After more than two decades of” regulatory assault,” Chinese officials have begun opening an olive branch to China’s top software technology companies. The initial public offering( IPO ) of e-commerce behemoth Ant Group, an affiliate of Alibaba, was canceled in November 2020, marking the beginning of the crackdown.
The majority of China’s major software companies were impacted by the” rectification” in addition to Ant Group. However, a chill was sweeping over China’s market by June 2023. The healing following Covid-19 was sluggish. The rate of children employment increased by more than 21 %.
The government most probably came to the conclusion that they had succeeded in achieving the majority of the rectification’s goals. Premier Li Qiang & nbsp bent over backwards at the China Development Forum in March 2023 to reassure prominent Western CEOs that China was welcoming the private sector, both domestic and foreign.
Regarding the” true” goals of the crackdown, there is andnbsp, no consensus among academic and journalistic commentators. One theory contends that the” exuberance” of Jack Ma, the founder of Alibaba and China’s most well-known personal entrepreneur, and the ultimately Communist orientation of President Xi Jinping were at odds with one another.
However, concentrating on Jack Ma ignores the fact that almost all software firms underwent some sort of correction. Another viewpoint contends that, given Xi’s embrace of the state-owned market, it was merely a plan to cut off the wings of Chinas’ leading private companies. However, data indicating an increase in the penetration of big private companies into China’s economy refuted Xi claims that he was hostile to the private sector.
Others contend that in order to align the platform tech companies’ mission and objectives with Xi’s social policy goals, such as” common prosperity” and the fight against” disorderly expansion of capital ,” a” great” correction was required. However, the crackdown’s real goal had little to do with rules because the authorities’ actions went beyond what might be regarded as the imposition of a stricter regulation.
Revision of regulations was merely a means to an end for different goals. A wave of & nbsp, or shareholder wealth destruction, characterized the crackdown. In November 2020, Ant Group was scheduled to launch its initial public offering ( IPO ) at an implied valuation of US$ 313 billion. & nbsp,
However, in July 2023, Ant Group announced a share buyback at an investment that was 70 % lower. Didi Chuxing, the largest ride-sharing company in the world, raised$ 70 billion during its IPO in New York in June 2021. It is now trading over the counter with a business valuation of roughly$ & nbsp,$ 16.7 billion after being forcibly delisted from the New York Stock Exchange.
The money transfer of platform companies to several state-owned entities was the other side of the coin. One method of extraction took the form of previously unheard-of charges. In April 2021, Alibaba received a$ 2.8 billion fine for alleged market dominance abuse.
Another method of extraction involved” deliberate” donations to causes that Xi supported. Tencent, the world’s largest game developer and investment in numerous start-ups,” earmarked”$ 7.7 billion in 2021 to a bank devoted to” common success.”
Another recovery method involved putting a stop to program companies’ ability to expand. Didi was prohibited from adding new customers for a period of 18 months. This fortunately allowed many of Didi’s state-backed rivals, including Huawei Technologies of T3 Chuxing, to enter the market.
The assault has had a significant impact on corporate establishment by fundamentally altering it. Platform software companies have been coerced into appointing state-nominated managers and issuing” golden shares” in subordinate companies to government-owned businesses through joint venture agreements. & nbsp,
Usually, these golden shares just make up roughly 1 % of a subsidiary’s capital. However, they grant majority shareholders overwhelming corporate governance right. In those businesses, the state now has the ability to reject tactical choices.
The defenestration of Jack Ma, the embodiment of China’s innovative success, was arguably the most significant change in business management. After the withdrawal of Ant Group’s IPO, Jack Ma was essentially exiled. Jack Ma’s voting rights were reduced from over 50 % to 6.2 % after the company underwent a share reshuffle.
Program businesses have escaped the regulatory crackdown. However, doing so comes at a cost to their business concepts, which cannot be changed. These businesses were extremely dissimilar from the majority of China’s large private companies prior to November 2020. & nbsp,
At the time, their business model could be characterized as” entrepreneurial” because it was entirely private, supported by top-tier venture capital, and led by entrepreneurs who were committed to maximizing shareholder value.
This business concept of entrepreneurship has then andnbsp been abandoned. Rather, these businesses must collaborate with another sizable private Chinese businesses that are frequently entwined with the government. Major state control over the personal business is ensured by this.
The change in the business model has even dealt a serious blow to persuasion in China’s personal business. If the government can deny a renowned personal businessman like Jack Ma control over the business he or she founded, it is difficult for the owners of Chinese private companies reason to be optimistic.
Sentiment & nbsp, may get better in the future. However, for the time being, the regulatory crackdown will continue to be a significant factor in China’s declining economic efficiency.
Martin Miszerak teaches as a visiting teacher at Beijing’s Renmin Business School.
East Asia Forum previously published this piece, which has been republished with a Creative Commons license.