Breaking News: Dangerous Chinese corporate crackdown threatens to slow innovation and growth

But there are serious obstacles to this strategy. China has sought for at least 15 years to rebalance its growth in exports and capital investment towards greater domestic consumption – efforts that have taken on new urgency, due to conflicts with the United States and other countries. . As long as its domestic market grows, China will be able to reduce the strategic vulnerabilities that its dependence on exports implies, and foreign companies will become more dependent on the Chinese market, giving China new sources of strategic leverage. .
For Chinese domestic consumption to increase, wages and household income from invested savings must grow. And for that to happen, China needs to move away from a growth model that has so far relied on heavy repression to keep wages for workers and incomes paid to savers low. This means moving towards more skilled industries that pay workers more, with investments mediated by a sophisticated financial sector that can generate reasonable returns even without access to cheap capital.
âWhile the parallels to Mao’s Cultural Revolution are probably overstated, fears that the new crackdown will prove to be counterproductive are not. ”
Massive over-indebtedness of unpaid debts
This transition would be difficult under any circumstances, but it is particularly difficult today, given China’s past actions. After emphasizing investments in fixed assets, China now faces a massive excess of unusable borrowing from developers and quasi-government vehicles. When restructuring over-leveraged entities, Chinese authorities usually force investors to bear losses, distributing them as they see fit.
But when we fear a general loss of confidence, especially among foreign investors, these entities have instead been bailed out. That’s why all eyes are now on the heavily indebted real estate developer Evergrande.
De Barron’s: How bad are things in China? Goldman Sachs has just reduced its growth forecasts to zero.
The answer remains unclear, as President Xi Jinping has pledged to maintain the position of the Chinese Communist Party (CCP) at the top of Chinese society and affairs.
Likewise, because China’s cavalier treatment of intellectual property rights has made advanced economies increasingly reluctant to share research and know-how, China must now create more of its own intellectual property. And while it has sophisticated universities and private companies capable of doing so, the key question is whether these entities will be incentivized to innovate freely despite the recent crackdown.
Protect the less productive
After launching campaigns to crack down on corruption, he has since decided to strengthen the role of state-owned enterprises, even though they tend to be the least productive players in the Chinese economy. Despite the central government’s preference for state-owned enterprises, the private sector has grown considerably (usually with support from the local government) and wealthy entrepreneurs such as Alibaba
9988,
-4.11%
BABA,
-0.36%
co-founder Jack Ma have captured the imagination of the public, sometimes even daring to criticize state policy.
âBy cracking down on the extremely rich, the government risks discouraging the simple rich from trying to create value. ”
The authorities insist that the crackdown on tycoons like Ma and their companies is carried out in the interests of “common prosperity.” It is presented as a movement against extreme individual wealth (read: billionaires), corporate monopoly (Alibaba and Tencent
TCEHY,
+1.94%
700,
-0.77%
allegedly used the power of their platform to restrict user choice) and the exploitation of workers by platforms that until recently boasted of their “996” culture (working 9:00 am to 9:00 pm six days a week). And it will strike a blow in favor of data privacy (by offering protection of individual data against companies, but not the government), and against cross-border data flows and foreign influence, including foreign registrations.
Certainly, as with the anti-corruption campaign, many elements of the new agenda seem attractive. Who could disagree with the slogan âHousing is for living, not for speculatingâ? The problem is not with the stated goals, but rather with their pursuit in a system devoid of checks and balances.
The implementation is tricky
And who decides what has social value? Bureaucrats and party officials do it. They are the ones who determined that video games and tutoring are more dispensable than chipmaking. And there is little or no opportunity to seek redress if they become overzealous in achieving what they think Xi wants.
While authorities have been careful to point out that the campaign focuses on the wealthiest and most prominent entrepreneurs, especially those who don’t seem to bring much social value, it’s also open enough to target just about n ‘ anyone. By cracking down on the extremely rich, the government risks discouraging the simple rich from trying to create value.
News Business Highlights
- Breaking News: Dangerous Chinese corporate crackdown threatens to slow innovation and growth
- Check out all the news and articles for business news updates.