Why Indian Entrepreneurs Should Stop Romanticising China’s State Capitalism After What Xi Is Doing To Its Tech Sector

In 2020, the first year of Wuhan Virus pandemic, China overtook the United States for the first time in having most companies in the Fortune Global 500 list.

The count was 124 to 121 in favour of China with Japan at distant third having only 53 companies on the list.

Not surprisingly, 91 of the 124 Chinese companies in the list were State Owned Enterprises (SOEs). But here is the meat of the matter.

While these 124 Chinese companies had more assets compared to the US firms ($36.9 trillion Vs $32.7 trillion) and slightly less revenue ($8.3 trillion Vs $9.8 trillion), profit margin and return on assets was poor and China stood at sixth and seventh position respectively on these parameters.

Culprit? You guessed it: SOEs.

SOEs’ average return on investment was one-third the level of private companies, and their average profit margin was only half that of Chinese private firms.

This speaks volumes of the inefficiencies of the Chinese SOEs, an issue long talked about by experts around the world.

But in 2016, Chinese president Xi Jinping declared his intention to reform them by — wait for it — making them "stronger, better and bigger." Next year, it was decided by the Chinese government to ’give full play of the party’s leadership and its core political role — that SOEs should stick to the political principle that all SOEs must be under the party’s leadership.’

Of course, this is very much in line with Xi‘s innate ability to learn all the wrong lessons from history, which is the biggest gift and relief to the world.

When he was 9, his father was expelled from the Chinese Communist Party by Mao for disloyalty. When he turned 15, he found his father sent to prison. Xi himself was sent to ‘re-education‘ camps in the countryside and reportedly stayed in a cave dwelling for seven years.

But in purging, he seems to be competing with Mao, cracking down on dissidents at the levels not seen in decades.

He also seems to be making an open mockery of the brilliant philosophy of Deng Xiaoping to ‘bide your time and hide your strength’.

With per capita income in China still one-fourth of the United States, Xi has decided to bare the dragon’s fangs in all its glory too early and forced open the eyes of whole world to the biggest threat that the world faces in the 21st century.

Like a clockwork and Hitler, he has managed to open so many fronts at the same time by enraging Japan, South Korea, Australia, India, Vietnam and the United States all at once, not to speak of the world’s masses by unleashing the worst pandemic in a century either through acts of commission and omission of the Chinese communist regime.

Nonetheless, what’s most stunning is Xi’s purge of his country’s tech industry, which is currently underway. First, the regime cancelled the IPO of Ant Financial followed by dismantling of the company. It took a series of actions against Alibaba (China’s Amazon) including slapping a multi-billion dollar antitrust fine and deleting its browser from app stores.

Jack Ma, founder of both Ant and Alibaba, disappeared for weeks following a meeting with government officials. The financial empire he created, once touted to take over the world, crumbled in a matter of a few months.

Next in line was Didi (China’s Uber). Just two days after after Didi launched an initial public offering on the New York Stock Exchange, which attracted $4.4 billion from US investors, Chinese regulators started a crack down on the company, announcing various penalties and Didi’s app was pulled down from the app stores because the regulators said they were reviewing it on national security grounds.

The stock fell 30 per cent soon after the IPO was launched, costing US investors serious money.

Similar actions of levying fines have been initiated against two other Chinese tech giants — Tencent and Baidu — on opaque grounds. In April, China summoned the tech executives of 34 internet companies and told them to rectify their anti-competitive practices within the next month to avoid meeting the fate of Alibaba.

The comprehensive industry-wide crackdown is too alarming to miss.

The word ‘antitrust’ is for consumption of the western world so that they think that the Chinese are taking action against the tech monopolies just like the US and Europe have over the last century on various occasions against their corporations, for indulging in practices that curb competition and prevent alternatives from emerging.

But Chinese actions are not limited to one or two companies. They are going after the whole industry.

Some commentators like Noah Smith view these actions as emanating from some higher noble goal of the leadership to reorient the country from tech companies which grow on the back of adding more consumers by supplying digital addiction to ones that produce hard tech stuff which will help Chinese win cold and hot wars in coming years and decades.

And so, when China’s leaders look at what kind of technologies they want the country’s engineers and entrepreneurs to be spending their efforts on, they see them spending that effort on stuff that’s just for fun and convenience, which is self-defeating.

They probably took a look at their consumer internet sector and decided that the link between that sector and geopolitical power had simply become too tenuous to keep throwing capital and high-skilled labour at it.

And so, in classic CCP fashion, it was time to smash,” he writes.

Not everyone shares his high estimation of Xi and co. Sanjay Anandaram, a leading tech observer, says that what the Chinese are doing isn't surprising.

"The over-riding goal for them is maintaining social harmony. That is, where the Chinese government and the party are in total control, ensuring there is no disturbance or threat of any kind to their rule and to therefore ensure on-going growth and economic prosperity in furtherance of these goals. The massive Chinese consumer internet companies, especially the listed ones, were a threat by way of their power over managing the data, minds and behaviours of Chinese citizens," he says.

”Their foreign listings along side the need to make disclosures were also an issue as they see that as area of potential vulnerability. That China is hell bent on becoming dominant in key core tech areas like batteries, 5G/6G, renewables, AI, semiconductors, space, rockets, submarines, is no secret. Control over Li by investing in Africa and tying up supply chains around the world is part of this effort. They began work on 5G close to 20 years ago. Apart from core tech, they have a huge focus on Standards."

"Their Standards 2035 document lays this out. Owning tech and standards gives them the disproportionate power they seek. And then there is the Dual Circulation policy, i.e., Internal supply, consumption along with control, management and supply to the world and circulation of the benefits back home. Their strategic moves — financial, military (including Xi being in Tibet), etc — are all aligned towards realising the goal of becoming a fully developed country by 2049. For that, any opportunity and possibility of social unrest itself must be obliterated. That is how I see the Chinese make their moves," he adds.

It’s also foolish to think the consumer-based companies like Amazon, Google, WhatsApp, Microsoft et al are useless and the best talent that’s being ‘wasted’ in getting people to consume more content can somehow be best utilised in areas that the State decides to channel it in.

The technology advancements these companies are making to make themselves more profitable is a huge asset for the US. It’s not without reason that the US security establishment is actively using their services to further strengthen its military tech.

The ability and freedom to innovate has a value that can’t simply be achieved by orders from the political leadership.

As John Mauldin wrote in his letter, there are obvious ’not seen’ consequences of trying to channelise capitalism and innovation in a top down fashion with an iron fist.