The Self-Destructing Technological Teardown of China by William R. Rhodes and Stuart PM Mackintosh

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Chinese leaders believe they can crack down on the country’s private tech sector while making significant strides as state-owned companies take over. But by reversing the policies that have enabled decades of rapid growth, they risk jeopardizing the unique economic model they seek to maintain.

WASHINGTON, DC – Global stock markets appear to be mesmerized by Chinese real estate developer Evergrande, who looks set to default on some of its massive $ 300 billion debt as the country’s real estate market cools. Investors are right to be alarmed. The Chinese real estate sector represents nearly 30% of GDP, and there is a well-established link between real estate recessions and deep recessions.

But problems in the real estate sector aren’t the only economic danger China faces in 2021-2022. The growing crackdown by the Chinese government on the country’s burgeoning tech sector could pose an even greater threat. After all, China’s vibrant tech companies have the capacity to innovate and drive growth just as the digital revolution, coupled with green transformation, requires a strong private sector and robust investment flows.

Yet President Xi Jinping, fearing that companies such as Alibaba, Tencent and Didi Chuxing have amassed too much wealth, data and power, has stepped up his attacks on the tech sector this year. Big Tech’s implicit challenge to the Chinese Communist Party’s monopoly on power has apparently grown too serious to ignore.

The regulatory repression is far-reaching and increasingly severe. In July, for example, Chinese authorities removed Didi, the country’s leading carpooling app, along with 377 million Annual active users – app stores, shortly after the company’s successful IPO in the United States. The intervention brought down Didi’s share price crash about 20%.

The ruling against Didi is just one episode in a multi-faceted battle between the CCP and the Chinese tech titans. Authorities also downsized Alibaba by canceling the planned IPO of its fintech subsidiary Ant Group and ordered Alibaba will sell its media assets, including the South China Morning Post. Company founder Jack Ma paid a heavy price for his risky decision to criticize Chinese financial regulators last year.

Certainly, other countries are also taking political and legal action against Big Techs, but their actions are much more limited and framed in antitrust terms. Consider, for example, the scrutiny by the US Congress of Facebook, Google and Twitter, or the European Union’s long-standing antitrust actions against Google, Microsoft and Apple. The nature and scale of the Chinese government’s recent attacks on the country’s most successful private technology companies are qualitatively different and can have significant negative effects on innovation, productivity and economic growth.

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China’s move towards increased state control over major tech companies, including the integration of CPC cells within them, risks dampening the remarkable dynamism of these companies. By aggressively moving away from supporting the private sector, the Chinese authorities risk killing the goose that lays the golden eggs of rapid economic growth and China’s best hope of securing the “common prosperity” Xi wants.

According to a recent study by McKinsey & Company, the share of Chinese urban employment supported by private companies more than quadrupled between 1995 and 2018, from just 18% to 87%. The share of exports generated by the private sector more than doubled over the same period, from 34% to 88%. And private sector capital investment has increased from 42% to 65% of the total. The message in the data is clear: cracking down on the private sector and threatening innovators is not the way to ensure rapid and sustained growth.

Chinese entrepreneurs can read the writing on the wall. They understand that their political and regulatory leeway is shrinking and that the balance has shifted in favor of public enterprises and public officials. And they understand that this atmosphere of unease is likely to persist.

The danger now is that more CEOs and their companies are pulling out, hampering investment and innovation. In fact, it can already happen. Data from the People’s Bank of China shows that loans to small and medium enterprises in the private sector increased by 6.7% in 2019, only half the rate of increase in loans to public enterprises. And companies that lack sufficient funds cannot invest, iterate or innovate.

Chinese leaders believe they can crack down on the private sector while making significant progress as state-owned enterprises take over. But new technologies and the dynamism of the private sector, along with the freedom to innovate, experiment, create successes and sometimes make mistakes, are all essential elements of the rapid transformation and evolution of the economy. China. State-owned enterprises do not have a similar achievement record.

Unfortunately, Chinese policymakers busy celebrating the CCP’s 100th anniversary this year seem to be learning the wrong lesson at the wrong time. By reversing the policies that have enabled decades of private sector-led growth in favor of greater state control, they will jeopardize the unique economic model they seek to maintain.


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