Why Xi Jinping Is Cracking Down On Big Businesses — Insights From His Own Speeches

To be hailed as a patriotic entrepreneur by none other than Chinese President Xi Jinping comes at a cost in a country where the driving political force has been a reluctant capitalist. Yet, the entrepreneur in question survived the days when thousands of businessmen were driven out of their homes to be humiliated on streets, beaten by party members, or even killed.

In one of the other sessions, half of his head was shaved off, intensifying the insult, and he was left with a broken finger after a physical assault. In another, his wife was beaten severely, and it wasn’t until the approval from the party that she was admitted to a local hospital.

Rong Yiren, who lived for almost 90 years before his death in 2005, survived the Civil War until 1949 followed by the era of prolonged pain under Mao Zedong who ordered brutality against capitalists during the campaigns of 1952-53, and during the Cultural Revolution of the 1960s.

Rong was not alone, for thousands of capitalists, now forgotten, endured the injuries and insults under the communist regime, and the ones who could not, escaped to Taiwan and Hong Kong.

Rong earned the respect of the Chinese Communist Party (CCP), but only 15 years after his death. As it is the norm in China, the punishment came much before the prize.

Today, the bullies of Beijing, led by Xi Jinping, do not share the same disdain or disregard for capitalists as Mao Zedong advocated. Compared to the days of Rong, the crackdown spree against certain sectors today comes across as far more lenient and accommodating.

However, even in its relative softness, Beijing’s move against the sectors it once celebrated for their pursuit of ‘community of common destiny’ warrants speculation.

The crackdown spree began with Jack Ma’s Ant Group whose initial public offering (IPO) was suspended a few days before listing.

This followed a new-antitrust decree from Beijing for China’s Internet companies, some with more than a billion users. Investigation into Alibaba’s anti-monopoly practices landed the company with a fine of more than 18 billion yuan.

Meituan, one of the biggest food and retail delivery services, was then under a probe from Beijing for poor worker conditions and anti-monopoly practices.

This was followed by a stern crackdown against Didi, China’s version of Uber, but much bigger than Uber, as the company aimed to raise more than $4 billion from foreign listings. Citing data security reasons, Beijing ordered a probe into the company.

Beijing then dropped a bomb on the country’s private education sector, valued at around $100 billion. The party hinted at banning academic tutors from making any profit. The memo extended to home-schooling and off-campus education companies, ordering them to register for a non-profit status and also disallowing approval of any new private educators by the local authorities. Restrictions were also speculated on foreign capital investments in the sector.

The obvious deduction from the actions of the last few months would be that the CCP wants to take back control of tech-economy from the private sector or that the CCP is now eliminating the private sector.

However, that would not be correct, for the misconception that the CCP is against private sector is as old as the Republic of China. A lesson from the life of Rong addresses this notion. In 1949, as the capitalists feared a crackdown from Mao’s soldiers, a few like Rong chose to stay behind while most fled to Taiwan.

The CCP, even with Mao’s contempt, chose to coexist with the business class unlike their Russian counterparts who eliminated it altogether. This decision to coexist served the Chinese interests when the economy was opened to the world in 1976.

Rong himself went on to represent the party as the founding chairman of the China International Trust and Investment Corporation. The corporation, one of the most critical arms of the party back then, would usher investments worth millions of dollars into the country.

Minus the crackdown spree, the regime under Xi too has accommodated the capitalists within the CCP framework.

The latter has also responded with loyalty, serving as the advocates of the CCP across the globe. In some corporations, CCP members holding prominent positions is public knowledge, wielding enough power to dismiss managerial level workers if they refuse to toe the party line.

The censorship is also not a problem. CCP has successfully managed to harmonise the Internet firms, ensuring that these platforms do not become a breeding ground for social discontent.

In 2012 itself, Xi, just having taken over as the President ordered that it was essential to ‘win back the commanding heights of the Internet’.

The Supreme People’s Court, the country’s highest apex body, in 2013, came out with a ruling under which it mandated prison term for as much as three years for anyone who was caught spreading rumours online, and if those social media posts received more than 500 shares or 5,000 clicks. The swift political takeover of Hong Kong and the silence on Covid-19 proved that Xi’s censorship of Chinese Internet was well in place, and successful.

So, if it is not about contempt or control of the private sector, what does Xi really want?

The only consistent fact about China is that one can never have all the facts, and therefore, some degree of guesswork is warranted, for when it comes to this unprecedented crackdown, there is more to what meets the eye.

From 1996, when the private sector comprised only 17 per cent of all companies, it has now increased to more than 85 per cent. While entrepreneurs running these firms happily toe the party line for private benefits, they are not always aligned to the party goals, as CCP recently discovered with Jack Ma when he called the Chinese financial sector one of the most heavily regulated in the world. Interestingly, Jack Ma was a long-term loyalist and member of the party.

Two, the Internet firms threaten the control of the state-owned enterprises and regulation purview. When the Ant Group, post its IPO suspension, was ordered to shape itself as a regulated private bank and no longer only a technology company, the reasoning stemmed from the inability of the financial regulators to exercise control over its lending and other fintech businesses.

Ant Group’s lending business was fuelled by an oversubscribed offering, speculated inflated valuation, and the absence of any capital requirements. Thus, in the event of Ant Group failing altogether, Beijing would have to be one to bail it out. For Xi, unchecked lending and soaring debt levels across China were a cause for concern around 2016-17. No wonder, Ant was ordered to guarantee more loans, worth $20 billion, during the probe.

Alibaba and Tencent too faced the wrath of the regulators. For China, reducing the might of the biggest online players in the digital payments sector also aligns with their long-term goal of ensuring that the state-backed digital currency supersedes wallets issued by the likes of Alipay or WeChat in a $27 trillion payment industry, where 94 per cent of the payments are controlled by two companies alone.

Three, the party wants to sustain the growth of its human capital. The private tutoring industry was adding to the academic burden of young students, increasing their studying hours and putting them at risk of non-communicable diseases at a very early age. The expenditure warranted for private tutoring was starting to burn a hole in the pockets of the parents.

There was another dimension to this debate, that of real estate. Panic-stricken parents were now investing in apartments closer to schools to ensure easy scheduling for the children. Some parents are going as far as investing in apartments right around their marriage, hoping that a school will come up in the area by the time the child is born.

Earlier this year, China allowed families to have three children, given the fertility rate in China was only 1.3 per woman. For Japan, it was 1.36 in 2019, and in the United States, it was 1.7. For Beijing, the capital fuelled tutoring industry threatened its long-term goal of families having more than one child. Thus, the crackdown, even as it wiped off 75 per cent of the sector.

Four, the CCP wants greater control over data. Given Beijing aims to be the global leader in the technologies of the future including artificial intelligence, 5G, Internet of Things, server centres, and so forth, unquestioned control over data churned out by private companies would be indispensable. With Didi, China’s largest ride-hailing app, data security has become a challenge.

Post the crackdown on Didi, Chinese social media was flooded with studies that had data sets revealing information about the traffic around government buildings in China, such as the Ministry of Public Security. For Beijing, the obvious worry was what if the same data is used tomorrow to profile government officials? Given the voluminous data held by Internet firms in China, Beijing’s crackdown does not come across as a surprise in a regime that prides itself on creating a surveillance system.

As with oil earlier, the state in China wishes to have a monopoly on data, the digital oil.

Given any platform with more than 100 million active users, monthly, would now require an internal security audit and review before going public anywhere in the world, the state has made its intent clear — they are not leaving the world’s biggest market of data creation, consumption, and processing to a handful of companies.

Five, the Chinese government wants greater foreign inflows through the stock markets in Hong Kong, Shanghai and Shenzhen where it has greater control and to disallow the companies from using the infamous Variable Interest Entity (VIE) model.

Turns out, when investors put their money in the likes of Aibaba and Tencent via the New York Stock Exchange (NYSE), they are not investing directly in the companies, given foreign investment has an upper-ceiling or is also banned.

For a long time, companies in China have been using the VIE structure through which they set up an offshore entity that is then listed on the NYSE, create contracts between this offshore entity and the main company back in China, and consolidate the final balance sheet so as to reflect the profits or growth of the main company as that of the entity, where investors have staked their interests.

However, with the intensifying trade war, the VIE structure puts the prospects of investment at risk. For the CCP, the VIE poses a threat of investor interests not aligning with that of the party, thereby risking a political revolt, similar to the one witnessed with Jack Ma.

While it would be a mistake to assume that these few months of crackdown from Beijing would negate the possibilities of any more capital inflow, given the size of the Chinese market, the Chinese now want investments to be driven through stock exchanges where they have greater control. They are not averse to foreign money, but they would want investors to come to China rather than companies going to the West.

For Beijing, the crackdown against the Internet firms is not eliminating the sector, but rendering it toothless. Simply put, the CCP is not killing the industry or the market, but only restructuring these industries to ensure its own invincibility. For Xi, looking to begin his third term in 2022, curbing monopolies is also about sending the classic communist message — the state is in control, the people are the priority, and unchecked capitalism is a curse.

Where does it leave the likes of Jack Ma then against the bullies of Beijing?

Between 1949 and his death, Rong donned many roles to adapt to the evolving needs of the CCP. During the cultural revolution in the 1960s, Rong was demoted within the party, and was ordered to sponsor the budget for the hydrochloric acid, required to unclog the toilets in the ministry followed by years that were spent in uncertainty before Deng Xiaoping took over.

While Chinese technocrats today do not have to worry about cleaning up CCP’s toilets, or exported viruses, or shaved heads and broken fingers, adapting to the party’s needs and aligning with their goals is what can keep them away from the wrath of Xi.

What Xi wants is controlled capitalism, suited to the goals of national security, social and economic prosperity, and political stability.

Mao Zedong could have taken a lesson in subtlety from Xi Jinping.