China’s Tech Crackdown Continues
Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: China’s tech crackdown, Dalio’s dollar doom, Ashworth’s response, and a look at China’s advantages in entrepreneurship. CCP Comes Down on Tech CEOs In October 2020, Jack Ma delivered mild criticisms of China’s financial regulators at a business conference. Within a week, the tech billionaire’s payments company, Ant Financial Group, saw its IPO halted after Ma was summoned to a meeting with financial regulators. Shares of Tencent and Alibaba, the country’s largest tech companies, subsequently plummeted as investors saw the incident as an indication of a broad crackdown by the Chinese Communist Party (CCP) on tech entrepreneurs. Chinese president Xi Jinping confirmed those suspicions on Monday, stating in a meeting with financial regulators that the government should take a harder line against “platform” companies. “Some platform companies are developing in non-standardized ways and that presents risks,” said a Chinese outlet describing Xi’s statements. “It is necessary to accelerate the improvement of laws governing platform economies in order to fill in gaps and loopholes in a timely fashion.” The remarks come in the wake of similar statements by Premier Li Keqiang, who announced a plan to expand oversight of fintech firms and bring more capital into the regulated banking sector. While the Chinese leadership is spinning the move as an effort to curb monopolies, it is more likely an effort to kneecap China’s increasingly powerful tech CEOs. After cowing Ma, Xi appears to have his eyes on the financial wing of Tencent Holdings, China’s most valuable tech company. Tencent, which operates the WeChat app, has lost $65 billion in value since Beijing’s antitrust authorities censured the company last week. For decades, Beijing’s economic strategy has depended on channeling capital to state-owned enterprises in the heavy industry and property-development sectors. While the Party has taken a generally laissez-faire approach to the tech sector, the rise of consumer-finance platforms undermines state control over capital flows. While the crackdown on fintech can look like a superficial power struggle between megalomaniacs, it has been targeted specifically at businesses in the financial sector. Regulators have decried “monopolization,” but as long as Beijing remains focused on fintech specifically, the crackdown may not be as damaging as some suspect. The trouble for Beijing is that its economic future depends on robust domestic consumption. While curbing the nonbank financial sector consolidates state power, it also undermines a core pillar of China’s economic strategy. And while Beijing’s leadership decries “unregulated” fintech firms, the debt of state-owned enterprises and local governments poses a far greater risk to the country’s financial stability than that of households. Absent an alternative source of consumer financing, China’s effort to become less dependent on exports will see limited success. Around the Web Ray Dalio is bearish on dollar-denominated debt The economics of investing in bonds (and most financial assets) has become stupid. Think about it. The purpose of investing is to have money in a storehold of wealth that you can convert into buying power at a later date. . . . In US, European, Japanese, and Chinese bonds an investor has to wait roughly 42 years, 450 years, 150 years, and 25 years1 respectively to get one’s money back and then one gets low or nil nominal returns. Bloomberg’s Marcus Ashworth argues that Dalio is pumping his portfolio The investor Ray Dalio has given us the benefit of his new world view in a LinkedIn post that takes a baseball bat to the idea of safety in holding bonds — or anything, really, in dollars. While much of his logic is undeniable it does suit a recent shift in where his firm Bridgewater Associates has been winning mandates, namely in China . . . The OECD expects the U.S. economy to grow 6.5% this year, which will outperform global growth expectations of 5.6%. It won’t be easy to shift investment dollars away from the world’s superpower when its economy is running hotter than many emerging markets. Random Walk While the boom in Chinese tech entrepreneurship appears to be stalling, today’s Random Walk takes a look at China’s advantages, as described by Kai-Fu Lee in his book AI Superpowers: China’s successful internet entrepreneurs have risen to where they are by conquering the most cutthroat competitive environment on the planet. They live in a world where speed is essential, copying is an accepted practice, and competitors will stop at nothing to win a new market. Every day spent in China’s startup scene is a trial by fire, like a day spent as a gladiator in the Coliseum. The battles are life or death, and your opponents have no scruples. The only way to survive this battle is to constantly improve one’s product but also to innovate on your business model and build a “moat” around your company. If one’s only edge is a single novel idea, that idea will invariably be copied, your key employees will be poached, and you’ll be driven out of business by VC-subsidized competitors. This rough-and-tumble environment makes a strong contrast to Silicon Valley, where copying is stigmatized and many companies are allowed to coast on the basis of one original idea or lucky break. That lack of competition can lead to a certain level of complacency, with entrepreneurs failing to explore all the possible iterations of their first innovation. The messy markets and dirty tricks of China’s “copycat” era produced some questionable companies, but they also incubated a generation of the world’s most nimble, savvy, and nose-to-the-grindstone entrepreneurs. These entrepreneurs will be the secret sauce that helps China become the first country to cash in on AI’s age of implementation. Lee argues that China’s cutthroat start-up ecosystem produces better businesses, but what happens when would-be entrepreneurs see figures like Jack Ma kneecapped by the CCP? — D.T. To sign up for the Capital Note, follow this link.