China cracks down on billionaires in rare governance tightening

The story: The age of unfettered gains for China’s ultra-rich now appears to be coming to an abrupt end. Even as the world’s 10 wealthiest people adde

China cracks down on billionaires in rare governance tightening

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• The story: The age of unfettered gains for China’s ultra-rich now appears to be coming to an abrupt end. Even as the world’s 10 wealthiest people added $209 billion to their net worth in the first half of 2021, China’s richest tycoons in the Bloomberg Billionaires Index saw their combined fortunes shrink by $16 billion. Shares of their flagship companies sank by an average 13% during the period, the first time in at least six years they’ve recorded declines when the broader Chinese equity market was rising.
• What went wrong: Behind the losses is a crackdown that has only intensified since November, when Ma’s Ant Group Co. was forced to pull its blockbuster initial public offering at the last minute. Policy makers are tightening regulations on some of the most important facets of Chinese economy, from financial services to internet platforms and the data that underpins most big businesses in modern China.

1. Regulators now have unveiled new draft rules requiring all domestic companies to undergo a cybersecurity review before listing in a foreign country.
2. Beijing’s motivations for the crackdown include concerns about anticompetitive behavior in the tech industry, risks to financial stability from lightly regulated lending platforms and the rapid proliferation of sensitive personal information in the hands of large corporations.
3. Another undercurrent running through latest initiatives is the desire to rein in the power of China’s tycoons, some of whom have amassed an enormous amount of influence over the $14 trillion economy.
4. Beijing wants to prevent its billionaires from becoming a force as strong as the family-run chaebol that dominate South Korea’s economy and many aspects of its politics.
5. Chinese public’s growing concern over rising inequality is prompting action, too.

• President speak: President Xi Jinping has acknowledged that the country’s development was “unbalanced” and said “common prosperity” should be the ultimate goal. The net result is a whole new era for the country’s billionaires and the investors who back them. Gone are the days when tycoons like Ma could confidently bend the rules to supercharge their companies’ growth and challenge entrenched interests like state-owned banks. Outsized public personas now are a liability. Unless you look small and "not powerful", and unless you show direct respect to the Communist Party, you are a goner.
• Larger than life: Some of the tech companies became larger than life, and the big lesson from the crackdown is: “Don’t get bigger than the government”. Didi notwithstanding, the message appears to be getting through. Ma, who criticized Chinese financial regulators in his last public speech before Ant’s IPO was abruptly suspended, has since resurfaced only a handful of times in carefully choreographed appearances.
• Changed China: The new environment will “fundamentally change” China’s tech sector, partly because investors will become more wary of funding entrepreneurs who could end up on a collision course with Beijing. U.S. President Biden has also taken aim at the billionaire class, calling for increased taxes on the rich and signing an executive order that aims to weaken dominance of America’s biggest companies. The move echoed an ongoing antitrust campaign in China that has ensnared giants including Alibaba Group Holding Ltd. and arch-rival Tencent Holdings Ltd.

1. The Chinese authorities are unrestrained by Western-style checks and balances, and act more forcefully than their U.S. counterparts
2. Beijing has a variety of tools for reining in billionaires, including detention in the most extreme cases. An internal disciplinary process for party members, known as 'shuanggui', is used for some tycoons in the past. Investigations by antitrust, cybersecurity and other regulators are more common ways to influence the behavior of tech giants. The government also uses “soft” methods including state-media campaigns.
3. While China’s crackdown has been most visible in the tech industry, the country’s property billionaires have also come under increased pressure as uthorities steadily restricted the industry’s access to funding in an attempt to rein in home prices and reduce systemic risks to the financial system.
4. A subtle sign of billionaires’ waning influence can be seen in their shrinking share of political appointments.

• Summary: The big question is whether all of this will be good for China in the long run, if it ends up undermining investor confidence. Some of Beijing’s new policies may foster competition in the oligopolistic tech industry, clearing the way for a new class of billionaires to rise. 

 

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