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China cracks down on technosphere as Beijing seeks to create “common prosperity”

Published: 12:27 14 Feb 2022 AEDT

China cracks down on technosphere as Beijing seeks to create “common prosperity”

Chinese authorities have introduced a series of legislation over the past year and a half, largely aimed at the tech sector — a move that has alarmed investors and wiped out billions of dollars in value from the country’s stock markets.

“It is the ant, not the lion, which the elephant fears.” - Matshona Dhliwayo

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China’s legislative onslaught began in November 2020 when the initial public offering (IPO) of billionaire Jack Ma’s fintech giant Ant Group was suspended.

Ant had hoped to raise up to US$37 billion from the market, in an IPO that would have been the world’s largest, beating the US$29.4 billion listing of Saudi Aramco.

Several days before the IPO was to take place, in October 2020, the company's founder and controlling shareholder, Ma, made negative statements about Chinese regulators and the Chinese Communist Party.

In a dramatic move two days before the IPO was set to occur, the offering was suspended by the Shanghai Stock Exchange after Ma was called in for “supervisory interviews” by related agencies.

Moves against market dominance

The crackdown that started with Ant has snowballed into an attack on every corner of China’s technosphere as the country seeks to end the domination of a few major players and create “common prosperity.”

Chinese authorities have introduced anti-monopoly legislation focused on the “platform economy” which broadly refers to internet companies operating a variety of services from e-commerce to food delivery.

China’s regulations have also aimed at strengthening critical data security and protection laws.

Alibaba pays US$2.8 billion fine

In April 2021, Chinese regulators fined Alibaba US$2.8 billion following an anti-monopoly investigation of the e-commerce titan, saying it abused its market dominance.

The investigation focused on Alibaba’s practice that forces merchants to choose one of two platforms, rather than being able to work with both.

The government said that the “choose one” policy allowed Alibaba to gain unfair competitive advantages.

Along with the fine, which amounts to ~4% of the company’s 2019 revenue, Alibaba will also have to file self-examination and compliance reports to the SAMR (State Administration for Market Regulation) for three years.

Rise and fall of Didi

Shares in Chinese ride-hailing giant Didi Chuxing closed down more than 19% on July 6, 2021, less than a week after the company listed on the New York Stock Exchange.

The fall came after China announced that new users in the country would not be able to download the app while it conducts a cybersecurity review of the company.

In December 2021, less than six months after its initial public offering, Didi said it would delist from the New York Stock Exchange.

The company wrote on its official Weibo account that it would begin the process of delisting and prepare to go public in Hong Kong.

Interestingly, Didi's announcement came on the same day that the US Securities and Exchange Commission said it had finalised rules that would mean US-listed foreign companies can be delisted if their auditors do not comply with requests for information from regulators.

New rules on overseas IPOs

The fallout from the Didi debacle led several other Chinese companies — including audio content platform Ximalaya and shared bike operator Hello — to cancel their US IPO plans and await clarification about overseas listings.

China had been flagging impending changes for months, not only to rules on overseas IPOs but also to the overall supervision of overseas-listed Chinese companies over their compliance with a series of new domestic regulations including the Data Security Law and the Personal Information Protection Law.

In December 2021, the China Securities Regulatory Commission (CSRC) proposed an overhaul of the main policy document promulgated in 1994 that regulates overseas listings.

The watchdog’s draft document put forward a new framework to supervise overseas share sales by Chinese companies.

Once the rules are finalised, it will, for the first time, establish a unified supervision system for all overseas listings, regardless of the location of the IPO and the ownership structure of the company, and provide a clear filing, vetting and approval process.

Regulatory crackdown on tutoring

Shares in China’s big tutoring companies fell steeply in In July 2021 after the government issued tough new rules on tutoring for students in the compulsory nine years of education.

The rules, aimed at reducing the cost of education, say tutoring services covering school subjects in those years can operate only on a not-for-profit basis.

New Oriental Education & Technology Group Inc., one of the largest after-school tutoring companies in China, laid off 60,000 staff following the drastic regulatory crackdown on the sector.

By the end of 2021, New Oriental shares fell about 89% compared to a year ago, while shares of competitors TAL Education Group and Gaotu Techedu Inc. have also fallen sharply.

Crypto ban for common prosperity

In late September 2021, the People’s Bank of China (PBOC) banned all cryptocurrency transactions in one of the world’s most intense crypto crackdowns.

The PBOC cited the role of cryptocurrencies in aiding financial crime as well as posing a growing risk to the country’s financial system owing to their highly speculative nature.

However, one other possible reason behind the cryptocurrency ban is an attempt to combat capital flight from China, according to a report published by the World Economic Forum (WEF) authored by Francis Shin.

As per the Chainalysis Blockchain data platform, more than US$50 billion worth of cryptocurrency left East Asian accounts to areas outside the region between 2019 and 2020.

As China has an outsized presence in East Asian cryptocurrency exchanges, Chainalysis believes that much of this net outflow of cryptocurrency was in fact capital flight from China.

It is estimated that about US$50 billion of capital fled China between 2019 and 2020.

With its common prosperity program, China is aiming to curb capital flight and encourage the domestic circulation of people’s wealth.

However, China’s attempts at wealth redistribution would be difficult to accomplish if the rich circumvented the country’s already strict capital controls through offshore cryptocurrency exchanges and acquired overseas assets.

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