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China wants stricter state control over just about everything—and the costs are mounting

August 12, 2021, 2:20 PM UTC

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On Wednesday, Beijing released a five-year blueprint for a sweeping new regulatory framework that would increase government control across nearly every sector of China’s economy.

The document, jointly issued by the State Council and the Communist Party’s Central Committee and published via the state-run Xinhua news agency, promises new laws to strengthen government supervision over a host of key areas including national security, antitrust, data privacy, food safety, and environmental protection.

As Reuters put it, “the announcement signals that a crackdown on industry…will persist on through the year.”

That’s an understatement. The broad language of the document suggests that much stricter state oversight of just about everything is the new normal for China. “The people’s growing need for a better life has put forward new and higher requirements for the construction of a government under the rule of law,” the document said. “It must be based on the overall situation, take a long-term view, make up for shortcomings, forge ahead, and promote the construction of a government under the rule of law to a new level in the new era.”

As if on cue, the state-backed Shanghai Securities Times reported Thursday that banking regulators will increase scrutiny of online insurance companies in an effort to “purify the market environment” and “protect the legal interests of consumers.” Shares of Zhong An Online Property and Casualty Insurance Co., a leading insurance platform backed by Alibaba Group Holdings, Tencent Holdings, and Ping An Insurance Group, tanked 9% in morning trading in Hong Kong.

Zhong An is the latest, well, casualty in a broader market rout triggered by a regulatory onslaught that, in recent months, has seen Chinese authorities slap Alibaba with a $2.8 billion fine; force the nation’s largest e-commerce companies to make sweeping changes to their payment platforms and delivery practices; bar the nation’s leading ride-hailing platform from registering new users; forbid companies in the nation’s $100 billion online tutoring sector from making a profit; and make it all but impossible for Chinese companies to sell shares on Wall Street.

Those and other interventions provoked a panicked selloff among global investors that has erased nearly $1 trillion in value from U.S.-listed Chinese stocks this year and dragged the Nasdaq Golden Dragon China Index, which tracks 98 of China’s biggest firms listed in the U.S., down 45% below its February peak.

Strategists at Goldman Sachs, who recently downgraded their recommendation on Chinese companies traded overseas, report that clients are asking them if China shares are “uninvestable.” ARK Investment Management guru Cathie Wood, once a fervent evangelist for China tech stocks, has dumped them from her portfolio. Even Softbank Group chief executive Masayoshi Son—perhaps the world’s boldest China bull—said Tuesday that his firm is “pausing” its investment in China.

The Wall Street Journal’s Nathaniel Taplin, in a recent column, compares the carnage in China shares to the moment in the movie Avengers: Infinity Wars when Thanos, the super villain, snaps his fingers and “half of life in the universe instantly disappears.”

But could it be that global investors are over-reacting?

In recent weeks, a small but growing chorus of China analysts has begun to make the case that Beijing’s regulatory blitzkrieg is neither irrational nor unpredictable—and is unlikely to damage the Chinese economy’s prospects for long-term growth.

Bloomberg, in this analysis, highlights two factors driving the crackdown: China’s “push for self-reliance as ideological divisions with the U.S. become more entrenched,” and Chinese president Xi Jinping’s effort to consolidate power ahead of a once-in-five-year leadership reshuffle in 2022.

A starting point for many who defend Beijing’s crackdown on the nation’s tech tycoons is that there’s a big difference between consumer Internet companies like Alibaba, video game giant Tencent, and Didi Global versus companies engaged in advanced manufacturing—the makers of semiconductors, commercial aircraft, telecommunications equipment and electric vehicles. As the Wall Street Journal‘s Greg Ip puts it, Xi believes the former are nice to have while the latter are need to have. Thus, even as the state is tightening the screws on the consumer Internet companies, it’s lavishing subsidies on manufacturers.

The corollary to that distinction is that, as they have grown, the consumer Internet companies have become increasingly unpopular with the Chinese masses. While those companies employ a lot of people and make life more convenient, China’s middle classes have come to resent the huge fortunes amassed by their founders, and sense that in many ways those fortunes have been earned by making the lives of ordinary people harder. The online education companies, as they grew, were sucking teaching resources out of the nation’s public schools and creating a kind of private tuition arms race for struggling middle-class families. The algorithms of the food delivery platforms were forcing drivers to behave recklessly to meet unreasonable delivery deadlines. Video game addiction has become a real problem among China’s youth.

Nor is it lost on Xi and his compatriots that the investors who suffer when the state leans on its consumer Internet companies are foreigners, not ordinary Chinese.

The Economist is correct in observing that “many politicians in America and Europe would love to fashion their tech industry into something like Mr. Xi’s vision: less social media” and “more strategic development of the techno-infrastructure of the 21st century.”

But the danger is that Xi risks driving away investors and entrepreneurs, thereby discouraging innovation. The distinction between “hard” and “soft” tech companies is rarely cut and dried. And as Taplin warns: “When a government comes to believe it can snap its fingers and create—or destroy—whole industries at will, things can easily go awry.”

More Eastworld news below.

Clay Chandler
– clay.chandler@fortune.com

This edition of Eastworld was curated and produced by Yvonne Lau. Reach her at yvonne.lau@fortune.com.

Eastworld News

Another day, another industry crackdown

China has now set its sights on another industry in need of reform—online insurance. The China Banking and Insurance Regulatory Commission said that “transgressions have been rampant" due to the quick development of the industry. The state watchdog ordered companies to ‘immediately rectify and regulate’ practices related to pricing, marketing and user privacy, it said in a note seen by Bloomberg. Shares of online insurers plunged after the CBIRC’s notice; ZhongAn Online P&C Insurance’s Hong Kong stock has dipped nearly 11%. Bloomberg

Bangladesh’s lockdown lift

Bangladesh’s government lifted most of its lockdown measures on Wednesday, even as the country battles its worst wave of infections. The country has recorded 50% of its COVID-19 cases and around 60% of its 23,000 virus-related deaths in the last four and a half months. The government argues that it has no choice but to reopen the country for economic reasons. “It’s not possible for the [state] to keep the country locked down forever,” said Mohammad Shahidullah, president of the government’s COVID-19 committee. At least 24.5 million Bangladeshis have been pushed into poverty because of the pandemic, notes an April study. Only 4% of Bangladesh’s 165 million people are fully vaccinated. New York Times

Hot property

Singapore is experiencing a major property boom this year, driven by the uber-rich plonking down their funds in the city-state’s residential market. The buyers are both wealthy locals and foreigners. In the first six months of the year, the amount spent in Singapore’s property market reached $24 billion—double the sum buyers in Manhattan shelled out in the same period. The property frenzy—Singapore's largest in over ten years—has also led to a 4.1% jump in home prices in H1 2021. Bloomberg

Karaoke blacklist

The Chinese government wants to ban citizens from singing certain songs at the 50,000 karaoke bars scattered across the country. Starting Oct. 1, China’s Ministry of Culture and Tourism says it will compile a blacklist of songs containing “illegal content” that “endanger[s] national unity, sovereignty or territorial integrity; violates China’s religious policies and spreads cults and superstitions; and advocates obscenity, gambling, violence and drug-related crimes or instigating crimes,” says state paper Xinhua. Fortune

Doctors in the shadows

Myanmar’s doctors are treating COVID-19 patients in secret as the country’s military junta continues to target health care workers. The military says the National League for Democracy, the political party of the civilian government it ousted in February, is inciting health care workers to strike. Nearly 200 doctors have been arrested, while hundreds have been slapped with arrest warrants for going against the military, says a Tuesday report from Physicians for Human Rights. Only 2.8% of Myanmar’s 54 million people is vaccinated. WSJ

Markets and movers

Korea’s nouveau riche – Move over, chaebols. South Korea top tech entrepreneurs are now among its most wealthy. Brian Kim, the founder of mobile messaging platform Kakao Corporation, is now the richest person in South Korea with a $12.9 billion fortune, overtaking Samsung Group heir Jay Lee. Other tech entrepreneurs are following close behind, including Seo Jung Jin, founder of biotech firm Celltrion, who has a net worth of $10 billion. Chang Byung Gyu, founder of video game giant Krafton, tripled his fortune to almost $3 billion after taking his company public on Tuesday.

Pony.ai – Chinese autonomous driving start-up Pony.ai has halted its New York SPAC listing due to regulatory uncertainty, sources told Reuters. It had planned to go public in October via a merger with blank check company VectoIQ Acquisition II, but will now focus on private fundraising. The Toyota-backed venture operates in China and the U.S., and joins the growing list of Chinese tech firms backing out of U.S. IPOs after Beijing cracked down on ride-hailing firm Didi last month.

Li Auto – Shares of Chinese electric vehicle maker Li Auto dropped 2.1% in their Hong Kong trading debut this Thursday. The company raised $1.52 billion last week. The carmaker says it plans to set up a new Beijing factory to boost manufacturing capacity and will sell its first battery EV by 2023. Founded in 2015, the Beijing EV startup raised $1.3 billion in its Nasdaq listing last year. Meanwhile, vehicle sales in China fell for the third straight month in July, by 11.9% from the year prior.

Coupang – South Korean e-commerce giant Coupang reported a $518.6 million net loss in the three months ended June, a five-fold increase from the same quarter last year. A June fire destroyed the company’s largest logistics center in the country, which contributed to its steep quarterly loss. Shares of Coupang sank 12%, taking the stock to its lowest level since May. However, Coupang’s Q2 revenue grew to a record $4.48 billion, 71% higher than the same period in 2020; and the number of active customers grew to 17 million this quarter, up from 13.5 million last year.

Great Wall Motors – Chinese auto manufacturer Great Wall Motors is shifting part of its $1 billion India investment to Brazil. The Hebei-based company may move up to $300 million to the Latin American country after dealing with a year-long delay from Indian authorities. Chinese investments in India are now subject to stricter scrutiny after geopolitical tensions ramped up between the two superpowers following a border clash last year. Around 150 Chinese proposals valued at over $2 billion are facing bureaucratic red tape from Indian regulators.

Final figure

80.32 million tonnes

Coal demand is surging in Asia, driven by economic recovery and hot temperatures increasing the use of air-conditioning. A total of 80.32 million tonnes of coal was unloaded at Asia-Pacific ports in July—the highest number seen since January, up from 80.16 million in June and 78.58 million in May. China took in 30.18 million tonnes of coal in July, a seven-month high; the country is the world’s largest producer, consumer, and importer of coal. Such demand and surging prices shows that the world is still far from the move away from coal that's needed to reach the climate goals outlined in the latest IPCC report.

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