China's biggest private companies are in chaos. It's all part of Beijing's plan | CNN Business (2023)

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China’s crackdown on private enterprise has wiped out more than $1.2 trillion in market value for many powerful Chinese companies and stoked fears about the future of innovation in the world’s second largest economy.

But the end goal of Beijing’s aggressive bid for control isn’t about creating chaos. The government wants to make clear to its corporate champions that tapping capitalist markets is fine — as long as it is on the ruling Chinese Communist Party’s terms.

The heavy selling has accelerated in recent months as Chinese authorities slap companies with fines, ban apps from stores and demand that some firms completely overhaul their businesses.

HONG KONG, CHINA - FEBRUARY 16: The Chinese and Hong Kong flags flutter outside the Exchange Square complex, which houses the Hong Kong Stock Exchange (HKEX), on February 16, 2021 in Hong Kong, China. (Photo by Zhang Wei/China News Service via Getty Images) Zhang Wei/China News Service/Getty Images Beijing calls for calm after historic tech stock rout

Hundreds of billions of dollars in market value has been erased in the last week alone, after regulators announced curbs on China’s for-profit education industry and its food delivery sector.

The way Beijing sees it, the efforts to rein in private enterprise are meant to protect the economy and the country’s citizens from instability. They’re also intended to fix longstanding concerns around overwork, data privacy and inequality in education.

“Ultimately, Beijing’s crackdown on private business is about control,” said Alex Capri, a research fellow at the Hinrich Foundation. “The main priority is about preventing behavior amongst private companies that could engender more independent and potentially non-conformist activities, which undermines Beijing’s state-centric model.”

A major corporate shakeup

Corporate China has been rocked by Beijing’s reforms.

The government first focused on tech, abruptly pulling an IPO for Ant Group in November. The company, best known for its Alipay payment app, was later ordered to restructure its operations and become a financial holding company.

No part of the tech industry has been spared scrutiny. Alibaba (BABA) was hit with a record $2.8 billion fine after regulators accused the e-commerce company of behaving like a monopoly. Other firms, including social media and gaming giant Tencent (TCEHY) and e-commerce platform Pinduoduo (PDD), have been hauled in front of authorities investigating alleged anticompetitive behavior, too.

A photo taken on July 9, 2021 shows Tencent's game Honor of Kings at the Electronic Sports Human PK AI competition held at the World Artificial Intelligence Conference 2021 in Shanghai, China. Costfoto/Barcroft Media/Getty Images Tencent cracks down on screen time after Chinese state media says gaming is 'spiritual opium'

And early last month, Didi was banned from app stores shortly after the ride-hailing company went public in the United States.

Regulators have set their sights on other industries, too. Other US-listed Chinese companies have been singled out by authorities who are probing them over data security issues. On July 24, China banned education and private tutoring companies from turning a profit or raising funding on stock markets — dramatic new rules that will almost certainly force many major firms to rethink their entire business model.

The crackdown is “unprecedented in terms of its duration, intensity, scope, and the velocity of new policy announcements,” analysts from Goldman Sachs wrote in a research report last week that called the strategy a “rebalancing of socialism and capital markets.”

“Chinese authorities are prioritizing social welfare and wealth redistribution over capital markets in areas that are deemed social necessities and public goods,” they added.

China's biggest private companies are in chaos. It's all part of Beijing's plan | CNN Business (3)

A woman on her electric-powered scooter films a large video screen outside a shopping mall showing Chinese President Xi Jinping speaking during an event to commemorate the 100th anniversary of China's Communist Party at Tiananmen Square in Beijing, Thursday, July 1, 2021.

Merit to the crackdown

Beijing’s decision to frame its unprecedented clampdown as a necessary public good has merit, according to analysts.

The regulatory crackdown on Didi and other internet companies, for example, focused on allegations that those firms mishandled sensitive data about their users in China, posing risks to personal privacy and national cybersecurity. There’s also been a public outcry in the country against widespread data breaches, abuse of personal information, and corporate surveillance.

Inequalities within education and private learning have also spurred plenty of reform. As the government announced its restrictions on for-profit tutoring last week, it claimed that the industry has been “hijacked” by capital and that has “distorted the nature of education.”

The country’s education system is heavily competitive and exam-focused, leading to concerns about student fatigue. Private tutoring, meanwhile, has flourished as urban middle-class families have tried to give a head-start to their children by preparing them intensively for exams — but such resources are costly.

The government’s focus on inequality is a “smart choice,” said Sonja Opper, a professor at Bocconi University in Italy who studies China’s economy and the private sector, given concerns about disparities in income and education.

The country is also increasingly worried about unemployment — especially the welfare of its young workers, a growing number of whom are complaining about a crushing culture of overwork.

A trader works during the IPO for Chinese ride-hailing company Didi Global Inc on the New York Stock Exchange (NYSE) floor in New York City, U.S., June 30, 2021. Brendan McDermid/Reuters The door is closing on Chinese tech IPOs on Wall Street

A movement called “lying flat” — “tangping” in Chinese — has become enormously popular among young people. It calls on them to reject societal pressures to work hard, get married, have children or buy property because of the diminishing rewards of achieving such goals.

Chinese tech companies have been widely blamed for forcing young people to work long hours and glorifying overwork culture. “996,” which refers to the practice of working from 9 a.m. to 9 p.m. six days a week, has attracted particular ire among urban young workers and is said to be common among big technology companies and startups.

The “lying flat” philosophy appears to have worried the ruling Chinese Communist Party. The word “tangping” has been largely censored on Chinese social media in recent months, and state media outlets have criticized the movement.

“The creative contribution of youths is indispensable for our country to achieve high-quality development,” the state-owned Guangming Daily wrote in a May editorial. It called the “lying flat” movement problematic as China contends with a labor shortage that could hurt its long-term economic goals.

The risk of aggressive action

Beijing’s tactics carry plenty of risk. Along with the $1.2 trillion in market value that Goldman Sachs says has been wiped off of prominent stocks, analysts also point to concerns that the crackdown could kill China’s entrepreneurial spirit — a critical piece of the country’s economic liberalization and rapid growth.

“The increase in regulation can bring some benefits to the Chinese corporate world as some sectors are very unregulated,” said Steve Tsang, director of the SOAS China Institute at the SOAS University of London. “But the increase in control also signals to the private entrepreneurs that they must now watch their steps more carefully and bring their businesses in line with Party guidelines or leadership.”

A logo of ride-hailing giant Didi Chuxing is seen on Didi Chuxing's building in Beijing, China, on July 3. Wu Hong/EPA-EFE/Shutterstock China is cracking down on data privacy. That's terrible news for some of its biggest tech companies

Opper, of Bocconi University, cited similar concerns, adding that Beijing’s decision to target specific companies may not be “the most effective policy response.” She suggested that progressive taxation and education support for the poor could more successfully combat inequality.

“China’s government may well feel, that more restrictive policies can be introduced, now that the country has moved closer to the technological frontier,” she said. “But it is highly unlikely that the entrepreneurial spirit — so successfully unleashed by leaders preceding [President] Xi Jinping — survives under a highly restrictive, regulatory regime.”

The reforms really come back to one thing, according to Tsang, who warned that economic inequality could hurt the legitimacy of the Communist Party if left unchecked.

“I think what Xi is attempting is not to crackdown on private businesses but to enhance regulations (or party control) over private enterprises so that they all ‘serve the people’ or follow the leadership of the Party,” he added.

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