Chinese tech giants generate billions, but have stifled small businesses

BEIJING – Investors in Chinese companies were caught off guard this summer by Beijing’s actions against local tech giants, including comments on overseas listed stocks.

One of the surprises was a mandate in late July that Chinese education companies should restructure and withdraw foreign investment. A separate order early last month called on app stores to remove Chinese rideshare app Didi – just days after its massive New York IPO.

Didi shares have fallen more than 30% since listing. The KraneShares CSI China Internet ETF (KWEB), whose main holdings include US-listed stocks Alibaba and JD.com, has fallen 29% in the past 60 trading days.

“It is probably important, especially for international investors, to note that there is a significant and profound change in philosophical thinking on economic policy, which is more important in the Chinese economy,” Zhu Ning said. , professor of finance and vice-dean at the Shanghai Advanced Institute. finances. “Foreign investors need to understand and (prepare for).”

In a “very big change,” Zhu stressed the political commitment of the Chinese Communist Party to deliver “common prosperity” – moderate wealth for all, in contrast to the country’s growing income inequality. This contrasts with ensuring that at least some “get rich first,” Zhu said.

Efforts to fulfill this commitment have accelerated over the past 12 months.

The Chinese government shielded Alibaba from foreign competition for years, until the company grew so prominent under founder Jack Ma that authorities abruptly suspended the massive IPO of its subsidiary Ant Group in November and shut down. fined Alibaba 18.23 billion yuan in April.

Resentment towards tech companies is also growing in China, especially from small businesses that feel strangled by digital behemoths.

“It may seem that the Internet platforms are giving us more opportunities, but it also places more financial burdens on us,” said a restaurant owner in Beijing who requested anonymity for fear of retaliation from food services. food delivery online. CNBC translated his remarks into Mandarin.

She initially listed her restaurant on Meituan – China’s dominant food delivery platform – in early 2019 and paid an 18% commission. She said that Meituan’s staff told her that since this was the lowest rate available on the site, she could not register with other food delivery sites.

When the pandemic cut income for diners in stores, she listed her restaurant on Alibaba’s Ele.me food delivery platform. This sparked furious calls from Meituan staff, who said she would have to pay a 25% higher commission fee if she did not opt ​​out of Ele.me. She decided to leave Meituan.

In late July, China’s antitrust regulator ordered food delivery platforms to pay workers the local minimum wage. Earlier this month, the State Council – China’s highest executive body – decided to remove restrictions on the ability of the country’s 200 million workers to access insurance. health and local pension plans.

The policy shifts come as China’s news media – which itself is heavily influenced by the government – has become more critical of Chinese tech companies and their culture of overwork.

Earlier this year, two employees of e-commerce giant Pinduoduo reportedly died as a result of overworking. The company confirmed one death in an online statement, while a representative was not immediately available to comment on the other death at the time of publication.

This summer, short film companies Kuaishou and then TikTok’s parent company ByteDance reportedly ended a policy of requiring employees to work regularly on weekends.

China’s anti-monopoly regulations are a good thing, said Yang Guang, who operates a convenience store in a Beijing apartment complex with his wife.

“If all of these day-to-day (needs) are all controlled by one or two companies, how can we have bargaining power? Yang asked, in Mandarin, according to a CNBC translation. He said he didn’t want to list his store on delivery platforms like Meituan or Ele.me because they would want around 15-25% commission fees.

Instead, he and his wife deliver their purchases to nearby customers on their own, communicating with them through the WeChat messaging app.

There are around 139 million small businesses in China, according to an official tally. Small businesses are often brought up at government meetings that discuss their operating difficulties and Beijing’s efforts to help them.

But small businesses polled for the official purchasing managers’ index in July revealed worsening conditions for a second consecutive month, while large businesses said they recorded slight growth.

The latest regulatory crackdown focused on limiting monopoly practices, increasing data protection and even encouraging more births.

The authorities “are trying to solve the problem of income inequality” in a year when they have a rare opportunity to tackle long-term problems without having to worry much about growth, said Zhiwei Zhang, economist in chief at Pinpoint Asset Management.

Officials have set a GDP growth target of more than 6% for this year, which is relatively low compared to the 8% or 8.5% growth many economists predict for China.

“That window, at some point, probably won’t always be open… The intensity of these policies has therefore been surprisingly high,” said Zhang.

Although he said it would be helpful if the authorities communicated more support for foreign investment and private entrepreneurs in general, Zhang noted that the latest crackdown has targeted sectors such as education “which the general public is aware of. ‘complained in the past’.

China’s U.S.-listed education stocks plunged to double digits in a single day last month after a new policy forced after-school tutoring companies to become nonprofits and prohibits investment of foreign capital.

Hongye Wang, China-based partner of venture capital firm Antler, said tutoring companies often take advantage of Chinese parents’ willingness to pay for whatever is needed to give their children a good education.

This meant that for two years, investors like him could earn a five-fold return on education companies regardless of the economic environment, Wang said.

The aim of the new government policy is to reduce the costs of education, especially for the poorest people living in rural areas, Wang said. He added that the state would likely also want to improve people’s access to medical care.

Beijing’s scrutiny of major Chinese tech companies comes as U.S. investors and financial regulators grow concerned about the regulatory risk associated with investing in China. In late July, the chairman of the United States Securities and Exchange Commission, Gary Gensler, announced that Chinese companies were to reveal whether Beijing had refused them listing on the American stock exchanges.

For Chinese start-ups, perceived uncertainty over their ability to go public could limit their ability to raise capital, said Nick Xiao, vice president of Hong Kong-based asset manager Hywin. “In this context, Chinese start-ups are likely to want to clarify why their business model is scalable in a resilient way and how it creates real value – both business and societal. “