Xi Jinping’s Regulatory Crackdown Strikes the Economy

Alicia Garcia Herrero, Natixis Asia Pacific Chief Economist, Bruegel Senior Fellow

Chinese policy makers have been engaged in a massive regulatory crackdown for over a year. A number of sectors have been affected, starting with the tech sector, followed by the education sector. At the same time the real estate sector has also been severely affected by a specific regulatory crackdown (the three red lines) and a more general antitrust push has also taken place. In addition, President Xi Jinping has put at the top of the agenda the quest for common prosperity. Below I will be reviewing three major issues related to China’s regulatory crackdown and its potential consequences.

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.

In September 2021, Tencent and Alibaba agreed to make their platforms more interoperable by, for example, allowing the use of competitor payment systems.

At a broader level, the regulatory overhaul that may soon characterise the European tech landscape can be largely interpreted as an acknowledgement that ex-post antitrust enforcement is ill-suited to address long standing and emerging issues observed in digital markets. The recognition that ex-post enforcement is not enough is an important driver of the recent tech crackdown in China. But with a significant difference: Chinese authorities do not yet have the same extensive experience of antitrust cases as their European counterparts, which might explain why the Chinese authorities appear to be willing to take an invasive, hands-on approach with restrictive rules dictating how algorithms should function. But this is unchartered territory: it is unclear whether the top-down rules defined by regulatory authorities are compatible with a smooth online experience. There is thus high potential fallout for Chinese users, with a decrease in the quality of service they experience. This risk is perhaps higher in China than in Europe.

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.

Looking at the spectrum of antitrust cases so far, one can think of several reasons why the Chinese authorities may be stepping up and deploying their arsenal of antitrust measures. The first, and more obvious, reason is the increasing size of Chinese companies and their oligopolistic behaviour in key sectors. These sectors, fintech and e-commerce, have been the target of recent antitrust measures. Interestingly, oligopolistic practices can also be found in old sectors dominated by state-owned enterprises such as energy and even the transport sector, although they have remained largely unscathed by the government’s antitrust push. Another good example is the ICT industry, where very few players, such as ZTE and Huawei and more recently Xiaomi in the hardware space, dominate the scene. Similarly, China Mobile and China Unicom dominate the telecom sector, in which foreign participation remains capped even after China’s renewed liberalisation measures like the foreign investment law, where no antitrust measures have been announced so far.

Against this backdrop, a more subtle — but possibly relevant — explanation of Chinese policy makers’ decision to step up antitrust measures is to increase state control over key private actors dominating new markets, especially in the fintech and digital space. Chinese leaders could consider this all the more necessary given these sectors’ economies of scale and network externalities but, most importantly, the data which can be accumulated about consumer preferences and beyond. Put very simply, these sectors might be more strategic today than energy or ICT, when one thinks about the size they could reach and the power imbedded in the control of data flows. Besides, if access to data were not a good enough reason to target big private companies with antitrust action, one cannot forget that the People’s Bank of China’s new digital currency will be using existing payment platforms such as Alipay and WeChat, which belong to the largest e-commerce and fintech groups. One might suspect that such concentration of power in private hands, including the circulation of China’s new digital currency, is considered too risky.

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.

There is, however, an important risk with China’s new development objective: growth could simply become too low to be able to redistribute it. Plummeting housing prices as households decide to stop purchasing new houses for fear of a similar event as that of Evergrande could be a warning sign. On the other hand, they could reduce household consumption as they will feel less wealthy (at least for those who already own property). Furthermore, investment in real estate is one third of total fixed asset investment, which is bound to collapse if housing prices plummet. China runs the risk of having more ‘common’ but less ‘prosperity’ to go around.

All in all, the ongoing regulatory crackdown in China is indeed becoming central in the government’s policies and certainly to President Xi’s vision of China’s new step into a socialist economy with Chinese characteristics.

*This article was originally published by ISPI at




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