China’s mixed GDP results raise the stakes of its tech crackdown

On Thursday, China reported that its economy grew 7.9% during the second quarter of 2021 compared to the same period last year. The figure, which was broadly in line with expert forecasts, suggests China’s post-COVID recovery is leveling off.

Second-quarter expansion was less than half the pace of the first quarter when China posted torrid year-on-year growth of 18.3%—although that jump mainly reflected the magnitude of the economy’s collapse in 2020 immediately following the outbreak.

Economists were heartened by industrial output and retail sales, which rose faster than expected in the most recent quarter. There is broad consensus among experts that the Chinese economy can achieve 8% growth for the full year, comfortably exceeding Beijing’s official target of 6%.

And yet China’s economy has come to a treacherous pass. Manufacturers grapple with price increases, shipping delays, and material shortages. Domestic consumer sentiment remains anemic. Because of the government’s “zero tolerance” approach to containing even the smallest outbreak of COVID-19, the county’s borders seem likely to remain closed to foreign travel for the rest of the year.

Meanwhile, corporate bond defaults have hit record highs this year.

Those and other concerns prompted the nation’s central bank last week to reduce by half a percentage point the amount of cash it requires banks to hold in reserve, freeing up about $150 billion in long-term credit. In expert commentary about the health of the world’s second-largest economy, one word seems to pop up repeatedly: “uneven.”

The mixed outlook raises the stakes of Beijing’s recent crackdown on the nation’s technology sector. A growing chorus of analysts now warns that Beijing’s campaign to rein in leading tech companies including Alibaba Group in e-commerce, Tencent Holding in video and chat, Meituan in food delivery and, most notably Didi Chuxing in ride hailing threatens long-term growth.

“They’ve gone too far, and basically scared innovators from innovating,” Center for Strategic International Studies senior advisor Scott Kennedy told CNBC.

Claremont McKenna College professor Minxin Pei, writing for Project Syndicate, warns that new regulations proposed last week, which require any Chinese company holding data for more than a million users to get clearance from the nation’s cybersecurity watchdog before selling shares overseas, could “choke off Chinese tech firms’ access to foreign capital” and do more to stunt the development of China’s tech sector than any legislation contemplated by U.S. China hawks.

Rhodium Group founder Daniel Rosen, in a sobering assessment of China’s long-term economic weaknesses published in the current issue of Foreign Affairs, describes Beijing’s moves last year to scuttle the IPO of billionaire Jack Ma’s Ant Group as part of a pattern in which China’s leaders revert to restoring central control after attempts at liberalizing proved too disruptive. “The crackdown,” he warns, “has been successful in reducing financial risks, but it has also reversed the benefits of reform, as many low-income consumers now have fewer choices in accessing credit.”

The New York Times‘ Raymond Zhong illustrates here how Beijing’s crackdown on Ant limits options for consumers and undercuts China’s small businesses.

Not everyone is so gloomy. HSBC Global Asset Management’s Alexander Davey, for example, on Wednesday urged investors to “see through the crackdown,” and look for buying opportunities in China’s tech sector. My two jiao worth: Caveat emptor.

Since he came to power in 2012, Chinese President Xi Jinping has put a high premium on stability and party control. As he approaches the end of his second five-year term, the risk for the Chinese leader is that his campaign to bring the nation’s disruptive tech sector to heel will cause another type of disruption: this one to China’s productivity, investment and ability to cope with its long-term economic challenges.

Speaking of control: China’s government has staked out a very clear position on emerging technologies for digital currencies. It takes a dim view of private cryptocurrencies, but is actively promoting a digital version of its own currency controlled by its central bank.

A few days ago, I spoke with Cornell University economist Eswar Prasad about China’s central bank digital currency (CBDC), and the prospect that it might one day dethrone the U.S. dollar as the world’s favorite reserve currency. In this Eastworld Spotlight interview, Prasad, a specialist on trade policy and author of the forthcoming book The Future of Money, explains why the U.S. shouldn’t worry.

On July 21, I’ll be moderating a virtual conversation entitled “Is Globalization Worth Saving?” In the wake of populist politics and a pandemic, can the free-trade, open-market global system be saved? Is it worth saving? Speakers include former World Trade Organization director-general Pascal Lamy and London School of Economics professor Keyu Jin.

Register to participate here.

More Eastworld news below.

Clay Chandler
clay.chandler@fortune.com

This edition of Eastworld was curated and produced by Grady McGregor and Nicholas Gordon. Reach them at grady.mcgregor@fortune.com and nicholas.gordon@fortune.com. 

Eastworld news

India’s Cowin app

On Jan. 16, India launched its Cowin app at the start of its massive vaccination program. Officials hailed the app as the technological backbone of the campaign and said it would make the management of doses easier and prevent misuse, but India's existing digital divide means that it has been difficult for the 50% of Indians without a smartphone to sign up for vaccine appointments. India’s vaccination rate has fallen to roughly 4 million shots per day, down from a peak of 9 million in June, and officials are now exploring how to make the campaign more analog. Fortune

The tech proletariat

A recent critique of China’s infamous “996” working culture—9:00 a.m. to 9:00 p.m., six days a week—has an unlikely inspiration: Karl Marx. An opinion piece in The CPPCC Daily, a newspaper run by China's top political advisory body, directly draws on Marxist language in calling on China Big Tech to stop its “limitless exploration of surplus labor for high surplus value.” The reference to Marx, and his broadsides against capitalism, is rare for a document coming from the top levels of China's government and a potential nod to China’s young workers that appear increasingly disillusioned with harsh working conditions. SCMP

Plot holes in Asia’s success story

Vasuki Shastry, Chatham House fellow and author of recent book Has Asia Lost It?, notes how the pandemic has revealed the flaws in the narrative of Asia’s economic success in a commentary piece for Fortune. Citing evidence from stalled social mobility to an out-of-touch political class, Shastry argues that Asia’s path out of the pandemic will not be a smooth one. Fortune

Vaccine hoarding

Thailand is considering halting exports of locally-made AstraZeneca vaccines to counter its own COVID surge. The country is suffering from its worst COVID outbreak yet, worsened by a painfully slow vaccine rollout. An added wrinkle: Thailand opened up three more islands in addition to Phuket for fully vaccinated travelers on Thursday as it hopes to fully open to international travel in under 100 days to help resuscitate its struggling tourism sector. Reuters

Markets and movers

Fast Retailing – On Thursday, the owner of popular fashion brand Uniqlo posted a net profit of $1.53 billion in its most recent quarter, up 67% from the same period last year. Still, Fast Retailing trimmed its profit forecast for its fiscal year ending in August from $2.3 billion to $2.2 billion due to ongoing effects of the pandemic. 

Lalamove — The on-demand logistics and delivery firm is considering moving its $1 billion U.S. IPO to Hong Kong as Chinese regulators increase scrutiny of homegrown firms listing in the U.S. In the wake of the government crackdown on ride-hailer Didi Chuxing, regulators recently proposed rules requiring Chinese firms to get government approval before listing abroad. 

Zomato — The food delivery company launched a $1.25 billion IPO on the Bombay Stock Exchange. Zomato is the first in a long list of unicorns expected to launch on the bourse in 2021. The surge of COVID cases in India has done little to harm the country’s stock markets, which have shown surprising resilience amid the outbreak. 

Flipkart — The Indian e-commerce firm completed a funding round that values the company at $37.6 billion. Softbank, which sold its stake in Flipkart to Walmart in 2018, has returned as part of this funding round.

Ark Investment — Holdings of China tech stocks in some of Cathie Wood’s ETFs have fallen to the lowest point on record as Wood warns of a “valuation reset” in the wake of Beijing’s crackdown of the sector. Investors are wary of saying that the rout of China’s tech stocks is over: the gap between the returns of major U.S. tech stocks and major Chinese tech stocks is the widest it’s been in a year.

Chinese livestreaming — China Ministry of Culture and Tourism issued a statement this week pledging to rein in China’s massive live-streaming industry that tech giants like Bytedance and Tencent have long relied on for growth. The new measures, which are expected to take effect at the start of next year, will force content creators and marketing agencies to collaborate with the government and ban practices like soliciting money from minors.

Fosun Pharma — Chinese regulators have completed a review of the mRNA COVID-19 vaccine developed by Germany's BioNTech and distributed locally by China's Fosun Pharma. The government still has not made a final decision on its approval, but authorities plan to use the vaccine as a booster shot to supplement China's vaccine supply.

Final figure

54,517

On Wednesday, Indonesia overtook India as the Asian epicenter for COVID-19, with a record 54,517 new cases. The surge in cases has been sparked by the delta variant, which may spread widely in a population with a vaccination rate of only 10%. Officials are worried the outbreak will strain the country's medical system, especially supplies of oxygen.