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China’s graft busters are going after Jack Ma’s hometown

August 24, 2021, 11:17 AM UTC

The Chinese Communist Party’s corruption watchdog has ordered 25,000 cadres residing in the eastern city of Hangzhou to engage in “self-examination” to resolve business-related “conflicts of interest” involving themselves or family members.

The local arm of the powerful Central Commission for Discipline Inspection issued the edict via its website Monday, two days after announcing a probe into Hangzhou’s most senior party official, municipal party secretary Zhou Jiangyong, on charges of “serious violations of discipline and laws.”

The CCDI didn’t connect its investigation of Zhou to a specific company or entrepreneur. But the agency said it plans a thorough review of relationships between party members and local businesses, and will probe the financial dealings of current party officials and those who have retired within the past three years.

Hangzhou, the capital of Zhejiang province, is home to 10 million people and a bevy of fast-growing technology companies. Foremost among them: Alibaba Group Holding, the e-commerce giant founded by billionaire Jack Ma, and Ant Group, the Alibaba mobile payments affiliate that Ma controls.

Zhou was promoted to the top party post in Hangzhou three years ago. Like Ma, he is a former teacher and Zhejiang native. The Financial Times reports that he has been “an enthusiastic booster of the city’s tech sector.”

Zhou’s detention and the corruption watchdog’s warning to Hangzhou’s cadres come amid a nationwide regulatory crackdown on China’s largest Internet companies. State media coverage of the two developments ignited speculation on Chinese social media that Zhou and other senior party officials had hidden financial ties to Alibaba, or may have stood to profit financially from Ant’s planned initial public offering. That listing, which aimed to raise $37 billion making it the largest IPO ever, was personally scuttled by Chinese president Xi Jinping last November after Ma publicly mocked China’s financial regulators as narrow-minded “pawnbrokers” who were stifling innovation.

On Sunday, Ant Group issued a statement saying it had “strictly followed laws and regulations” in an “open and transparent” IPO process. The company dismissed speculation regarding its derailed IPO as “false rumors.”

That may be so. But in hindsight it is now clear that Xi’s decision to cancel Ant’s IPO was the opening salvo in a ten-month regulatory attack that has laid siege to Internet companies in some of the most dynamic sectors of China’s economy—not just e-commerce and mobile payments, but also food delivery, ride-hailing, video games, online tutoring, entertainment, and digital health care.

At a meeting of the Party’s central financial and economic affairs commission last week, Xi signaled that the Party intends to expand that campaign to address a host of other social ills including the increasingly unequal distribution of wealth and income in China. The committee noted that in the previous four decades of China’s economic “opening and reforms” the Party had focused on growth, enabling some people, in the words of then-leader Deng Xiaoping, to “get rich first.” But from here on, the panel vowed, the priority will be “common prosperity.”

Some Chinese entrepreneurs will find that latter slogan chilling; it was coined by Mao Zedong, who deemed capitalists public enemies. It’s possible that Xi means the term in a more benign sense to suggest merely eradicating extreme poverty.

As the Wall Street Journal‘s Keith Zhai and Stella Yifan Xie report, Xi was focused on social equality before he took power in 2012—but in internal party discussions dismissed debates about which should come first: making the “cake” bigger or dividing it into more equal slices. Xi argued, according to Zhai and Xie, that the Party should be able to achieve both. But it may also be that Xi is trying to eat his cake and have it—and fails to recognize that intimidating entrepreneurs, enlarging the role of state-owned enterprises, and seeking to micro-manage every aspect of China’s economy poses a genuine risk to long-term growth.

However Xi understands “common prosperity,” he uses the term with increasing frequency: Bloomberg reports the phrase has appeared 65 times in Xi’s speeches and meetings so far this year compared with 30 in all of last year.

Meanwhile Zhejiang, known for its thriving economy and robust private sector, will be at the vanguard of the new policy emphasis. A series of guidelines published in June by the State Council, China’s highest governing body, designates Zhejiang as a “pilot zone” for policies to “properly adjust excessively high incomes,” and encourage entrepreneurs to expand philanthropic contributions that “give back” to society.

Xi knows Zhejiang well; he served as the province’s party secretary between 2002 and 2007, just as Alibaba was emerging as a tech powerhouse.

It has been widely reported that policies to be tested in Zhejiang will include new taxes on property, inheritance, and capital gains, as well as expanded public health and welfare benefits. But it seems increasingly clear that the Party also intends to ramp up its anti-corruption campaign in the province. In fact, Hong Kong’s South China Morning Post, owned by Alibaba, says that effort has been underway for months. Of the 25,000 current party cadres and officials in Hangzhou, the Post reports, CCDI investigators will “randomly” select 10% for “further examination.”

More Eastworld news below.

Clay Chandler
clay.chandler@fortune.com

This edition of Eastworld was curated and produced by Eamon Barrett. Reach him at eamon.barrett@fortune.com.

EASTWORLD NEWS

Wooing Asia

President Biden nominated potentially two of the most important ambassadorships for his administration on Monday: Rahm Emanuel for Japan and R. Nicholas Burns for China. The Senate has yet to confirm Burns and Emanuel for their roles. The U.S. is looking to bolster its relations with Japan as ties with China deteriorate. U.S. Vice President Kamala Harris began her short tour of Singapore and Vietnam on Monday with the same ally-building mission in mind. NYT

COVID-zero China

China, once again, brought a COVID cluster to heel by enacting strict lockdowns in cities where clusters of the highly contagious Delta variant broke through. On Monday, China reported zero new local COVID cases, a month after a cluster of cases emerged among airport staff in Nanjing. China insists on a COVID-zero approach, either resisting calls to learn to “live with the virus,” or arguing that sending cities into lockdown every time there's a mild outbreak is a better way to live with the virus. But China's zero COVID strategy has disrupted global business, as local authorities close even international shipping ports to contain the virus. Fortune

DIY Taiwan

Taiwan began rolling out its first domestically-developed COVID vaccine on Monday. The Medigen vaccine has yet to complete Phase 3 trials but regulators have granted the shot emergency use authorization. Only some 3% of the island population is fully vaccinated, as the government struggles to secure supplies from international drugmakers. Bloomberg

Discloser

The SEC is issuing new requirements to Chinese companies listed on U.S. exchanges, according to documents seen by Reuters, that demand Chinese companies disclose risks attached to investing in VIE corporate structures. The VIE structure is necessary for some Chinese firms to sidestep prohibitions on receiving foreign investment and many Chinese companies already disclose that risk. The demands also require Chinese firms to disclose the risk of regulatory interference from Chinese officials, as Beijing tightens data privacy laws. Reuters

Compromise

The SEC’s new rules (above) are the latest salvo in the regulator’s attempts to get Chinese companies to disclose audit documents, which Beijing often prohibits. But on Monday, China regulators hinted they are amenable to a solution. The State Council issued guidelines to boost cross-border accounting cooperation. Bloomberg

MARKETS AND MOVERS

IPO halt — Chinese bourses in Shenzhen and Shanghai have halted IPOs for over 40 local companies while regulators investigate four intermediaries involved in the deals, including a lawyer and a brokerage. The cancelled listings include the semiconductor unit of electric vehicle maker BYD, which had filed to list in Shenzhen. 

Didi brakes — China ride-hailing leader Didi Chuxing has halted plans to expand into the UK and the EU following a regulatory crackdown in Beijing, the Telegraph reports. Beijing’s clampdown came days after Didi raised $4.4 billion in a New York IPO in June. Didi reportedly worries expanding into a foreign market now could bring further unwelcome scrutiny on the company.

Ningbo ships — Ships have resumed docking at a terminal in the port of Ningbo two weeks after authorities closed the terminal following the discovery of a single case of the COVID-19 Delta variant. Ningbo was the second port Chinese authorities closed this summer in response to COVID outbreaks, piling tension on already strained global shipping lines.

Building EVs — China Evergrande, the world’s most indebted real estate developer, tried to offload its electric vehicle division to smartphone maker Xiaomi. Authorities are pressuring Evergrande to resolve its $301 billion debt while Xiaomi has pledged to invest $10 billion in EVs over the next decade. But, Evergrande says, Xiaomi decided not to purchase the group’s EV unit. Evergrande did not say why.

Hong Kong rallies — HKEX, the operator of the Hong Kong bourse, reached an agreement with indices provider MSCI to launch a futures contract based on the MSCI China A50 Connect index. The index tracks stocks traded in Shenzhen and Shanghai that are available to investors in Hong Kong through a stock connect program. The futures will launch on October 18—two years after HKEX first sought regulatory approval for the tie-up.

ReNew Power — One of India’s leading renewable energy producers, ReNew Power, became the first Indian company to raise over $1 billion through a SPAC on Tuesday, merging with Nasdaq-listed RMG Acquisition Corp. The merger create a combined entity worth $8 billion and could pave the way for other Indian companies to venture into the frothy SPAC market.

FINAL FIGURE

$9 million

Myanmar’s economic, political and societal collapse after its February coup might have increased drug trafficking across Southeast Asia as meth makers in Myanmar—one of the world’s largest meth production hubs—face fewer barriers to the illicit trade. Last week, Thai police seized 1,000kg of meth smuggled from Myanmar, with a street value of some $9 million. Seizures—a proxy for production—are higher in 2021 than they have been for years, hinting at an alarming growth in the trade of hard drugs across Southeast Asia.

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