In his early years, China’s President Xi Jinping was regarded as a driver of reform who would increase private enterprise, harness private-sector innovation and link China more firmly to world markets. He was western educated and seemed a natural successor to Deng Xiaoping, who had been the controversial voice of reform.
Some China experts assured us we were entering an age of US/China economic collaboration, regulated through the World Trade Organisation, the club of central bankers and other leading global bodies and treaties. Gradually, they thought China’s markets would integrate more with western ones – and Beijing would accept more of the global rules.
When President Xi announced that he was not going to retire from his office after the standard ten years – nor find a successor in the second half of a 10-year tenure – alarms sounded about his true intentions and the nature of Chinese political society.
The man who had successfully presided over a big expansion of the economy and the flourishing of a large number of successful digital companies became, in practice, an advocate of more state enterprise, more censorship and regulation of the private sector, and more control over the lives and thoughts of all Chinese under his One China vision. President Xi set about removing dissent in Hong Kong, re-educating Muslims in western China, dealing with any potential challenger around him, and stressing the need to unite China with his thoughts.
This different vision of the President was confirmed visibly by the 2021 centenary celebrations of the Communist Party. There was President Xi in full Mao costume, with the Politburo and other leaders in suits, beneath a portrait of Chairman Mao. The words were tough, asserting a Chinese nationalism and reminding the world that China is embarked on a project to increase its strength and to secure all the necessary intellectual property and manufacturing capability to have a very strong military. Mao was now beating Deng once more.
Since then, we have seen the Peoples Bank of China confirm that it has “earnestly implemented the decisions and arrangements made by the Communist Party Central Committee and the State Council”. The State Administration of Regulation has fined a host of internet companies and required business model changes from many. The Cyberspace Administration of China, Xi’s own creation, has banned the apps of some companies, reminded all of their need to treat core state data with respect, and produced a new Data Security Law.
The Chinese state intends to control all Chinese data to avoid its foreign exploitation and to ensure conformity with approved thinking. The government has condemned “disorderly capital expansion” and is working its way through various companies who are said to have placed growth and their profit above the public interest. More sectors may be hauled up before the authorities.
State-direction of business
These changes will drive some successful entrepreneurs out or make them much more cautious. They will reinforce the growing digital divide with the US. They are probably part of a plan to spend more investment capital and energy on technology that can support the military and increase the power of the state. The government will not favour enabling technology that extends individual freedoms. It can portray some of its actions as tackling abuses or problems that worry people.
Clamping down on internet games is proposed to help avoid digital-game addiction. Attacking private tutor firms is to dissuade people from the fees they think they need to pay to help their children get on at the expense of others without the cash. Some of the attacks on technology companies are described as conventional anti-monopoly and cartel actions. There is more to it than that.
If you want to understand the sectors and companies that can do better you need to follow the government plans, which no longer rate the consumer internet as a priority. It will be businesses that build the power of the state in all its manifestations, businesses that remember that their central aim must, like the Peoples Bank of China, be to earnestly implement the wishes of the authorities.
Attacking private profit and locking up a few rich entrepreneurs whose views are too liberal is all part of the vision. This all implies a discount valuation for Chinese chares. It also means many global investors, including from Biden’s USA, will be put off the idea of investment in this fast-growing economy by wider considerations of governance and the nature of the state.
There are always two-way arguments in markets – and some will see the latest slide in shares on the back of tough government action as a buying opportunity. There may be a rally this year based on the continuing recovery of the Chinese economy and the possibility of some monetary relaxation as inflation comes under control. Some valuations are now well below comparable US companies. There will, nonetheless, be a longer-term price to pay by investors for more state enterprise and direction.
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