing into a corner.

First came former President Donald Trump’s tariffs, currency exchange-rate shenanigans and corporate enemies list – and aggressive Federal Reserve easing. Then, President Joe Biden arrived in January and, rather than revering his predecessor’s policies, he tightened the screws even further.

This suggests that it is the United States, rather than a single maverick president, that sees China as the new enemy.

As such, the tech crackdown may have been “driven by a geopolitical assessment of China’s situation,” Gave says. “In essence, the Chinese leadership has concluded that the US is now gunning for China, and that China needs to build a war-ready economy – by accumulating large strategic reserves of energy, building a domestic semiconductor industry and so on.”

The bottom line, Gave notes, “it is the job of any leader to hope for the best and plan for the worst. And if you are Xi, planning for the worst likely means insulating China as much as possible from the US. In this sense, capital markets may not be a bad place to start in order to convey your message to the country.”

Ex-President Donald Trump made China America’s Public Enemy No 1 – but there has been little amelioration of policies since Joe Biden came to office. Photo: AFP / Andrew Caballero-Reynolds

Then and now, back and forth

The caution SoftBank is applying to China is reflective of the gulf that has opened between Beijing’s leadership style, now and then.

In 2000, it was President Jiang Zemin calling the shots. Particularly between 1998 and 2003, when Zhu Rongji was premier, Jiang’s government really hit the financial reform accelerator.

Not only did Jiang and Zhu guide China into the World Trade Organization, they sent shockwaves across state-owned enterprises, leading to the shuttering of 60,000 companies and the elimination of more than 40 million jobs.

They also liberalized the media. In 1998, Jiang even held a joint press conference in Beijing with then-US president Bill Clinton. Jiang took questions from reporters and allowed the spectacle to be carried live in China.

Then, China turned cautious again.

The arrival in 2003 of Jiang’s successor, Hu Jintao, set the stage for a rather milquetoast period for reform. The arrival of the global financial crisis in 2008 further reduced Beijing’s appetite to accelerate the development of the private sector.

Xi’s arrival in 2012 began on a promising note with pledges to let market forces play a “decisive role” in decision making. In the years that followed, though, Xi’s crackdowns on the media increased opacity. For all Xi’s strength, he has displayed less confidence on the world stage than did Jiang.

Granted, the Xi era clearly has had its successes. One is the internationalization of the yuan. Another is getting Chinese stocks added to global indexes like MSCI and bonds to benchmarks like FTSE-Russell.

And Xi has big and exciting plans for the future – plans that have made international money movers sit up and take notice.

His ambitious “Made in China 2025” scheme aims to lead the future of semiconductors, biotechnology, aerospace, renewable energy, self-driving vehicles, artificial intelligence, green infrastructure – you name it.

Xi has ordered the creation of the Greater Bay Area, a kind of “Silicon Valley East,” in southern China. It groups Hong Kong and Macau with Shenzhen and eight other municipalities all destined to become powers all their own: Guangzhou, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing.

The idea is for any tech unicorns that come out of this giant special-enterprise zone to list shares in China or Hong Kong.

Yet Xi’s assault on his tech sector seems at cross purposes with these goals.

Chinese President Xi Jinping reviews troops. Photo: AFP

Costly common prosperity

Oxford University economist George Magnus, the author of Red Flags, reckons that “much of what’s going on falls under Xi’s social agenda, aka common prosperity, in which the CCP will act against the tendency of markets to exacerbate inequality or threaten the party’s control of data, unchallenged power and so on.”

At what cost, though?

“The CCP leadership is not a group of economic magicians, and China’s economic development from a poor to a middle-income country today cannot be extrapolated as if by spreadsheet,” Magnus says. That’s “why I think a China-centered future is less certain than some insist.”

On Wednesday, Xi’s government hinted that Beijing’s ongoing offensives could go on for years. The State Council and the Communist Party’s Central Committee said officials are “actively” working on measures to increase oversight of sectors that touch on national security, technology and monopolies.

So what sectors are next in the firing line?

Some speculate luxury items. Others reckon it could be alcohol, e-cigarettes, pharmaceuticals, chemicals, baby food, beauty items, pets, logistics companies …  

Here again, says Gave, the US effect can’t be ruled out. It’s possible, he says, that “behind these moves lies not just social policy, but industrial policy.”

Gave explains that “if the Chinese leadership believes the US is intent on knocking China down – and the US government did bring Huawei to its knees – then the Chinese government needs to corral the country’s brightest minds into solving its immediate challenges: building a domestic semiconductor industry, creating advanced materials and so on. Developing video games or finding ways to insert ads into online cat videos can wait.”

To illustrate this, Gave offers a US comparison.

“Think of US scientists at the time of the Manhattan Project,” he said. “Back in 1943-44, America’s most brilliant scientists signed up to work for the greater good of the war effort. It would have been inconceivable for the best minds to flock to Madison Avenue to sell Coca-Cola or Kellogg’s breakfast cereals.”

It’s not clear, though, if Xi understands how much damage what Carson Block at Muddy Waters Capital calls “the capriciousness of the policy environment in China” is doing to his global soft power.

It is entirely possible Xi doesn’t care. His top priority right now is a very domestic one: Winning an unprecedented third term as president next year.

Or is this all simply a matter of Xi’s broader goals getting lost in translation?

Yes, argues billionaire investor Ray Dalio, who believes Xi’s “anti-capitalist” campaign, notably against Didi and tutoring companies, is not what Western media and investors think.

“They interpret moves like these two recent ones as the Communist Party leaders showing their true anti-capitalist stripes even though the trend over the last 40 years has clearly been so strongly toward developing a market economy with capital markets, with entrepreneurs and capitalists becoming rich,” says the founder of Bridgewater Associates, the world’s largest hedge fund. 

“As a result, they’ve missed out on what’s going on in China and probably will continue to miss out.”

But others worry Xi’s determination to wall China off will undermine its grander ambitions, including leading the world in digital currency innovation. One reason Xi’s team is reportedly going after Alibaba, Ant, Baidu, Didi, ByteDance’s TikTok, Tencent and others is to control data.

In that, there is a Catch 22. The more Beijing effectively nationalizes the collection, analysis and use of data, the less overseas investors might trust a digital yuan.

Mao Zedong. Photo: AFP

Mao + Deng = Xi 

In the early 1990s, Deng Xiaoping extolled CCP bigwigs to hide China’s capabilities and bide their time. Xi departed from that low-profile policy, in part by letting outward-facing innovators like Ma put China on the globe’s investment map.

By 2018, former Australian prime minister Kevin Rudd concluded that Xi had “turned that on its head” as Beijing enacts “consciously and deliberately a more overtly activist Chinese foreign policy” and “international economic policy in the world at large.”

Xi appears to be synchronizing Deng’s financial reform era with Mao Zedong’s total-control ethos. The aim may to be build a China that can wall itself off from foreign influence while still thriving in economic and financial terms.

If that is, indeed, what is underway, how it will play out is anyone’s guess.

What’s an investor to do? Gave of Gavekal advises that a “one-year to three-year view, building up small positions in China’s e-commerce, gaming and fintech giants” is the strategy to implement.

But he warns punters to be ready for fresh surprises from a Xi government that is, to borrow a famous Chinese proverb, “feeling its way across the river one stone at a time.”

“The near term is likely to prove challenging,” Gave admits. “With high volatility and the tape severely affected by the slightest rumor, and by the large numbers of investors looking to get out of Chinese equities, regardless of price.”