China wipes out $US100 billion industry as it widens crackdown

China just wiped out a $US100 billion ($135 billion) industry. It’s not its first assault on its big private sector businesses, however and probably won’t be its last.

Over the weekend China announced the detail of reforms of its private sector education companies, one of the hottest sectors in its economy and the target of massive amounts of foreign investment.

Gaotu’s Larry Chen lost $US15 billion of paper wealth as shares in the US-listed company plunged nearly 80 per cent. Credit: AP

It banned the companies from making profits, raising capital or going public. It also banned them from teaching foreign curriculums, importing foreign textbooks and employing foreign teachers.

It has effectively destroyed the companies and the wealth of the private sector entrepreneurs who profited from the ambitions of parents trying to maximise the chances of their children gaining entry to the country’s best universities. The founder of one of the biggest of the companies, Gaotu’s Larry Chen, lost $US15 billion of paper wealth as shares in the US-listed company plunged nearly 80 per cent.

There are some industry-specific motivations for the assault on a sector the authorities said had been “hijacked by capital.”

They are concerned about the pressure on children, the costs to parents and the impact of those costs on China’s rapidly declining birth rate (parents can’t afford more children) and on inequality.
There are, however, broader influences that tie the decision to effectively close down private education to other measures China has taken to crack down on its technology companies.

Also at the weekend, China directed Tencent Holdings to relinquish exclusive music-licensing rights.
Earlier this month, just days after its $US68 billion initial public offering, China’s authorities ordered ride-sharing giant Didi Global’s app, and several others in that sector, to be removed from app stores.

They had previously effectively demolished what had been a vast and fast-growing peer-to-peer lending sector and forced the planned $US37 billion float of Jack Ma’s Ant Group to be pulled at the last minute amid a severe tightening of regulations of China’s fintech sector generally that will curtail their previously unfettered growth and see them regulated like more conventional financial institutions.

There’s also been a broader toughening of regulations around China’s e-commerce businesses on consumer protection and anti-trust grounds.

It looks like an assault on China’s private sector, particularly the fast-growing digital businesses that now accounts for nearly 40 per cent of China’s GDP – businesses that for decades had been encouraged because of the growth and dynamism they had injected into an economy previously dominated by inefficient state-owned industrial and property enterprises.

Under the crackdown, private education companies are banned from making profits, raising capital or going public. It also banned them from teaching foreign curriculums, importing foreign textbooks and employing foreign teachers.Credit: Getty Images

That would be consistent with the tightening of the Communist Party’s control of everything within China under Xi Jinping’s leadership.

It also, however, reflects the increasing maturity of the economy.

The sectors China is now reining in experienced their explosive growth largely because they were essentially unregulated. The businesses are now of a size – and the sectors and the wealth they have created so concentrated – that it isn’t particularly surprising that the authorities have decided to start regulating their activities.

Whether the concerns are financial stability or – as in the anti-trust actions – consumer protections, the authorities’ actions aren’t out of kilter with how such dominant and monopolistic businesses would be regulated elsewhere. There are similar concerns in western economies about the power of Facebook, Google and Amazon and analogous efforts to regulate them.

While the previous environment might have been too lax, by choking the growth of its most successful companies China risks undermining the most competitive and innovative sectors of its economy.

The sheer scale of the wealth of entrepreneurs like Ma and Chen also represented a challenge to the construct of China’s society and to the party itself.

Ma’s outspokenness and willingness to criticise Chinese regulators has been cited as a factor in the action taken against Ant Group.

Ma disappeared from public view for quite some time after the IPO was abandoned and the Chinese businessman with arguably the biggest international profile has maintained a very low profile ever since. The Party doesn’t want billionaire challengers to its authority to emerge.

The decision to ban foreign teachers and texts from its education sector points to another, broader, motivation for the sudden frenzy of regulatory activity in the private sector of China’s economy.

Whether it is what children might be taught, or Chinese companies listing on foreign stock exchanges, the authorities want more control.

Another consistent underlying theme to most of the actions taken against technology-driven companies over the past year is that the authorities want to restrict cross-border data flows – they want all domestic data to be stored and protected within China – and they want access to the data that the private companies have on Chinese citizens (and any others that the companies might have garnered).

China, with the “Great Firewall of China,” is arguably the most restrictive country in terms of cross-border data flows and its recent actions are tightening those restrictions further.

It isn’t alone in regarding data as an asset; an economic and strategic resource that is becoming increasingly valuable as this century progresses. With land, labour, technology and capital, China regards data as a critical production factor and it wants access to and control of the data held by its private companies.

There’s been a raft of legislation recently – data security laws, cybersecurity regulations and privacy laws – to regulate domestic data and prohibit Chinese companies from sharing their data with others offshore.

Outspoken Alibaba founder Jack Ma has been keeping a low profile.Credit: AP

The action against Didi was at least partly driven by fears the vast data it has on the domestic travel of Chinese citizens, including officials, might be accessed by the US, even though the data is held on servers within China.

China also isn’t unique in seeing data in strategic and competitive terms – the US has been banning or trying to ban Chinese companies from operating in the US because of similar concerns and the European Union has its own data protection legislation and strategy – but it is pursuing the localisation of data far more aggressively and intrusively than the US or Europe, where privacy concerns extend to the access that the state has to individuals’ personal data.

The wide-ranging crackdown on China’s big tech sector may give the authorities, and the Party, more control over their citizens’ data but there is a cost associated with that control.

The big tech companies that flourished in a less-regulated environment provided China’s economy with its entrepreneurialism and dynamism. While the previous environment might have been too lax, by choking the growth of its most successful companies China risks undermining the most competitive and innovative sectors of its economy.

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