The image on the front cover of this week’s Economist is striking. A Chinese state worker, sledge hammer over his shoulder, poised to slam it down onto brands of well-known and successful tech companies: tik tok, Didi, Meituan, Tencent. The imagery refers to the clamp down by Chinese regulators on these and other companies; actions which have wiped over $1 trillion from the share price of these organisations. In recent times when we have evidenced the growing reliance and importance of technology on all aspects of our lives, it seems curious for these measures to have taken place. But the apparent motivation behind the Chinese authorities’ actions reflects what we would expect from anti-trust regulators in capitalist systems – the break-down of anti-competitive practices, particularly those stemming from monopolistic positioning. In the West the process would involve lengthy investigations and protracted litigation. In China, the judicial due process was replaced with a more expedient diktat of the anti-monopoly agency.
This activity raises several political, economic and financial questions. First, it seems curious, even strange, that the Chinese state would clamp down on businesses that demonstrate such success, not only domestically but globally. The Economist refers to the actions as a ‘…refinement of their policy of state capitalism..’ where the success needs to be tempered by ensuring the dominance of central control. There is also the prospect of using the gains of these successful companies for the broader good by sharing the data gleaned by these organisations across a wider group of providers. Here there is reference to the government considering data to be a ‘factor of production’, just like labour or land.
The actions are also perplexing from a financial perspective. China has enjoyed a rapid growth of many tech companies and as we have seen the expanding of China’s weighting in global equity indices, there is ever growing demand among international investors to access equity stakes in Chinese companies. The regulatory actions and pulled IPOs will spook some investors, although perhaps the longer-term impact will be to make investors be more discerning about what they invest in, rather than following the largest components of the most accessible index. Indeed, this could offer a real opportunity for those smaller businesses that have been frozen out of growth by the anti-competitive behaviour of the giants.
In some ways the clamp down offers greater certainty of the economic and financial direction of the country. The 5-year plan clearly articulates the priorities for development, with a focus on domestic capability to enhance self-reliance. It will be increasingly important for international investors to be able to interpret that strategic plan to identify those sectors and companies that will benefit and avoid those where there could be regulatory invention, perhaps most starkly evidenced recently in the for-profit private education sector.
So, although there is an element of the Chinese government telling these companies and their entrepreneurial owners to ‘toe the line’, I suspect their mid to long term prospects, like so many of the emerging ideas in China, will continue to grow apace.