CHINA’S MOST recent economic pride and prowess is largely attributed to the competitiveness of its technology companies, specifically its FinTech[1] companies. Compared to their counterparts in the finance industry, these companies had considerably less financial oversight because they are not traditional financial institutes, and government policies encouraged their growth[2]. However, in November of 2020, China introduced rigid regulations to limit said companies’ influence to further centralize the Communist Party of China’s (CPC) political power. Jack Ma, the billionaire founder of Alibaba Group[3] and Ant Group[4], is often blamed for these regulations, which were implemented after his speech criticized the CPC in October last year; however, it is more likely that Ma’s speech was merely the spark that gave the CPC a reason to expedite the regulations that had already been in the works. Regardless, President Xi has green-lighted a five-year plan that will introduce tougher economic regulations, causing investors to raise concerns about the long-term consequences for China’s tech sector.

The spark

   On October 24, 2020, Jack Ma made a controversial speech that criticized the CPC’s obsession with preventing systemic risks, the outdated global banking standards cited in the Basel Accords[5], and the Chinese regulatory body[6]. The CPC was alarmed by the insinuation that its systemic risk prevention policies were linked to a lack of innovation; President Xi’s party has claimed to maintain its grip on power because of guaranteed domestic economic security. One of CPC’s economic policies is to prevent “too-big-to-fail” FinTech companies from taking risks that have the potential to destabilize other industries, the overall economy, and the stock market[7]. For example, Ant Group generates most of its revenue through its financial services, which can potentially harm traditional banking. Some of its most popular services depend on combining small loans and selling them to banks; state-owned banks are concerned because the risks of such practices fall to them. Instead of Ant, these banks are now responsible for getting the customers to pay back their loans. If the customers do not pay, the loss of money negatively affects banks, which would eventually lead customers to abandon traditional banking services, damaging their business model. With such concerns and Ma’s speech in mind, regulators hurried to finalize their regulatory drafts for more oversight over corporations.

   The timing behind the implementation of rigid policies on Chinese corporations is debatable. Some analysts claim that Ma knew of the inevitable regulations, and his speech was an attempt to challenge the Basel Accords and the regulatory committee. However, regulators dispute these claims; they argue that Ma’s disregard for the risks of the overall economy prompted them to take a closer look at Ant and its business model[8]. The enforced regulations were already in the process of being approved, and Ma’s speech merely sped up the implementation.

Consequences for Chinese corporations 

   The five-year plan, also known as the Red New Deal, has already affected a myriad of Chinese corporations. This deal attempts to control companies’ anti-competitive practices, overseas listings, data security, consumer privacy, and mergers[9]. The CPC has argued that these policies are aimed to give the Chinese people more control over the Internet and technology-related sectors of the economy.

   Tech Giants such as Alibaba, Didi, Tencent, JD, Meituan, and Baidu are only a few of the victims of the policy changes. The ruling party has specifically targeted these businesses as President Xi does not want their chief executive officers (CEOs) to endear themselves to the public and inadvertently create alternative sources of influence and power. Alibaba, for instance, was fined a record $3.8 billion for its alleged “monopolistic practices[10].” Before the crackdown on businesses, Alibaba required sellers to sign agreements that barred them from selling their products on other platforms. The new regulations now prevent such anti-competitive practices. Other companies that have disregarded the CPC's financial standards have been dealt with swiftly. For example, Didi was warned to delay its public listing on the New York Stock Exchange due to data security concerns. However, Didi disregarded the cybersecurity watchdog’s advice and made $6 billion on the first day of its debut. In retaliation, China temporarily banned Didi’s app from stores, causing share prices to fall sharply, and accused Didi of collecting data from their users without permission. In the end, Didi admitted to their alleged infractions and followed Chinese regulations.

The dilemmas

   The Red New Deal has posed complications for investors and the ruling party. Investors are faced with growing uncertainty as China rolls out unprecedented policies that have damaged the stock markets and the Chinese economy. However, even with tech companies not defending themselves in lawsuits, and China’s major companies losing $3 trillion off of their market value, investors have not withdrawn their investments from Chinese financial markets[11]. Wall Street, for example, continues to advise clients to cautiously invest in China, as in the long-term China’s new business model will eventually stabilize.

   While it is still somewhat safe to purchase Chinese equities in Mainland China, investing in Chinese companies listed overseas is riskier. These companies are under threat of veritable financial murder from the CPC because the government does not like companies it cannot easily manipulate. Because of this, companies know that they may face serious domestic regulations unless they cancel their listings overseas. Professor Daryl Bockett (Prof., Int. Relations, UIC) identified this leveraging as a problem and said that “the international financial system does not work if one of the major players is not playing by the same rules as everyone else.” He added that these policies also introduce a risk to investments that is often overlooked. “In particular, without the concept of human rights as a limit on government power, foreign businesses have to accept that they and their employees are subject to the whims of Chinese authorities. It adds a layer of risk to investing in China that I think many investors have not fully considered,” he further elaborated.

   These regulations are likely to hurt the Chinese economy. President Xi faces a dilemma himself in balancing regulations and economic growth. While it is likely that Chinese officials may adjust course if the economic consequences of these policies are “bad for business,” it would be an error to exaggerate this. Xi mainly cares about staying in power. Professor Bockett asserted, “Although nothing has happened so far that cannot be undone, or at least mitigated, given a choice between hurting the stock market and weakening the CPC’s grip on power, President Xi will choose to let the stock market take the hit every single time.” It is important to recognize that “balancing political power and the economy is not Xi’s priority.”

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   For the next five years, the CPC will enforce regulations to monopolize their control on their tech sector. The long-term effects of said regulations will be seen after all the policies outlined in the Red New Deal are applied by 2025. While President Xi may choose his political power over the economy, even he has to recognize that his control depends largely on his ability to sustain the economic growth of China.

[1] FinTech: A combination of “financial” and “technology;” A company that integrates technology into its various financial services to improve quality

[2] Nikkei Asia

[3] Alibaba Group: The Chinese Amazon

[4] Ant Group: The Chinese PayPal

[5] Basel Accords: A series of agreements that advice on international banking regulations

[6] Ledger Insights

[7] WIRED

[8] Nikkei Asia

[9] Financial Times

[10] ABC News

[11] CNN