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The political risk associated to all Chinese businesses has escalated ten-fold over the past few weeks. What started as a scare has turned into trauma, with the Chinese regulatory authorities clamping down on a number of its most successful darlings of the past decade. Government control has become the priority over growth and innovation, of which the businesses in the East have been at the forefront over the past few years. It’s an obvious concern for South African savers and pensioners, who are more often than not subject to funds that track the JSE All Share Index, of which the Naspers stable constitutes almost a quarter. BizNews regular’s Piet Viljoen and Sean Peche have voiced their concerns over the past weeks, with similar action having taken place in Russia recently, wiping billions in value off Russian listed companies. Who knows what the future holds, but the ominous sign posts are a serious cause for concern. – Justin Rowe-Roberts
China’s crackdown on its technology sector has set off alarms about Chinese political risk for investors
After years of exceptional gains, the country’s tech stocks took a hammering with the crackdown last week. They have somewhat recovered, but the targeting of the larger companies in the tech sector must raise questions about whether the Chinese Communist Party has decided to sacrifice growth and technology innovation for social control.
After reforms allowing private enterprise in the late 1970s, China has brought about 800 million people out of poverty, according to the World Bank. But since then there has been a question as to whether a new breed of industries, including a thriving tech sector, can indefinitely achieve their potential under an authoritarian system.
Fundamentally, the rise of new technology can create immense uncertainty, and the Party is worried that the tech giants are becoming alternative centres of power. They have a deep fear of the disruption that this could cause. China has long blocked many foreign websites, including Google and Facebook, and has sought to create its own giants and alternatives behind its Great Firewall – but this thrust for such a high degree of control is new.
The Chinese government is not alone in trying to control the genie that has come out of the tech giants. The US and Europe have been increasingly tightening the noose of competition law and rules on the use and sharing of data, but China has taken this to a new level.
The South African stock market – and, therefore, savers and pension funds – are now highly exposed to developments in China. Through investments by Naspers and Prosus in the diversified tech giant, Tencent, about a fifth of the Johannesburg Stock Exchange’s market capitalisation is now in Chinese tech. The Centre for Risk Analysis estimates that an additional third of the local market’s capitalisation has exposure to China through commodities sales. The gains made in these asset classes have been enormous, with phenomenal Chinese growth, but their downside risk highlighted last week has to be troubling.
Chinese tech groups listed in the US have been hammered. The Nasdaq Golden Dragon China index is down by more than 16 percent over the last month. It recovered from its low last week after reassurances to global financial institutions from the Chinese authorities, but concerns continue.
Since late last year there have been unrelenting attacks on firms in the Chinese tech sector. Bloomberg reports that the speed of the introduction of new regulations to curb the sector has been dizzying’’, with one regulation to curb monopolistic practices finalised in three months. All this points to a policy decision by Beijing to act with speed against big tech.
Rivalry with the West
This shows China’s ambivalence to the sector. China desperately wants a tech sector to thrive, so as to generate growth, and as part of its rivalry with the West. The country has the expertise and has done phenomenally well in high-tech sectors. There is an arms race between China and the West in the area of Artificial Intelligence. Yet it is deeply worried about the potential social and political disruption that the magic could unleash.
The campaign against the sector began in November last year, when Chinese regulators halted a massive public offering of an Alibaba sister company, Ant, a payments group. The founder of Alibaba, Jack Ma, had become too rich and too cheeky, and the authorities reacted by cancelling Ant’s public offering. In April, this was followed by a $2.8bn fine on Alibaba for abusing its market position. There was also an antitrust investigation into Meituan, a takeaway delivery service. Then, in July this year, the Chinese authorities blocked Didi Chuxing, a ride-hailing app, from all app stores after an investigation into its data security.
Last week’s crackdown on online education might be to ensure greater social equity, and raise falling birth rates by reducing the costs of having children. The Chinese may well be fearful that privately owned online portals will not entirely stick to the syllabus and children may be subjected to undue influence. The new rules will ban online education companies from making profits, raising capital or listing on stock exchanges and accepting foreign investment, according to the Financial Times. And last week, Tencent said its WeChat social network had suspended user registration to upgrade security in line with regulations. What is next is unclear, but the sector is now in a new era of pressure from the government.
The Chinese must feel tech companies are too large, too influential through their control of networks and media content, and too powerful in sitting on vast amounts of data. They also do not want foreign shareholder influence. With the US campaign to exclude Huawei from 5G networks, China has additional motivation to bar the West from investing in its sector.
And there is probably a view in Beijing that the founders of tech companies are too rich for the good of the state, the party, and social cohesion. The party certainly does not want a billionaire tech mogul spouting off on the big issues of the day like an Elon Musk or Bill Gates. Last week, Sun Dawu, an outspoken billionaire agriculture mogul, who happened to be friendly with dissidents, was jailed for 18 years for what The Guardian reports as ‘gathering a crowd to attack state organs’, ‘obstructing government administration’ and ‘picking quarrels and provoking trouble’.
It is difficult to prove this as a hard rule, but there are strong historical examples that the greater the degree of freedom in society, the greater the innovation and technological progress. When asked why the Allies had won the war, Prime Minister Winston Churchill or an aide are variously credited with saying, ‘our German scientists are better than theirs’.
The UK was able to attract many scientists who had fled from the Nazis.
Strong pull factor
With the large number of Chinese and Indian scientists and engineers now working in the US, the quote on scientists could well be applied to some of the best brains from these countries today. Certainly, higher US pay has to be a strong pull factor for the Indians, but political freedom is an important added incentive. They also are probably attracted by the security of property rights in the US, so that they can at least dream of making it big.
The success of the UK effort at Bletchley Park in breaking German codes during the Second World War relied on many people who were misfits. They needed people who could solve very difficult problems and that meant they had to find the best. Microsoft and Apple were started by college dropouts who are unlikely to have fitted into the environment of a bank or civil service. It is often first-generation immigrants who start businesses, and the unconventional thinkers who become the philosophers, innovators, and entrepreneurs.
Its rigid controls raise the question of whether China will allow its misfits to survive and thrive. Much may depend on that. Freedom might be a key technological edge of the West, for the moment.
- China wants manufacturing, not the internet – With insights from The Wall Street Journal
- Tencent founder Pony Ma the biggest loser in China’s crackdown on Big Tech
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