In U-turn to Mao era, heightened risks for businesses operating in China

At the mercy of a new generation of Red Guards.

Xi Jinping demands that the private sector surrenders to the Chinese Communist Party (CCP) with absolute loyalty.  

By Lee Kok Leong, executive editor, Maritime Fairtrade

In recent months, Xi, in his bid using Maoism to exert totalitarian control over China to bolster his credentials as well as political achievement ahead of next year 20th National Party Congress, where he is hoping to extend his rule when his term as general secretary expires, has initiated a series of far-reaching moves that have harmful consequences for the Chinese economy.  For example, Goldman Sachs estimated that his crackdown on the private sector has wiped out US$3.1 trillion in market value for Chinese companies worldwide, half of that from tech companies alone.

It is more likely than not that Xi, who has dominated the CCP, will be able to be the first supreme leader to rule beyond the ten-year term limit.  However, this comes at a cost to the economy as Xi’s heavy-handed and dangerous moves are designed to arouse the people’s animosity against businesses and to inflame class struggle between ordinary citizens and the rich, thereby bringing the country back to Mao Zedong’s revolutionary era which ended badly with disastrous impact on the economy and a high fatality rate. 

Growing risks of investing in China

For four decades, Western nations have pursued a policy of economic engagement with China and hoped that with more wealth, the country would implement political change and move toward democracy over time.  Yet, Xi is taking the country back to the Mao era and China has become more totalitarian.  Under the guise of antitrust, data security, and the need to narrow wealth inequality, he cracks down on the private sector and abuses the human rights of his own citizens in order to cement total control to consolidate his monopoly on power.  

The key to understand Xi’s intention is to look at the consequences of his actions and not just look at his words.  Therefore, for the businesses operating in China now, it is important to keep in mind that they are operating in a Maoist regime, Xi is turning his back on capitalism and that they are at the whims and mercy of Xi.  The private sector is now intertwined closely to the political landscape and has lost the last vestige of independence.  

Ultimately, Xi is sending this message: The companies have to align their business interests to Xi’s interests if they want to continue to operate in China.  He wants “politically sensible people” in the private sector who will “firmly listen to the party and follow the party.” They should contribute to the longevity of the party by helping to advance the government’s goals while avoiding causing trouble.

China expects total surrender from businesses

Xi has used a variety of reasons, for example antitrust or data security, to bring the rich and powerful tech companies, including Alibaba, Ant Group, Didi, Meituan, Pinduoduo and Tencent, in line with his priorities and in the process, he has wiped out hundreds of billions of dollars from the stock markets.  Investors are burned and there is a loss of confidence about the future of innovation and entrepreneurial spirit in the world’s second largest economy.  The heavy selling has accelerated in recent months as Chinese authorities penalized companies with massive fines, banned apps and demanded business overhaul.

For example, the Nasdaq Golden Dragon China Index, which tracks 98 of China’s biggest companies listed in the U.S., plunged 22 percent in July, its biggest one-month drop since October 2008.  Stocks included in the Index have seen a loss of US$829 billions in market value. 

Throughout the years, getting a good education is a highly prized pathway to break out of the poverty cycle.  As millions of families strived for a better future through education and were willing to pay good money to get it, the private education sector was one of the most attractive for global investors who had invested billions of dollars in both public and private companies.  However, on July 23, without giving any advance notice, Xi ordered all private tuition companies to convert to non-profit institutions “in order to boost the country’s birth rate by lowering family living costs”.

This announcement effectively decimated some of the biggest publicly listed education companies after a panic selloff which saw some of the stock plummeted between 30 percent and 40 percent.  Moreover, the new rule will also restrict new foreign investment, once a key channel for companies to raise money.  The sector, which was once valued at US$100 billion, is now worth only US$24 billion, according to Goldman Sachs.  Investors are left high and dry, wondering what will happen to their remaining capital now that the education companies are non-profit.

The rich are giving away money to avoid Xi’s wrath

Just like Mao’s Red Guards’ revolutionary movement against landowners and capitalists, Xi is now drumming up populist support against the tech companies and their owners.  On August 17, Xi called for a return to “common prosperity”, emphasized a need to “regulate excessively high-income groups” and wanted businesses to return more of their profits to society.  

In a rush to fall in line and demonstrate loyalty to Xi’s effort at wealth redistribution, many big tech companies pledged massive donations.  For example, Tencent donated US$15 billion and Pinduoduo US$1.5 billion.  Tech billionaires including Pinduoduo’s Colin Huang, Meituan’s Wang Xing and Xiaomi’s Lei Jun have also donated a big portion of their personal fortune.  In the foreseeable future as long as Xi is in power, it is speculated that more companies and individuals will follow suit and that they are bound to highly publicize their obeisance. 

Importantly, it is worthwhile to note that the donations are taken from profits that are supposed to go to investors and shareholders.  This begs the question of who has the first claim and ultimate control to these companies’ profits and assets. 

No passport, no English, no hope of a better future 

On July 30, the Chinese Entry and Exit Bureau confirmed that the country has stopped issuing new passports and has imposed entry and exit controls on the population, purportedly to stem the surge in the Delta variant of Covid-19.  This move has left Chinese nationals overseas stranded with expired passports and prevented citizens from travelling out of the country.  But more tellingly, it signals that Xi is using the pandemic as an excuse to curb freedom of movement.

In August, the Shanghai education bureau banned the teaching of English in schools starting from the fall semester and at the same time, made it mandatory to study “Xi Jinping Thought”.  This heavy emphasize on political indoctrination from a young age is killing the freedom of thought, which is essential to critical thinking and the ability to differentiate between right and wrong.  Given the current fervor of nationalism and anti-western sentiments, it is speculated that the English ban will not stop at Shanghai but will be implemented throughout China in times to come.  

In the age of globalization, these seemingly bizarre and backward policies are going against the trend of economic development and growth.  But if seen through the context of Maoism, then it makes perfect sense for Xi in using these draconian brainwashing measures to control the people’s freedom of movement and freedom of thought to make them more pliable in order to raise a new generation of Red Guards.  

For this new generation of Chinese, there is no opportunity to travel overseas to broaden their horizon, no knowledge of English which is a global common language to exchange different ideas and opinions, and coupled with the fact that the internet is heavily censored, they can only think and say what the CCP wants them to.  And on a macro level, all these Maoist policies will make the economy less competitive.

In fact, to stay in power, Xi is gambling with China’s future.  His pathological need to control everything stems from knowing that he does not have a legitimate mandate to rule and without total control, he fears there will be dissent from the people as well as enemy factions within the CCP.  Investors must know that Xi’s China is not Deng Xiaoping’s China where “To get rich is glorious”.  Those days are over and with a return to Maoism, China’s future is not looking bright.

Image credit: Naresh777 / Shutterstock.com

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Lee Kok Leong

Lee Kok Leong

Kok Leong, executive editor, has overall editorial responsibility for the direction and focus of Maritime Fairtrade. He has two decades of working experiences, including holding senior regional roles in business-to-business (B2B) print and online publications. He enjoys his work as a journalist, and regards it as a calling.

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