China's private sector is feeling pressure from the
government. From tech firms to real estate and even to video
games the Chinese Communist Party is ramping up regulation
on these high profile industries. These changes have
many different drivers from economic concerns to ideological
ones. Microsoft recently pulled LinkedIn from China and plans to
release a China specific option for job hunting in the country.
Evergrande, a giant firm in China that deals in real estate
and several other ventures has run into debt problems that
could require government intervention. Meanwhile, the
government is pressuring big names in tech such as Chinese
business magnate and Alibaba founder Jack Ma. But even as the
crackdown seems to be hitting a high point Goldman Sachs has
been granted full ownership in a joint securities venture. The
business climate in China is both closing in on some sectors
and opening and others creating a hurricane of opportunities and
pitfalls.
Jack Ma is a titan of Chinese entrepreneurship, the
astronomical rise of Alibaba. And also Ali pay, which is owned
by ant group was unparalleled in China, and it followed it up
with a big entrance in the US. But after an group's IPO was
paused, things started to hit in a different direction for Jack
Ma,
Jack Ma is probably the best example of a figure that CCP is
looking to, if not take down at least to reduce his public
profile.
Of course, he gave this speech that was you know, incendiary to
put it lightly and sort of considered rude by many people
in China, and many people think that sort of contributed to the
IPO being pulled. But But again, if you look at the specific
reasons that were given by the government, there was actually
you can trace back like several years of work to regulate this
industry, namely consumer credit and small business lending. his
management
style and work ethic filtered throughout the Chinese tech
industry resulting in what's known as the 996 workstyle,
China's Supreme Court announced that the so called 996 culture
is illegal. Jack Ma is famous for advocating the 996 culture,
which means that you are expected to work from 9am to
9pm, six days a week, a terribly unpopular policy among workers.
Another component to Jack Ma's troubles is the Communist
Party's priorities and fears seeing these
figures like Jack Ma and others emerge who have become, you
know, influential celebrities in their own right. And while those
figures have never actually challenged the party, in fact,
have gone out of their way to signal that they will not change
the party. Even the possibility of the private sector getting
that power seems threatening to the regime.
Shortly after, Xi Jinping came into power as the General
Secretary of the Communist Party in 2012, he began to crack down
on corruption. Now, the Chinese government is taking a look at
the burgeoning power of big tech and under Xi Jinping's guidance,
the government has begun a campaign to bring Tech Under
even more state control. One element of this is Xi's
consolidation of power within the party,
that Xi himself is coming into this period of deep uncertainty.
Where, although he's you know, secured, like abolition of the
term limits that previously held Chinese leaders to like a decade
in power, he still has to solidify that in 2022 - 2023.
Make sure that transition goes smoothly.
There's also a fear of big tech wielding too much power or using
it irresponsibly. One instance of the state asserting itself
over Chinese enterprises was the failed launch of the Didi IPO
Didi is a rideshare service that managed to beat out Uber in
China as the go to app for grabbing a ride. Didi raised
more than 4 billion for its IPO in the New York Stock Exchange,
but Chinese regulators unhappy with Didi's data practices
pulled the IPO.
Just before its IPO the Chinese government warned or advised
Didi to cancel it, ignored that advice and went through with it.
So that really got it in trouble because it directly went against
the Express advice of the Chinese government.
China has made it very clear in the past couple of years
actually starting in 2016. That cybersecurity data security is
going to be a major concern of the government especially
because China's heavily investing in becoming more and
more digital
Tencent, which offers video gaming and messaging software
such as the GuJian game franchise and wechat a popular
messaging app in China has focused on adjusting to the new
regulatory environment that among other things, limits video
gaming for Chinese minors. Another push underway by the
state is to change how characters are even portrayed in
video games.
But GuJian impact is also you know, deeply influenced by like,
Korean and Japanese game design, which includes things like quote
unquote, effeminate characters. And so just at this point where
the you know, the video game market was potentially about to
be a real source of international success with
China, it feels like they're taking measures that are going
to, you know, may well cripple that
Evergrande is a titan of real estate in China. But the debt
load for Evergrande became overwhelming totaling around 300
billion in liabilities. The Chinese state is currently
evaluating what to do about Evergrande situation.
I think the general consensus is that this is going to be I think
the term that's used that is most apt is probably a control
the detonation.
One reason Evergrande ended up in this situation has to do with
how real estate is managed in China,
the local governments in China actually have a huge budget
deficit, because most of the tax revenues go to the central
government, and they make up that deficit by selling real
estate, or working with real estate developers, you know,
licensed, selling and selling them use of the land. And that
has led to this sort of asset bubble, and has led to these
basically unsustainable practices of funding,
worries of a real estate bubble in China causing reverberations
throughout the economy are not new. But Evergrande has put the
spotlight on this troubled industry. But that
is a fraction of the total debt that the real estate sector has
accrued, which is about $5 trillion. And about 3 trillion
of that I believe, is since 2016. Alone. So you've had this
massive buildup of debt that is now kind of going to unspool as
the property market deflates, it hasn't exactly crashed yet, but
they're having massive problems moving that future future stock.
And that's causing, you know, huge worries. And the way I
think that the party will react to that is by cracking down
because in part, that's the the language that word that the
party understands.
One recent example reported by the New York Times is the
detention of two executives for suspected crimes who worked for
the HMA group, a Chinese conglomerate, which recently
collapsed. The effects of this regulatory crackdown are still
being learned. Microsoft recently announced that LinkedIn
will be pulled from the China market due to the new data
compliance requirements and the difficult regulatory
environment. These new data requirements could force foreign
companies to hand over user data to the Chinese authorities,
which in turn could potentially be used for the government's
purposes. One of the
consequences of this is that the China market will be a riskier
place than it has been for foreign investors. It's been
risky all along, in part because China's even the private
companies are not very transparency, you can't really
know what the underlying facts and figures are to guide your
investments hard doing due diligence in the Chinese market.
And these new restrictions may make that more difficult,
there is hope that some of the efforts will result in more
competitiveness within China,
the regulations are not necessarily to boost the
competitiveness of a specific company, right? It's not like to
create some national champion so that Alibaba, you know, can go
and compete against Amazon globally, or anything like that.
It's not about that. It's about leveling the field and then
creating a more fair ecosystem. So one of the things that both
Alibaba and Meituan the food elivery giant have gotten heavy
ines for is this practice of wo trees, one, which was
asically, you know, xclusivity, where they said, if
ou are on our platform, you annot be on competing
latforms, as you can imagine, hat is, of course, helpful to
libaba, but very, very hurtful o the vendors and merchants,
but the ideological concerns of the regulatory push me into
being an economic wildcard
that for the last 40 odd years, you've had three pillars of
party support in China ideology, the economy, and nationalism.
Now, ideology has always been the weakest. And while they've
been trying to prop it up, they've been trying to, you
know, reassert kind of map like Marxist ideology, Marxist feelin
, it's still very weak, there s not a lot of genuine like beli
f or support there. The econo y was by far the strongest pilla
. But that's been that's been wo n away. And so they are going
o lean more and more and more n nationalis
the future could be brighter for Chinese investment in other
sectors than the tech areas that are experiencing heightened
regulation.
There are new companies that are working completely different
things that, you know, might actually become more of a global
brand, you know, that that the companies I just mentioned, and
let's not ignore the fact that those even those consumer
internet giants have also started investing in those new
sectors at least five years ago. So I think we're going to see
very different technology innovation coming out of China
going forward and if I will advise investors, that's where I
would be
looking