54 Business The EconomistNovember 14th 2020
2 authorities in the unwinding of his finan-
cial conglomerate.
The crackdown has put an abrupt end to
a boom in global spending by Chinese
firms: in 2016 there were $200bn-worth of
overseas mergers and acquisitions, the fig-
ure in 2019 was less than a fifth of that. And
under government pressure private groups
have divested assets worth billions of dol-
lars. hna, an airlines and logistics group
that bought a large stake in Deutsche Bank
and Hilton Worldwide, a hotel group, has
sold assets worth over $20bn in recent
years. Anbang Insurance was nationalised,
putting the Waldorf under the ownership
of China’s Ministry of Finance. Baoshang
was taken over by the state and allowed to
file for bankruptcy in August. Acquisitions
of European football clubs by Chinese
groups have all but ended.
Analysts have praised the way in which
systemic risks posed by companies such as
Anbang and hnaappear to have been re-
duced on Mr Xi’s watch. Within China few
dare to criticise him for his failings. Those
who have done so have been dealt with se-
verely. Ren Zhiqiang, a senior member of
the Communist Party who once ran a state-
owned property firm, penned a missive to
friends earlier this year in which he re-
ferred to Mr Xi as a “naked clown”. He was
sentenced to 18 years in prison in Septem-
ber for bribery and embezzlement.
The party has also been increasing its
influence over private firms in more subtle
ways. Under a strategy referred to as “party
building”, firms have been asked to launch
party committees, which can opine on
whether a corporate decision is in line with
government policy. The number of com-
mittees in publicly traded but privately
controlled companies is still low. Accord-
ing to a survey of 1,378 Chinese listed firms
by Plenum, a consultancy, of the 61% that
were privately controlled only 11.5% had
party-building clauses in their charters
compared with 90% of state-owned firms.Party invitation
Yet the prevalence of such committees
looks likely to grow. In September Mr Xi
asked for the private sector to “unite
around the party”. A day later Ye Qing, vice-
chairman of the All-China Federation of In-
dustry and Commerce, a powerful organi-
sation controlled by the Communist Party,
issued a more detailed list of demands. He
called for private groups to establish hu-
man-resources departments led by the
party and monitoring units that would al-
low the party to audit company managers.
This might not affect all firms equally.
“For big companies, there’s no negotiation.
The party approaches you and you say yes,”
says Joe Zhang, a business consultant who
has sat on the boards of Chinese private
and state corporations. However, he also
argues that for most smaller firms, less vis-ible and not as economically important,
party cells are little more than a rubber
stamp as profits will trump state influence
on decision-making. Their influence may
not necessarily be unwelcome either. One
executive, whose company has a party
committee, argues that by growing closer
to the thinking of the party leadership, “we
can steer the company accordingly”. This
heads off potential clashes with the state.
So far there is little evidence to suggest
that party committees have hurt profitabil-
ity, says Huang Tianlei of the Peterson In-
stitute for International Economics, a
think-tank. But increased party influence
could inhibit some operations. “Innova-
tion may be suppressed. More red tape can
emerge. A firm can turn from profit-driven
to goal-driven, sacrificing profitability,”
says Mr Huang.
It is possible that party committees may
soon play a larger role in tech firms. A raft
of new regulations presents a more imme-
diate threat. Ant is connected to hundreds
of millions of people through its payments
and lending platforms. Like other Chinese
tech giants it holds precious data on cus-
tomers as well as controlling a pipeline
through which hundreds of billions of dol-
lars are lent and spent. That such power
lies in private hands is a source of tension
between the party and entrepreneurs.
“These resources need to be tightly con-
trolled and the political loyalty of the firms
and entrepreneurs, not only to the regimebut also to individual political leaders,
needs to be strictly maintained,” says Sun
Xin, an academic at King’s College London.
“The case of Ant is just one manifestation
of this underlying logic.”
The halting of Ant’s ipowas triggered by
new draft regulations aimed at online mi-
cro lending. For Ant, the rules can only be
interpreted as an attack on the firm’s lend-
ing platform, its biggest source of revenue.
Mr Ma may regret comparing China’s banks
to pawnshops in a speech in October. The
comments infuriated senior officials and
played a part in the hasty suspension of
Ant’s ipo. But Mr Ma is not to blame for the
latest onslaught of antitrust rules, al-
though he may have sped up their arrival.vie-ing for influence
The new rules, under consideration for
some while, will for the first time explicitly
apply monopoly controls on internet and
e-commerce firms. For many years China’s
antitrust laws have not exempted the
groups but they have also not been targeted
in monopoly cases. This has allowed a few
companies to control large swathes of the
digital economy. They also take aim at the
structures that have allowed Chinese tech
firms to raise capital overseas. Barred from
allowing foreign investors to take direct
stakes, for two decades virtually all capital-
hungry tech groups have skirted the rules
by using a “variable-interest entity” (vie) to
link foreign cash to the Chinese market.
The structure creates an offshore holding
company into which foreigners invest.
That company has a contractual agreement
with an onshore firm to receive the eco-
nomic benefits of the underlying assets.
The vie structure has long been tolerat-
ed by Chinese authorities, but without full
legal recognition. Foreigners have virtually
no recourse in China to claim rights to the
assets they have invested in. Foreign funds
have long been wary of the framework but
most Chinese tech companies still use it to
structure their overseas listings. The new
antitrust rules could require companies to
seek approval for such arrangements, call-
ing into question whether vies will be per-
mitted in the future and so the way that for-
eign capital will reach Chinese tech
firms. The threat of withdrawing tacit ap-
proval for a vie is another way the state can
intimidate firms and their owners.
Perhaps the new rules will humble the
outspoken Mr Ma. He has not spoken pub-
licly on the matter, but Ant has bent the
knee and agreed to embrace the new regu-
lations. Mr Xi has made clear that no com-
pany is too big, and no ipotoo valuable, to
be allowed to challenge the state. 7Tech-tonic shift
ChinaSources: Plenum; Bloomberg*AtNovember11th
†Based on 1,378 firms representing 80% of Chinese market cap
‡Guidelines promoting Communist PartyListedcompanies†with“partybuilding”
terms‡incharter,June2020,%Mainland-domiciled companies
Marketcapitalisation*,$trnPrivateState-ownedAll10080604020018
15
12
9
6
3
0
2010 15 20Tech companies
share of total, %6.8 14.7 23.7Te c hOtherCorrectionIn our article on video-gaming last week
we wrongly attributed a quote to Tony Habschmidt
at Newzoo, rather than his colleague, Tom Wijman.
Apologies for the error.