Xi Jinping’s Regulatory Crackdown Strikes the Economy

The tech sector and data issues

Since Ant Financial’s IPO was stopped by regulatory action in November 2020, the Chinese tech sector has been looked upon by local and global investors with a mixture of admiration and surprise, and even fear. Whether it’s China’s rapid development in the digital space, the expansion of its data industry, the amount of funding available to Chinese tech start-ups (which dwarfs European counterparts) or the government’s claim of medium-term global dominance in artificial intelligence — all this fits into the narrative that China’s tech sector is to be both admired and feared. The sector is a competitive threat to other countries’ economies and is the only alternative to the current online world, which was conceived largely by Silicon Valley. The (actual or perceived) ease with which companies can access masses of personal data and develop innovative solutions is often put forward as a major factor explaining Chinese success. To justify lagging behind, European companies point to the regulatory constraints they are burdened with in Europe, but which are almost non-existent in China. The news that the Chinese government has clearly ramped up regulation in the digital space and is brandishing its enforcement stick against Chinese technological champions has thus come as a shock to non-Chinese observers. After Ant Financial but also DiDi and Alibaba (the equivalents of Uber and Amazon in the West) experienced problems with their listings from November 2020 onwards, China banned minors from playing games online for more than three hours per week, in a move to address increasing concerns about gaming addiction among Chinese children. Along those lines, the Chinese Personal Information Protection Law (PIPL) came into force on 1 November 2021 with some input from the EU’s General Data Protection Regulation (GDPR) playbook but with more leeway when it comes to the government’s enforcement ability. Finally, the forthcoming Internet Information Service Algorithmic Recommendation Management Provisions regulation will attempt to address concerns that plague tech regulators around the world: disinformation, nudging and algorithmic manipulation, online user addiction and price discrimination.

Antitrust forces

When Ant Financial’s initial public offering, which should have been the biggest listing of all time, was suddenly cancelled in November 2020, China’s antitrust policies became (and have remained) a huge topic of discussion both in China and globally. While initially deemed an isolated case due to the company’s refusal to accept a tougher regulatory environment for lending practices, it quickly became apparent that China’s antitrust policies were much broader and had started much earlier. In fact, rules for the automotive and pharmaceutical sectors were published well before the Ant case, and other e-commerce cases had already materialised. In particular, an investigation into the food delivery app Meituan for anticompetitive practices had already started back in the spring of 2020. In the same vein, a case against Google’ s potential abuse of its dominant position in the Android mobile operating system was announced in September 2020.

Common prosperity as an additional reason for the regulatory crackdown

One of the key traits of China’s post pandemic reality is President Xi’s push for better income distribution through the achievement of so called ‘Common Prosperity’. In the crackdown on the education sector, the link with ‘common prosperity’ is quite obvious. In fact, access to private education is one of the main reasons for worsening income inequality, especially among young people. The third crackdown is in the real estate sector, which is possibly the most important contributor to worsening income inequality due to the rapid growth in house prices sustained over many years. Housing affordability has continued to worsen and access to housing, or the lack thereof, has long been a key factor in explaining income disparity. The unrelenting increase in housing prices stems from the lack of investment opportunities for Chinese households in a financial system with little choice and no access to foreign assets. To cater to this demand and faced with increasingly expensive land which has long been the main tax base of local governments, real estate developers leveraged themselves in order to afford land. Limiting and bringing this leverage under control was another key reason for the government crackdown, which also wants to moderate house prices so as increase housing affordability. In August 2020, the Chinese regulator introduced ‘three red lines’ to limit the expansion of the most leveraged developers. Among them, Evergrande with a debt worth of US$300 billion stood out as the most leveraged and as owning the most assets.

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