Entrepreneurial capitalism in China faces a bleak future
In May 2022, Chinese Vice Premier Liu He indicated the government’s intention to end the campaign of “regulatory correction” – a set of regulations imposed on the education, tour-sharing and technology sectors.
He’s the chief economic adviser to Chinese President Xi Jinping — so his message must have been agreed by Xi, who appears to have finally woken up to the damage the year-long crackdown has done on investor sentiment.
Heng Seng fell 23.7% between December 2020 and mid-May 2022, a result that is partly explained by strict regulatory actions. While the worst seems to be over, the deeper problems the campaign has caused remain unresolved.
One explanation for the regulatory crackdown is that the crackdown is part of Xi’s strategy to steer China toward a Maoist model of governance in which the private sector is dramatically downsized and private companies are likely to lose what remains of their autonomy and become mere appendices. for the state.”
However, recent research contradicts this view as the penetration of the Chinese economy by the private sector is increasing. From 2015 to 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 companies — increased by only 40%.
Another explanation is that wealth inequality is the goal of China’s tech campaign. Tech founders are now among China’s richest citizens, a statistic that Xi could see as a “capital surplus” and a barrier to “shared prosperity”.
But expropriating the accumulated wealth of China’s top tech entrepreneurs will have no effect on the country’s massive income inequality. It seems that the majority of China’s 100 largest billionaires are not affected by the inevitability of “common prosperity”.
The most likely explanation for the campaign is that it is an attack on the private sector for entrepreneurship in China. Target companies include taxi transportation platform DiDi, Alibaba affiliate Ant Financial, streaming entertainment service Tencent, food delivery platform Meituan, and e-commerce company JD.com.
The framework of “Types of Capitalism” developed by international management professor Yansheng Huang suggests that these companies eschew business opportunities from state-owned linkages, relying instead on the genius of their entrepreneurial founders and international investors.
This distance from the state is hampered by the repression through which the Chinese Communist Party moves to consolidate political control over corporate cash flows.
Large private companies in China have grown through joint ventures with “private investors” – that is, state-owned enterprises – over the past 20 years. 2000-2019 saw a fivefold increase in such joint ventures. In 2019, 358 of the 542 largest private companies were directly associated with SOEs, while 73 had indirect communications.
The world of China’s largest corporations is like a maze in which “large private owners are closely linked to the state and large state owners have deep ties to private owners”. This labyrinth is embodied in the East Hope Group conglomerate – a group of companies that manage 236 companies, including 15 “private investor” joint ventures.
Although they are well proven, the details of these links are vague and presumably useful for large private companies. While such links are valid, they involve SOEs claiming their own cash flows in exchange for ownership opportunities in the market.
These “private deals” include “get the money” — a form of “profit-sharing with Chinese characteristics” in which private companies pay for growth opportunities by sharing shares with state-owned enterprises, whose leaders are likely to pay opaque rents to senior party officials.
A large private corporation may choose to “break away” from the state when its business model and access to private capital eliminates the need to pay “access money.” This is the case for the higher tech platforms targeted by the crackdown, whose digital platforms can generate revenue by registering more users and selling services without the need for “private investors.”
DiDi’s ultra-thin and transparent structure, as outlined in the company’s initial public offering prospectus, is an interesting case. A few state investors have participated in DiDi’s previous fundraising rounds, as its founders have always sought to raise capital from world-renowned names such as Apple, Temasek and Alibaba.
Softbank, Tencent and Uber were major shareholders in DiDi after the initial public offering round – a very different world from East Hope Group.
Not surprisingly, these companies have angered the Chinese Communist Party. The criticism of the former CEO of Alibaba Group, Jack Ma, of the financial and regulatory system in China may have sparked this outrage, but the reasons behind it go 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 the DiDi case will unfold (the company was fined 8 billion yuan ($1.18 billion) by a Chinese regulator last week for breaching data security laws), but a lot can be learned from a review of Jack Ma’s experience with Ant Financial.
Although Ant Group may be allowed to go ahead with its much-delayed public offering on the Hong Kong Stock Exchange, the company has paid a heavy price. Regulators are pushing for a corporate restructuring as Ant Financial will face state-owned partners to run what were previously privately owned business units.
The future of entrepreneurial capitalism in China looks decidedly bleak.
Martin Misrak is a visiting lecturer at Renmin School of Business, Renmin University, Beijing.
This article was first published by the East Asia Forum, which is based at the Crawford School of Public Policy in the School of Asia and the Pacific at the Australian National University. Republished under a Creative Commons License.