Tech and tuition crackdown: why China doesn’t want stock market heroes

  • China wants to avoid a tech-led bubble bursting. But whether more pain now means more gain later will not be put to the test until the US tech bubble bursts

Viewed at one level, the Chinese government’s crackdown on the country’s entrepreneurial elite seems to echo former chairman Mao Zedong’s call in the 1950s to “let a hundred flowers bloom” – and then chop off their heads. But it is probably more accurate to see Beijing’s strategy as being one of pre-emptive bubble bursting.

High-flying tech and other entrepreneurs, whether they soar in the firmament of the United States or China, tend to generate stock market bubbles as big as their personas, bigger even than their personal fortunes. These draw disproportionate amounts of savings into stock market situations that inevitably (and painfully) go bust.

Seen in this light, Chinese regulators or party officials seem to have chosen their moment well to rein in the perceived excesses of high fliers such as Tencent Holdings, Didi Chuxing, Ant Group and others. When (rather than if) a correction or crash occurs on Wall Street, US authorities may wish they’d done the same with Microsoft Corp, Amazon, Google etc.

A tech-led crash would take an awful lot of investors, both individual and institutional, down with it and the political backlash could be severe. Western capitalism has a heavy bias towards equity financing – the US ratio of stock market capitalisation to gross domestic product is about 234 percent, for example. So, a great many people stand to get hurt.

This is more than double the ratio in China, where it is still under 100 percent. But it has been rising rapidly and a combination of growing investor expectations and the increasing lure of US-style superstar entrepreneurs may explain the official desire in China to avoid a tech-led bubble bursting.

Even so, there is a perception among some outside the country that China is shooting itself in the foot with its crackdown on tech, and even education sector entrepreneurs, where Beijing has moved to “all but end China’s multibillion-dollar student tuition industry”, as one analyst put it.

Stock prices fell sharply on Shanghai and Shenzhen as well as Hong Kong exchanges after the various strictures were issued, and Nigel Green, CEO of DeVere investment group, noted that they had wiped “hundreds of billions of market value from China’s largest tech giants” while cautioning investors to exercise extreme care.

“This tough new approach being taken by Beijing has spooked the tech sector which is already on high alert amid fears that the government wants more control over private enterprise,” Green suggested in a note.

But there is another view – that China is intent on having entrepreneurs, investors and the economy take pain now for gain later – or at least to avoid even greater pain later. To mix metaphors, we might say that China is cleaning out the Augean stables before the thoroughbred companies bolt.

As senior market analyst Jeffrey Halley at Oanda told me, China is “assertive against sectors of the economy that threaten social stability in the longer term. It does not want to undermine its financial markets but the CCP [Communist Party] will accept short-term pain for what it believes is a long-term gain.”

Compared to the severity of Beijing’s actions, the antitrust and other excess-curbing measures by successive US administrations against the likes of tech giants Alphabet, Google and Facebook look mild. In China’s case, it could be argued that the greater the pain now, the greater the future gain.

This will not be put to the test until the US tech bubble bursts. All that can be said with certainty before this happens is that, the bigger they are, the harder they fall, whether in relation to stock prices or the tech entrepreneurs whose inflated image breeds investor hysteria.

To see this in perspective, consider how many corporate champions of the fight against climate change, pandemic solutions entrepreneurs, barons of infrastructure investment or other key players in socio-economic reform enjoy the cult status of Mark Zuckerberg or Jack Ma.

Stock market heroes are not always champions of the people. As Paul Sheard, research fellow at the Mossavar-Rahmani Centre for Business and Government at the Harvard Kennedy School says, “the market is good at generating innovation and growth but blind to considerations of fairness and equity”.

Chinese President Xi Jinping’s thoughts seem to reflect those of predecessor Deng Xiaoping more than Mao’s when it comes to the super wealthy. “Wealth in a socialist society belongs to the people. To get rich in a socialist society means prosperity for the entire people,” Deng was once quoted as saying.

Xi recently called on the country’s private entrepreneurs likewise to “strengthen their feelings for the country and assume social responsibilities”. This seems sound advice for anyone looking at long-term health rather than short-term wealth issues.

South China Morning Post, 2021-08-02

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