China’s President Xi Jinping wishes to signal a new era. He wants to move on from the reforms of Deng Xiaoping, which were based around adopting a greater free enterprise approach under the slogan “socialism with Chinese characteristics”.
Deng famously stated that some Chinese could get rich first, as he sought to reverse the damage of Mao’s cultural revolution and move large numbers out of poverty. Today, President Xi wants to make equality a more-important goal under the new slogan of common prosperity.
The President has been energetic in getting arms of government to pursue the new policy vigorously. There have been moves to get rich-and-successful entrepreneurs and entertainers to pay more tax by sending them bills for tax avoidance and evasion.
Corporates under attack
Large profitable companies have been told to make substantial charitable donations to boost domestic improvements for the not-so-well-off.
The technology sector has faced much tougher regulation. There have been crack downs on raising capital and listing in the US, and on anti-competitive behaviour. There are bans on the use of algorithms, fake reviews and inappropriate use of data.
The private tuition sector has come in for rough treatment to stop rich people buying advantages for their offspring. Children are now only allowed to enjoy online games for three hours a week on Friday to Sunday, to prevent excess use getting in the way of their studies.
An independent patriotic blogger wrote an important piece recently which appeared on various official sites and was allowed wide circulation. It began by saying: “Everyone can sense that a profound transformation is underway”
It stated that the Chinese entertainment industry is “rotten to the core”, providing the background to actions taken against individual well-known performers – and the work underway to restrain or remove fan clubs. The cult of personality for anyone other than the Leader is not well received, and the excessive wealth they are said to accumulate is frowned upon.
Some are removed from social media sites. The blogger made clear the wide-ranging nature of the new policies. “Capital markets will no longer be paradise for get rich quick capitalists, cultural markets will no longer be heaven for sissy boy stars, and news and public opinion will no longer be in the position of worshipping western culture.” The three great mountains of education, health care and housing have to be levelled.
Whilst this is not official wording, it clearly captures a mood the state is happy to allow. The blogger warns of the dangers presented by America and argues for a different Chinese approach, with vigilance over the feared hostile intents of the US. The government itself looks as if it intends to rein in what it sees as excessive pay and shareholder reward. It is taking stakes in successful companies to gain greater visibility of their actions, whilst at the same time strengthening regulatory powers and probes.
Bulls of China rightly point out that President Xi is unlikely to want to create the impoverishing chaos of Mao’s cultural revolution, and will not want to stop all the engines of growth and technological development. They think the market has now fallen and has relative valuations which reflect the new more hostile approach to successful free enterprise. They look forward to more cuts in bank reserve requirements and in interest rates to offset the slowing economy. They see some of the badly hit technology stocks as now good value.
The problem with that view in the longer term is President Xi has sent a strong message. The actions of central government are bad enough for business, but this will now be amplified by local government and party officials as they compete to find examples of rich people and companies not pursuing the new goal of common prosperity.
Deciding to attack the very entrepreneurs who can innovate and create more jobs is not a wise move. At the same time the authorities are trying to reduce the overall levels of borrowing, with worries about the credit worthiness of the property sector in particular.
Circumstances may well force them to relax money and credit more in the months ahead, but there are now deep structural and policy problems which will detract from the profitability of Chinese investment. Western investors now more preoccupied by governance issues may also become more cautious about trusting the more hostile and aggressive approach of the Chinese authorities.
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