Alicia Garcia Herrero (Natixis) | Chinese policymakers have been engaged in a massive regulatory crackdown for more than a year. A number of sectors have been affected, starting with the technology sector, followed by the education sector. At the same time, the real estate sector has also been badly affected by a specific regulatory crackdown (the three red lines) and a more general antitrust push has also taken place. Moreover, President Xi Jinping has put the pursuit of common prosperity at the top of the agenda. In this note, I will review three major issues related to China’s regulatory crackdown and its potential consequences.
The first concerns the technology sector and data issues. At a broader level, the regulatory overhaul that may soon characterize Europe’s tech landscape can be broadly interpreted as a recognition that ex post enforcement of antitrust laws is ill-suited to address long-standing and emerging issues seen in digital markets. Recognition that ex post enforcement is not enough is an important driver of China’s recent tech crackdown. But with one significant difference: Chinese authorities do not yet have the same extensive experience in antitrust cases as their European counterparts, which could explain why Chinese authorities seem willing to take an invasive and hands-on approach with restrictive rules dictating how whose algorithms should work.
The second problem concerns the antitrust forces. Looking at the range of antitrust cases so far, one can think of an obvious reason why Chinese authorities might step up and deploy their arsenal of antitrust measures is the growing size of Chinese companies and their oligopolistic behavior in key sectors ( fintech and e-Commerce). Interestingly, oligopolistic practices can also be found in formerly state-owned dominated sectors such as energy and even the transport sector, although they have remained largely untouched by the government’s antitrust push. neither in the ICT sector nor in the telecommunications sector. In this context, a more subtle – but perhaps relevant – explanation for the decision of Chinese policymakers to step up antitrust measures is to increase state control over major private players dominating new markets, in particular in fintech and the digital space.
Common prosperity is an additional reason for regulatory repression. One of the key features of China’s post-pandemic reality is President Xi’s push for a better distribution of income through the achievement of so-called “common prosperity”. In the crackdown on the education sector, the link to “common prosperity” is quite obvious. Indeed, access to private education is one of the main reasons for the worsening of income inequalities, especially among young people. The third crackdown concerns the real estate sector, which is perhaps the biggest contributor to worsening income inequality due to the rapid growth in house prices that has been sustained for many years.
There is, however, a significant risk with China’s new development goal: growth could simply become too weak to redistribute. Falling house prices as households decide to stop buying new homes for fear of an Evergrande-like event could be a warning sign. On the other hand, they could reduce household consumption because they will feel less wealthy (at least for those who are already owners). Furthermore, investment in real estate accounts for a third of total investment in fixed assets, which is bound to collapse if house prices fall. China runs the risk of having more “commonality” but less “prosperity”. Overall, the ongoing regulatory crackdown in China is indeed becoming central to government policies and certainly to President Xi’s vision of a new step for China towards a socialist economy with Chinese characteristics.