Billionaire crackdown: China’s risky new pathway to Mao’s ‘common prosperity’

What began as a crackdown on China’s big technology companies earlier this year is morphing into a far more substantial shift in China’s economic model.

From the late 1970s China has pursued Deng Xiaoping’s roadmap to achieving Mao Zedong’s goal of “common prosperity,” or an egalitarian socialist economy. Deng had a trickledown view of how that goal could be achieved.

The start of the rolling assault came after Alibaba’s Jack Ma made some derisive public comments about China’s financial system, its regulation and the big state-owned banks within it last year.Credit: Bloomberg

“Let some people get rich first” has been the guiding philosophy that has underpinned China’s remarkable economic growth over the past four decades.

It led, however, to some people, most notably the tech entrepreneurs, getting very rich. China has about a third more billionaires than the US – it has more than a thousand of them – and shares the first-world problem of rapidly increasing wealth inequality.

It is unclear what the spark was for this year’s frenzy of actions to rein in the big tech companies and the billionaires who created them, although the start of the rolling assault came after Alibaba’s Jack Ma made some derisive public comments about China’s financial system, its regulation and the big state-owned banks within it last year.

That public display of hubris, independence and disdain for the authorities didn’t go down well.

The planned $US37 billion ($51.3 billion) float of his Ant Group was called off two days before its launch, the previously very visible Ma disappeared from public view and has rarely been sighted since and the Chinese authorities began a series of quite dramatic changes to the regulation of the big tech companies.

The big fintechs like Ant and Tencent were ordered to become financial holding companies and subjected to bank-like regulations; then there were competition and consumer protection regulations imposed on the dominant tech groups; then data privacy and national security regulations that have hobbled China’s ride-sharing companies and, more recently, “reforms” that have wiped out China’s big probate education sector by banning them from making profits or raising capital.

Only last week China approved tough new laws that impose stringent controls on the private sector’s management of individual’s information (without limiting the government’s access to it).

Abuse of users’ digital data – exploiting it, selling it or using it to protect and extend monopolies – has been a theme in some of the regulatory actions this year. There’s also been a conviction that the data has significance for national security and geopolitical competition and that access to it, particularly for Chinese companies listed in the US, needs to be tightly controlled.

There must have been some private “encouragement” given ahead of the formal adoption of the new policies because China’s billionaires, having already lost tens of billions of dollars from the impact of the crackdown on tech on their companies’ share prices, have been lining up to demonstrate their philanthropic credentials in recent months.

In many respects, China’s approach to its tech sector this year reflects the similar issues that Western governments are grappling with as they try to develop regulatory and tax frameworks that capture their mega-techs like Google and Facebook. Instead of the endless lobbying and negotiation that characterises efforts to regulate tech companies in the West, however, China’s just done it.

Last week the crackdown on big tech – which has seen more than $US1 trillion wiped from the listed companies’ market capitalisations – was put into a wider context; one that suggests China has reached an inflection point in economic management, shifting from the Deng philosophy of “socialism with Chinese characteristics” which used market mechanisms and private wealth creation to generate the growth that would lift living standards for all to a purer form of socialism.

Xi Jinping’s strategy for achieving common prosperity, according to reports in the state-owned media of a mediating of the Communist Party’s Central Committee for Financial and Economic Affairs, has a far greater emphasis on redistribution than on wealth creation.

According to the reports, the party officials have committed to “strengthen the regulation and adjustment of high-income groups and enterprises to give back to society more.”

President Xi Jinping’s strategy for achieving common prosperity, according to reports in the state-owned media, has a far greater emphasis on redistribution than on wealth creation.Credit: AP

That would include changes to the tax and social security systems and fiscal transfers to promote greater access to education and upwards mobility.

“Excessive” and “unreasonable” income would be regulated and the wealthy individuals and companies would be “encouraged” to give back more to China’s society.

There must have been some private “encouragement” given ahead of the formal adoption of the new policies because China’s billionaires, having already lost tens of billions of dollars from the impact of the crackdown on tech on their companies’ share prices, have been lining up to demonstrate their philanthropic credentials in recent months.

Tencent’s Pony Ma initially promised to donate $US7.7 billion improving society and reducing poverty and then doubled that pledge last week; online retailer and food delivery giant Meituan’s founder donated $US2.3 billion of his shares in the company to his foundation and smart device maker Xiaomi’s founder distributed $US2.2 billion of shares in his company to two foundations.

The risk for China, of course, is that restricting “excessively high” incomes, coercing the wealthy to “donate” their wealth for the common good and enmeshing their most successful entrepreneurial companies in regulatory nets could impact entrepreneurial activity, wealth creation and productivity in sectors that are critical to China’s ambition of dominating this century’s key technologies.

They are among a host of Chinese billionaires and millionaires scrambling to give away their money.

Openly being discussed in the state media are capital gains, wealth, property and inheritance taxes in what appears to be a dramatic shift from the emphasis on creating wealth – in an economy where the private sector is materially larger than the state-owned or controlled enterprises and where its digital economy accounted for nearly 40 per cent of its GDP last year – to redistributing it.

There are still a lot of blanks to fill in within the new strategies Xi is pursuing.

What do a commitment to “reasonably adjust high incomes” and to “encourage high-income groups and enterprises to give back to society more” actually mean in practice?

Will China, as it has done to its $US100 billion private education sector, simply nationalise some of its largest enterprises?

Is Xi proposing a radical shift in the nature of China’s economy towards a significantly more socialist one with far fewer of those “Chinese characteristics” or does he envisage just some finessing of the economic model around its edges?

For the moment it doesn’t appear that the party is going to completely abandon Deng’s formula of letting “some people get rich first” but is targeting the wealth and power of those who have become too rich and powerful to help address the widening inequality and reduce the threats to the party from social unrest and from powerful independent-minded entrepreneurs that the gulf between the wealthiest and poorest citizens could generate.

The risk for China, of course, is that restricting “excessively high” incomes, coercing the wealthy to “donate” their wealth for the common good and enmeshing their most successful entrepreneurial companies in regulatory nets could impact entrepreneurial activity, wealth creation and productivity in sectors that are critical to China’s ambition of dominating this century’s key technologies.

It’s a risk that Xi is self-evidently willing to take.

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