Overreach, page 35
The re-engineering of electoral rules will henceforth prevent pro-democracy candidates from winning a legislative majority or the chief executive position. Of the ninety legislative slots, only twenty are directly elected, and all elected representatives must take a loyalty oath and be vetted for their patriotism; 72 percent of the local district council representatives and candidates either refused to take the required loyalty oath or their oaths were disqualified.49
Hong Kong’s open society is rapidly closing as it becomes absorbed into the mainland’s political culture. The government is deploying ideological indoctrination to erase Hong Kong’s separate identity, just as it has been doing in Xinjiang and elsewhere on the mainland. Professional civil servants are being educated about the PRC’s political system in mandatory short courses.50 Students from kindergarten on up must take a new course that reinforces their national identity and teaches them about national security.51 Academic freedom on university campuses is shrinking as students report faculty to the tip line and some administrators endorse the new law.52 When the new contemporary art museum M+ opened, the Hong Kong official in charge of it said that all the works it shows must comply with the security law, and forbade some works, including a photograph by Ai Weiwei giving the middle finger in Tiananmen Square, from being displayed.53 Books seen to violate the security law are being removed from libraries.
Media freedom is in free fall as journalists are prosecuted for colluding with foreigners to endanger national security, publishing a seditious publication, and other political offenses under the new law. The Apple Daily, one of Hong Kong’s pro-democracy newspapers, was shuttered, its assets frozen, and its founder, Jimmy Lai, and several other of its journalists sent to jail; the police also raided the media outlet Stand News and arrested seven editors and former board members.
When the British Parliament complained that China was abrogating Hong Kong’s civil rights, which the Joint Declaration had promised to protect for fifty years, the PRC official spokesmen replied that the Joint Declaration was a historical document and no longer in force.54 Xi felt just as unconstrained by this international treaty as he did by the UN Law of the Sea arbitration decision.
The cost of China’s breakneck destruction of freedoms in Hong Kong has been considerable, but Hong Kong has paid a much higher price than China. The White House declared that Hong Kong was no longer sufficiently autonomous to merit the preferential treatment that the United States had extended to it, so it will receive the same treatment, including export controls, tariffs, and visa restrictions, as any other Chinese city. The US also froze the assets of Chinese and Hong Kong officials involved in the Hong Kong crackdown and imposed other penalties, and the EU, UK, and Canada followed with their own sanctions. One of the most significant losses to Hong Kong has been the departure of skilled people; a number of countries are offering safe-haven visas to Hong Kong residents. London has offered Hong Kongers with British National (Overseas) passports (issued to Hong Kong natives who were adults at the time of the 1997 turnover) and their dependents a six-year pathway to citizenship. Taiwan, Japan, Australia, Canada, and the United States are also considering special programs to take in Hong Kong political refugees.
The 2021 Regulatory Storm
The fourth bolt from the blue was the regulatory storm of 2021, when the state ambushed private companies in a slew of actions that wiped out billions of yuan of their value. Although Xi had appeared to appreciate the importance of the private economy when he was a provincial leader, after moving up to the center, he inclined more toward state control as his political objectives eclipsed his economic ones. “When Xi Jinping came into office,” according to one political theorist, “he felt things were out of control. He had to make a fundamental judgment call: will the party have to adapt to the market economy or is the market economy damaging the fundamental interests of the Party? He decided to hold the line against more marketization.”
Early in his first term, as I noted previously, Xi had presented an ambitious plan for market-oriented reforms to the Central Committee—it promised that the market would play the “decisive role” in the economy. Nonetheless, to this day most of its commitments haven’t been fulfilled.55 In 2019, I joined a group of foreign CEOs to meet with Premier Li Keqiang, who tried to reassure these businesspeople that the government’s commitment to market reforms and opening was genuine. But most sectors haven’t opened to foreign businesses beyond China’s original WTO pledges in 2001. The one exception is financial services. In 2019 and 2020 China started allowing foreign ownership of local banks, securities and mutual fund firms, and life insurers and futures-trading houses. The government aimed not just to deepen China’s inadequate capital market but also to motivate Wall Street executives to lobby Washington for more friendly policies toward China.
According to one theory, Xi had been supportive of market reforms until 2015, when a stock market crash and an attempt to introduce a market-based mechanism to set the value of China’s currency embarrassed him by creating chaos, leading him to conclude that the state needed to be more active in guiding the economy.56 The central government tried to rebuild investor confidence and stabilize financial markets during that crash and a subsequent one in 2018 by deploying a “national team” consisting of a handful of state-backed financial institutions to make large purchases of Chinese shares (28.8 billion dollars’ worth in 2015).57 Xi prefers to rely on state companies and financial institutions because he can direct them to put a floor under financial markets as well as to support his pet projects like the Belt and Road Initiative, steer the economy, and achieve other noneconomic objectives. He’s also ordered the Party to penetrate private firms to bring them in line with his goals.
Instead of letting the market drive the economy, Xi has once again put the Chinese Communist Party right in the middle of it. He has strengthened the power of the government and the Party over businesses, with the Party in charge and the government implementing. By politicizing economic policymaking he is putting China’s unprecedented economic success at risk. Xi’s goals are political (winning a third term and ensuring longevity for the Party), ideological (demonstrating the wisdom of Xi Jinping Thought on Socialism with Chinese Characteristics for the New Era), and security (reducing vulnerability to Western sanctions by achieving technological self-reliance). To attain these goals, he appears willing to tolerate lagging productivity, declining private sector confidence and investment, and loss of stockholder value.
Under Xi the central state also is steering the economy and imposing new demands on private businesses related to data security, antimonopolistic practices, and advancing technological self-reliance and certain social objectives. In the name of what he calls “common prosperity,” he demands that wealthy entrepreneurs make charitable contributions to redistribute wealth. He also expects businesspeople to lend their support to his pet projects, such as the new city of Xiong’An, which is being built to relieve overcrowding in Beijing, and the Guangdong–Hong Kong–Macao Greater Bay Area. No matter how often these entrepreneurs profess their political loyalty through their contributions, Xi doubts their sincerity, and he has shown that he is willing to cut them down to size even if that harms the economy.
The flurry of government actions in 2020 and 2021 directed at private tech firms shocked foreign and domestic investors alike. China’s digital economy constitutes 38.6 percent of the country’s GDP.58 Xi’s policy changes destroyed $1.1 trillion of market value from the stocks of China’s six top tech companies alone.59 The question was why the Xi regime would wound the homegrown Internet tech companies of which it was so proud.
The thunderclap was the decision, reportedly made by Xi himself, to block the $34 billion IPO of the Ant Group, Alibaba’s financial affiliate, on the new STAR market in Shanghai and the Hong Kong market just two days before Ant was set to go public. Alibaba had been listed on the New York Stock Exchange since 2014, but Ant’s listing inside China was supposed to win it brownie points by showing the company’s patriotism.
Alibaba’s founder and former CEO, Jack Ma, while addressing a financial forum, had criticized Chinese banking regulators for imposing overly tight controls and offered to help provide the government with innovative solutions to the country’s financial problems. Ma’s comments embarrassed vice president Wang Qishan and the top financial officials who were in the audience. The securities regulators had approved the IPO for the fintech firm, but the banking regulators had qualms about the risks Ant’s microloans created for state-owned banks. After Xi ordered the IPO cancelled, the banking regulators imposed strict rules on Ant that require it to fund at least 30 percent of its loans, and forced Ant to turn itself into a financial holding company overseen by China’s central bank.60 Xi also may have been displeased that Ant’s investors, who stood to make a killing from the IPO, included a number of children and grandchildren of retired leaders from other political factions.61 All the current and potential investors lost money; Ant’s dual listing had attracted orders totaling at least $3 trillion from individual investors,62 and Alibaba lost more than half its market value in the year after Ant’s IPO was scratched.63
Following this blow, the government hammered away at private Internet companies, both individually and as a class, almost weekly during 2021. The Chinese antimonopoly authority fined Alibaba $2.8 billion and the food-delivery company Meituan $533 million for anticompetitive practices. The Ministry of Industry and Information Technology temporarily prohibited Tencent from upgrading its apps or launching new ones. Banking regulators zeroed out all the fintech peer-to-peer lending companies. The Cyberspace Administration of China (CAC) hauled individual firms onto the carpet to demand that they repair their data security problems. The CAC also cracked down on celebrity fan groups, which had become a big business because they viewed them as a potential collective-action threat, as well as a diversion from the fan worship of Xi Jinping.64 After Xi condemned video games, the National Press and Publication Administration set rules to limit youth under age eighteen to playing only for an hour, between 8 o’clock and 9 o’clock at night, and only on weekends and holidays.65 The central government made “capricious and abrupt”—as one American economist put it—interventions in the economy, forcing every business to “constantly look over its shoulder to comply with, or even to anticipate, the changing goals of the supreme authorities.”66
Building on the 2017 Cybersecurity Law, two new laws, covering Data Security and Personal Information Protection, increased the government’s sway over the data private companies collect. Data related to national security or public interests, broadly defined, must be shared with the government. In the name of security, the new rules forbid foreign firms like Apple or Tesla, as well as domestic firms, from transferring abroad information they collect in China about roads, shipping, coal use, or anything else that might fall into the ambiguous category of “sensitive information.”
But beyond security concerns, Xi’s underlying political objective is preventing big private companies from becoming alternative power centers. “Whoever controls data will have the initiative,” he has said, according to reporting by the Wall Street Journal.67 Just days after the ride-sharing company Didi, with 377 million annual active users and 13 million drivers, launched its IPO on the New York Stock Exchange, the CAC began an investigation into Didi’s data practices, told the company to stop registering new users, and ordered all Chinese app stores to remove the Didi app. The CAC had earlier advised Didi that it had concerns about its data management. Didi went ahead with the IPO listing anyway, in the belief that the CAC could not prevent the overseas listing of a Chinese company.68 Didi discovered that its assumption was wrong, and as a result, lost $40 billion in market value in the six months after the June IPO; its investors, including Uber, took a huge haircut. Meanwhile, the US Securities Exchange Commission had finalized a rule requiring Chinese companies to hand over more financial data to regulators within three years to conform with American accounting standards or be delisted on US exchanges. Didi’s stockholders, caught between the two governments, voted to delist from the NYSE and move its IPO to Hong Kong.
In July 2021, a CAC opinion on data security required companies planning an overseas IPO and holding personal data from at least one million users (which is virtually all of them, because one million is a small number in China) to receive its prior approval and in addition to be approved by a new interagency group that includes propaganda, public security, court, justice, procuratorate, finance, and securities regulatory departments.69
Beijing also wiped out the entire after-school tutoring industry, a sector worth $120 billion that employed ten million people, by banning private educational firms from publicly listing and making profits. According to the Wall Street Journal, this draconian measure was the result of a brief instruction from Xi to the Education Ministry in which he indicated that he wanted to reform the industry and the ministry’s desire to please him after he had rejected the first version of their policy as too soft.70 His objective was to relieve parents of the financial burden of exam prep and encourage them to have more children. Although Chinese demographers have known for years that the country faced an aging population and labor shortages because of the one-child policy, Xi may have panicked when the census data showed that although the one-child restrictions had been eased, the 2020 fertility rate had still continued to decline to 1.3 children. He also claimed to be worried that the exam-prep rat race was unhealthy for children and that it disadvantaged low-income families, though online tutoring actually is a popular low-priced option such families can utilize.
Affluent Chinese parents will find workarounds to the ban by, for example, hiring household help who can teach English. (Parents in South Korea were able to evade a similar ban attempted in 1980.71) By discouraging the study of the English language, the tutoring ban will turn China inward; more than half of all tutoring is to teach English. Shanghai already has eliminated English final exams in primary school.72
Running through all the specific actions toward private tech firms that came in rapid progression during 2021 is a line of connection: that of expanding the power of the government and the party over the private sector73—what one foreign expert calls a “red thread.”74 Municipal and provincial governments, as well as central bureaucracies, have piled on with their own regulations, following behind Xi’s drive to put the companies in a political cage. The authorities also are facilitating online nationalist broadsides against individual firms for selling out China’s interests to foreign investors.
Xi’s suspicion of capitalists is reflected in his Marxist-sounding catchphrase “prevent the disorderly expansion of capital,” which he raised in connection with what he called the “barbaric growth” of platform companies and their efforts to “get rich overnight.”75 It’s handy for the government to deflect blame for its domestic problems by vilifying the rich capitalists.
The pressure on private firms in China has rarely been as intense as it is today. In addition to the difficult domestic situation, Beijing’s clash with the United States and other of its trading partners has hurt the private firms, many of them foreign owned, that dominate exports. The share of private fixed-asset investment in manufacturing and infrastructure peaked in 2015 at more than half but has been shrinking since then.76 A Chinese business school that tracks the business conditions for small- and medium-sized enterprises, most of which are private, found in 2018 that it had fallen to the lowest reading that had ever been recorded since the monthly survey began in 2011.77 I’ve recently encountered quite a few CEOs of private companies who decided to sell them and move abroad with their families because after the 2021 storm, the pressure on them became intolerable.
In a rare dissent from the politically correct cheerleading for Xi’s statist views, a retired Shenzhen Party secretary named Li Youwei argued for less state direction and equal protection for private business: “At this critical moment, the most important thing is to win the hearts of entrepreneurs, so that they feel that their personal safety and property rights are guaranteed by the government and laws and can hence be determined to work hard, invest, and develop in China.”78 Retired officials are practically the only voices daring to publicly question Xi’s choices these days.
Winning the Tech Contest
Although Xi Jinping increasingly is focused on his political, ideological, and security goals, as one American economist observes, “they have not displaced the overarching goal to which China has been dedicated for a decade: building a world-beating high-tech industrial base.”79
Made in China 2025 (MIC2025) is Xi’s ambitious industrial policy, focused on putting China on the top rung of the global ladder in innovation-driven advanced manufacturing. The centralization of the economic decision-making process enables Xi to allocate all the resources he wants to further his grand scheme. The plan, which highlights ten sectors, was drawn up by the Ministry of Industry and Information Technology and experts from the China Academy of Engineering in 2015. The revolutionary technology that is its centerpiece is artificial intelligence (AI), which created a “Sputnik moment” for Chinese planners—at least in their minds—when DeepMind’s AlphaGo Artificial Intelligence beat the world’s best Goplayers.
The Innovation-Driven Development Strategy, which is the master plan for MIC2025 promulgated by the Party center and State Council in 2015, sees “revolutionary new technologies . . . reshaping the global competitive landscape and changing the relative strength of nations.”80 The explicitly competitive framing of the plan communicates clearly that China is playing to win what it sees as a zero-sum game. The plan’s open ambition raised the hackles of American politicians, inspiring the Trump administration’s Super 301 tariffs (which tracked the ten MIC2025 sectors) and the Entity List banning US technology sales to certain Chinese firms. The inclusion of the Military-Civilian Industry Fusion Program was another red flag for Americans, who worry about China’s technological advances enhancing its military capabilities. And the huge sums of government money subsidizing Chinese firms to accelerate their innovations indicated that China was further diverging from the global norms of fair market competition.
