China’s chaotic regulatory crackdown reflects splits among policymakers

For nearly two years, a crackdown under President Xi Jinping’s banner of “common prosperity” has brought a clutch of China’s biggest companies to heel and reasserted the Communist party’s control over the country’s tycoons.

But a stark change of rhetoric from policymakers in recent months, including vice-premier and top economic official Liu He and premier Li Keqiang, has stoked hopes a regulatory storm that has wiped trillions of dollars off the value of Chinese companies may be close to ending.

In a meeting of China’s top political consultative body attended by industry leaders on Tuesday, Liu pledged support for the “platform economy” and for “digital enterprises” to list shares overseas.

But the remarks were overshadowed and undermined by comments Xi made six months ago that were republished this week in Qiushi, the party’s flagship journal. The president restated his vision of “common prosperity” and stressed the importance of “supervision of capital” and “reining in its negative effects”.

The distance between the promises from leaders such as Liu and Li and commercial realpolitik is emblematic of the chaotic policy environment as rival factions in Beijing battle for influence and favour under the most powerful Chinese leader in a generation.

The fight is between senior party and government officials focused on economic growth and those more concerned with security and party control. Neither group threatens Xi’s primacy but the fallout has echoes of the infighting and policy guesswork that plagued China under Mao Zedong.

“You’re beginning to see this phenomenon that we saw in the late Mao period,” said Victor Shih, a professor of Chinese political economy at the University of California, San Diego. “Just because they’re all followers of Xi Jinping, doesn’t mean that there isn’t competition and power struggles.”

China’s zero-Covid policy, which has led to hundreds of millions being put under lockdown and mass testing campaigns, has raised uncertainty among foreign investors © Bloomberg

The commitment to zero-Covid is also seen by many as a symptom of the nationalist and ideologically driven system that has made the world’s second-biggest economy too risky. The cost of Xi’s strategy, which has resulted in sweeping lockdowns of hundreds of millions of people, has buffeted attempts by Beijing to assuage markets and arrest economic decline through policy easing and stimulus measures.

The landscape bodes ill for overseas investors. Since the regulatory crackdown entered its most intense phase in July 2021, the market capitalisation of Chinese tech groups listed in Hong Kong and New York has fallen by about $2tn, according to Bloomberg data.

Some analysts viewed Liu and Li’s comments as signs of a reprieve for the “platform economy”, which includes ride-sharing group Didi Chuxing, Pony Ma’s internet behemoth Tencent and Jack Ma’s Alibaba and Ant, the financial technology company.

Yet a regulatory filing released by Didi in New York last week was a reminder of the looming threat. Ten months after Beijing launched a cyber security review of the company, Didi said it was unsure if its proposed “rectification measures” would satisfy authorities.

Other unresolved regulatory actions include an investigation into the restructuring of Ant, the state’s plans to take “golden shares” in companies and a series of fundraising setbacks.

Bureaucrats from China’s finance ministry and top securities regulator have also been trying to broker a compromise with the US over access to Chinese companies’ audits. But these efforts could be undermined by national security priorities and concerns about data sharing, leading to hundreds of Chinese companies being delisted from US markets as early as next March.

Line chart of Market capitalisation (US$bn) showing Beijing’s crackdown pummels China tech valuations

The clashing regulatory visions are embodied by the security focused Cyberspace Administration of China, a Communist party body that answers to Xi; and the Financial Stability and Development Committee, a powerful organisation that reports to the State Council, China’s cabinet, led by Liu.

Kendra Schaefer, an analyst at Beijing-based consultancy Trivium China, said the pro-growth faction has a “30-year vision for how tech companies will fit into the ‘socialist market economy’”.

The heart of that view includes China’s leading tech companies “supercharging” the trading of data “providing that is done safely” within Beijing’s regulatory framework, she said.

But the pro-growth planners have increasingly been outgunned by the CAC, whose influence has snowballed from propaganda and censorship to data and network security as well as content control.

The CAC is led by Zhuang Rongwen, a member of the president’s “Fujian clique”, a network of Xi’s closet allies developed during various tenures in the eastern province from 1985 to 2002, according to Alex Payette, chief executive of Cercius Group, a consultancy that specialises in elite Chinese politics.

Chen Long, a partner at Plenum, a Beijing-based consultancy, believes a “clear signal, directly from Xi himself” is badly needed but arguments that China is “uninvestable” are “a waste of time”.

A person walks past a sign at the Alibaba headquarters in Hangzhou
A regulatory crackdown on China’s tech sector has wiped trillions of dollars in value from leading companies, including ecommerce group Alibaba © Qilai Shen/Bloomberg

“What they are saying is, ‘We lost a lot of money, we don’t know why we lost money, so it’s uninvestable.’ My answer to these people is: ‘You guys have to do better research,’” he said.

Experts point to the ambiguous reviews under the CAC — which in the Didi case has been joined by at least seven other government departments, including China’s state spy agency — as evidence of the uncertainty.

“Liu He said the companies can still list overseas, no problem . . . But it doesn’t matter what Liu He says. You cannot go around the CAC review now,” Shih said.

These challenges will only become more acute if Xi secures a precedent-breaking third five-year term at the Communist party’s congress this year.

“This kind of ‘within faction’ competition will intensify after the 20th party congress, when there won’t be any other factions left — there will only be Xi Jinping’s faction, but it doesn’t mean the end of political competition,” Shih said.

“This happened under chairman Mao all the time.”

Additional reporting by Tabby Kinder, Cheng Leng and Hudson Lockett in Hong Kong

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