Weekly Brief: China's "Common Prosperity"
- Waseda Economics and Finance Forum
- Sep 13, 2021
- 3 min read
China's "Common Prosperity"
Recently, China’s regulatory crackdowns have been occupying the headlines. The sequence of government interventions on numerous sectors of its economy has shocked investors at home and abroad, and there seem to be no signs of slowing down.
The first shot was fired on November 3rd, 2020 when authorities suspended Ant group’s dual IPO, which came to an abrupt end less than two days before what would have been the largest debut in history. This, however, was just the prelude to a series of draconian measures on sectors in its economy that ranges from real estate, online education, gaming, entertainment, and more. As observers scramble to try to understand the rationale behind these recent moves, it becomes evident that the concept of “common prosperity” serves as the guiding principle behind the coordinated crackdowns. To begin with, this was not a new concept. It was first introduced by Mao in 1955, where he defined it as “...an essential requirement of socialism and a key feature of Chinese-style modernization.” Chinese Communist party jargons are usually unpredictable and hard to decipher, but Xi began frequently citing this term during the past two years, accompanying it with swift regulatory actions targeting specific industries; these concrete initiatives shed light on Xi’s version of “common prosperity”, one that aims to achieve nation-building goals characterized by combating monopoly, income disparity, depopulation and refining a “corrupted civil culture.” As a consequence, sectors and companies directly affected by these waves of unrelenting clampdowns have seen a tremendous decline in stock prices and valuation.
To name a few, following Ant group’s fiasco in November 2020, e-commerce giant Alibaba also became a subject of China’s anti-monopoly campaign, where it was fined a whopping 18 billion yuan ($2.75 billion) after a probe by officials. The fine was equivalent to 4% of the company’s total sales in 2019 in China. Alibaba has since “pledged 100 billion yuan ($15.5 billion) over five years toward Xi Jinping’s “common prosperity” vision.” In the same sequence of events, DiDi, China’s leading mobile transportation platform, had its application removed on application stores until the company complies with regulations on consumer data privacy, this occurred only two days after its IPO on the New York Stock Exchange, a public offering that was officially frowned upon by China’s Cyberspace Administration.
What Next?
There is no doubting the Chinese Communist Party’s determination to bring its domestic tech behemoths to cater to its agendas. Investors must be prepared for similar events in the near future, as we predict more similar blitzkrieg-like announcements of regulatory hurdles in those aforementioned sectors of the Chinese economy.
Foreign investors have since taken a cautious stance on Chinese investments. George Soros has called investing in China a “tragic mistake” while Ray Dalio voiced his optimism for China’s continued growth.
WEFF thinks China still possesses great potential for sustained growth and is a good diversification destination as its swings are relatively detached from the rest of the world. Its infrastructure is unparalleled and the labor market has an abundance of lower, middle, and upper-tier workers. Ultimately, the recent policy contraction on commercial activities will not have a lasting effect on the country’s long-term growth thesis.
Timeline:
Nov 3, 2020 | Ant Group IPO (valuated at US$37 billion) suspended by authorities |
April 4, 2021 | State Administration for Market Regulation: Alibaba fined 18 billion yuan ($2.75 billion) |
July 5, 2021 | Cyberspace Administration of China: DiDi application to be removed for download until the company complies with regulations on consumer data privacy |
July 11, 2021 | State Administration for Market Regulation: to prohibit the proposed merger between HUYA Inc. and DouYu International Holdings Limited following the SAMR's antitrust review |
July 24, 2021 | State Administration for Market Regulation: ordered Tencent Music Entertainment Group (TME) to terminate “all of its exclusive music licensing agreements”, and fined the company RMB 500,000 (USD 77,360) for anti-competitive behavior. |
July 24, 2021 | The General Office of the Central Committee of China’s Communist Party and the General Office of the State Council: announced “Double Reduction” - a comprehensive ban on the financing of certain types of educational institutions |
Aug 27, 2021 | Cyberspace Administration of China: to take down information online or in the press that “bad-mouth” China’s economic and financial conditions |
References:
Photo of Xi Jinping → Ju Peng/Xinhua via Getty Images
Ross, Lester et al., (Aug 23, 2021.). China Releases “Double Reduction” Policy in Education Sector. [Website]. Retrieved from China Releases "Double Reduction" Policy in Education Sector | WilmerHale
Douyu.com. (July 12, 2021.). DouYu Announces Termination of Merger Agreement with Huya. [Website]. Retrieved from DouYu Announces Termination of Merger Agreement with Huya - Jul 12, 2021
Li, Jiaxing. (Sept. 1, 2021.). Tencent Music Entertainment terminates all exclusive copyright agreements in antitrust fallout. [Website]. Retrieved from Tencent Music Entertainment terminates all exclusive copyright agreements in antitrust fallout | KrASIA (kr-asia.com)
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