Fabien Baussart

China targeting tech sector unicorns for tighter control

‘Common prosperity’ is a pet phrase of the Chinese Communist Party (CCP) that the country’s industrial magnates are beginning to dislike a lot as a policy directive from President Xi Jinping is ending the domination of fintech heavy weights. It begins with Jack Ma’s Ant.

Ant Group’s Alipay, the digital payments app with over a billion users, is being broken up. This is the second blow to Ma after the attempted public listing of Ant, Alipay’s parent company, worth $37 billion, was quashed last November. Now, Alipay’s “treasure trove” of consumer data is to be handed over to a partly state-owned credit scoring firm. Its profit- making consumer lending arm may be excluded from any future IPO. A separate platform for the app’s profitable lending operation would be created under the plan.

To add insult to injury, Ant has been asked to undertake sweeping changes in its business model, “including restructuring itself into a financial holding firm”. It is also to fold its two micro-loan services, Jiebei and Huabei, into the new finance firm, BBC reports.

Financial Times broke the news last month about the Chinese regulators planning to break up Alipay. Shares of tech giant Alibaba fell after the report. The regulatory measures, coincidentally, are hitting Jack Ma’s companies after Ma criticised Chinese regulators last October, saying they were stifling innovation. That made the regulators target Alibaba and in April, it was hit with a $2.8 billion fine over monopoly concerns.

While the choice of MA’s companies may be on account of his critical statement, the action is part of the CCP’s move to tighten its control over big businesses in China. From rising private tuitions to the gaming industry, which wiped out $1 trillion in market value of China’s four largest tech companies, the party has been undermining private enterprise systematically in the name of preserving Chinese culture and ensuring economic equality. The regulators are simultaneously also targeting the internet giants at present on competition and privacy and cryptocurrency issues.

President Xi’s ‘common prosperity’ goal is being flayed by the big businesses on the ground that it defies the logic of China becoming an economic superpower in the last two decades that was completely based on a public-private sector partnership. James Kynge wrote in Financial Times saying Xi’s attack on big business in China is a “grand experiment for 21st century authoritarian governance”.

The western media was quick to point out where this discrepancy arises from. Deng Xiaoping told the CBS in 1986: “To get rich is no sin. We permit some people and some regions to become prosperous first for the purpose of achieving common prosperity faster.”

Financial markets across the world, led by Wall Street, are hurriedly discussing the development in China, wondering how it would affect them and the investors. They all agree that as the Chinese government’s sudden distrust of its private sector grows, the entire tech sector is at risk of crumbling down in the country and with it the dreams of the startup unicorns that made China what it is today.

Ant Group, for instance, is among the most valuable companies in the world. It is among a small group of companies, each an outsized unicorn, valued at over $1 billion each. China has 227 unicorns according to a 2020 ranking, as reported by Quartz, behind the United States’ 233. Nearly a fourth of the world’s unicorns come from China. Sixteen percent of the world’s unicorns operate from one single city – Beijing. According to Refinitiv, Chinese companies raised $80 billion funds in US IPOs between 2010 and 2021.
It is not that the CCP was unaware of how these companies became the giant unicorns they are today. These companies rode the wave of Chinese prosperity in the first decade of this century as millions of wealthy and digitally connected Chinese became users of the companies, fostering venture capital investment. There were regulatory loopholes that were taken advantage of. The Chinese government was aware of it but allowed the companies to take advantage of the loopholes for even doing business abroad. It is that “permissive era” that President Xi is burying at one go now.

The government now has the complete picture of how the unicorns exploit the loopholes, through data security, monopolistic behaviour, random pricing, bad workplace practices, and the like. It is now using these “rationales” to cut the unicorns to size.

Among the unicorns to have faced the wrath of the Chinese regulators recently are Tencent, Alibaba, Ant Group, Byte Dance and Didi Chuxing. Having seen the fate of Alibaba and Ant, most of these companies have overnight shed their high profiles and trying their best to restructure themselves to avoid the regulator’s axe.

There are genuine fears in China’s tech sector that the crackdown has to do with a tighter control of consumer and government data and reassertion of the government’s authority over the private sector while humbling the growing numbers of tech billionaires. If this continues, private investment in the sector may dry up and the government will have fund it itself.

About the Author
Fabien Baussart is the President of CPFA (Center of Political and Foreign Affairs)
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