Excellent MOA on China crackdown on big tech
Posted by MikeD on July 30, 2021, 9:59 am
China Cracks Down On Tech - Its People Benefit |
Back when Stephen S. Roach was Morgan Stanley's chief economist Moon of Alabama often quoted from his columns. Fifteen years ago Roach spoke out against globalization and emphasized the need of labor power. His takes stood in stark contrast to the conventional wisdom of that time. Roach retired from Morgan Stanley around 2011 and has since been a senior lecturer at the Yale School of Management.
While I had not read Roach for some time I today stumbled over a column of his which I find astonishingly wrong and badly argued.
Roach writes about China's recent clamp down on fin-tech, internet monopolies and private education companies:
China’s regulation of its spirited tech sector could be a tipping point for the economy
The subtitle is a good summary of the column:
There are legitimate reasons for China’s anti-tech campaign, but when the full force of regulation is used to strangle the business models and financing capacity of the economy’s most dynamic sector, it weakens confidence and the entrepreneurial spirit
China has recently cracked down and financial consumer services, hail services and private education companies. Alibaba's fintech spin off Ant was prohibited from going public. Didi, the Uber of China, went public in U.S. capital markets even though it been warned not to do so. Its apps were taken down and it will have to pay a severe fine. Other tech companies are also under pressure says Roach:
Moreover, there are signs of a clampdown on many other leading Chinese tech companies, including Tencent (internet conglomerate), Meituan (food delivery), Pinduoduo (e-commerce), Full Truck Alliance (truck-hailing apps Huochebang and Yunmanman), Kanzhun’s Boss Zhipin (recruitment), and online private tutoring companies like TAL Education Group and Gaotu Group. And all of this follows China’s high-profile crackdown on cryptocurrencies.
It is not as if there were a lack of reasons – in some cases, like cryptocurrencies, perfectly legitimate reasons – for China’s anti-tech campaign. Data security is the most oft-cited justification.
This is understandable in one sense, considering the high value the Chinese leadership places on its proprietary claims over big data, the high-octane fuel of its push into artificial intelligence. But it also smacks of hypocrisy in that much of the data has been gathered from the surreptitious gaze of the surveillance state.
The issue, however, is not justification. Actions can always be explained, or rationalised, after the fact. The point is that, for whatever reason, Chinese authorities are now using the full force of regulation to strangle the business models and financing capacity of the economy’s most dynamic sector.
Stephen Roach thinks, wrongly, that it is bad to restrict certain business models and financing through public offerings. But from China's point of view it makes perfect sense. Why should it care how much money foreign investors lose by that:
Beijing is pursuing other goals: reining in the power of its tech titans and boosting startups; protecting social equality; and making sure the cost of living in cities isn’t so high that families aren’t willing to have children. And Beijing is suspicious of companies that are skilled at raising capital overseas—beyond its watchful eye.
Sometimes, China might feel it’s being hijacked by hot foreign money. For example, Beijing wanted to scale down investment in for-profit education as early as 2018, but venture capital kept pouring in. Now the lucrative bet has been called to a halt.
Or consider geopolitical risks. Because of the [variable interest rate corporate] structure, in theory, DiDi, which is incorporated in the Cayman Islands, didn’t need Beijing’s approval to list in New York. But China’s cybersecurity office was concerned enough about DiDi’s data security—such as possible exposures to sensitive government locations—that it suggested the company postpone its IPO. DiDi ignored the warning, and we all know how it’s turning out.
The companies Roach listed are largely monopolies. They often buy up competitors and thereby, like Microsoft does in the U.S., prevent innovation. Moreover Alibaba's Ant tried to be a bank without being regulated as one. It promoted consumer credit and pulled people into debt. The delivery services and hauling services abused their workers. The tutoring companies took extremely high prices and distorted the otherwise equal chances between pupils, the basis of China's meritocracy.
All that is enough reason to strongly regulate them. But what was probably even worse is that the greedy owners of those companies planned to go public in western capital markets. They would thereby fall under foreign regulators and foreign laws. Other countries would probably gain access to the data they collect and use that against China. On top of that foreigners would gain the profits the companies make in China. At a time of a longer conflict between the U.S. and China it is better for Chinese companies to stay at home. If these companies really need more capital to grow they can find enough in China and do not need to go abroad.
Socialism with Chinese characteristics simply does not prioritize speculative capitalism over other values.
Stephen Roach knows that but he dislikes it. He argues that the regulation crack down on those companies diminishes the confidence in China. That is correct with regards to the confidence of 'western' speculators. But Roach argues, without evidence, that the clamp down will also hit the confidence of Chinese consumers who will thereby spend less:
Nor is the assault on tech companies the only example of moves that restrain the private economy. Chinese consumers are also suffering.
Rapid population ageing and inadequate social safety nets for retirement income and health care have perpetuated households’ unwillingness to convert precautionary saving into discretionary spending on items like motor vehicles, furniture, appliances, leisure, entertainment, travel, and the other trappings of more mature consumer societies.
The reason is that China has yet to create a culture of confidence in which its vast population is ready for a transformative shift in saving and consumption patterns.
Confidence among businesses and consumers alike is a critical underpinning of any economy.
But why should a crackdown on abusive conglomerates diminish Chinese consumer confidence. Might it not do the opposite?
Roach does not think so:
Modern China lacks this foundation of trust that underpins animal spirits. But while this has long been an obstacle to Chinese consumerism, now distrust is creeping into the business sector, where the government’s assault on tech companies is antithetical to the creativity, energy and sheer hard work they require to grow and flourish in an intensely competitive environment.
I have frequently raised concerns about the excesses of fear-driven precautionary saving as a major impediment to consumer-led Chinese rebalancing. But the authorities’ recent moves against the tech sector could be a tipping point. Without entrepreneurial energy, the creative juices of China’s New Economy will be sapped, along with hopes for a long-promised surge of indigenous innovation.
Why should people not save for their old age and consume on 'trappings' instead? Why should they take up credit? Why should they accept abusive monopolies and financial speculation?
Roach's argument is disingenuous as he answers none of the above questions.
Others, like Berkshire Hathaway's vice chairman Charlie Munger, are much wiser:
Berkshire Hathaway vice chairman Charlie Munger praised the Chinese government for silencing Alibaba's Jack Ma in a recent interview, adding that he wishes US financial regulators were more like those in China. "Communists did the right thing," Munger, the 97-year-old longtime friend of Warren Buffett, said about the handling of Ma, who criticized officials in Beijing last year for stifling innovation.
Although he would not want "all of the Chinese system" in the US, Munger did say "I certainly would like to have the financial part of it in my own country."
Munger also told CNBC's Becky Quick that while "our own wonderful free enterprise economy is letting all these crazy people go to this gross excess," the Chinese "step in preemptively to stop speculation."
China has decided to live by producing stuff instead of by betting on financial speculation. It does not favor the finance, insurance and real estate (FIRE) sectors which dominate the U.S. economy. Unlike the U.S. China puts socialism before shareholders which in the end increases consumer confidence:
The Hang Seng Tech index, launched with fanfare last July and comprising internet darlings-turned-gargantuan blue chips such as Tencent and Alibaba, has cratered 40% since February to record lows.
Investors have so far responded with alarm that tipped on Tuesday towards panic. They dumped health stocks in anticipation the sector will be next in the firing line, even as the property and education sectors reel.
Housing, medical and education costs were the “three big mountains” suffocating Chinese families and crowding out their consumption, said Yuan Yuwei, a fund manager at Olympus Hedge Fund Investments, who had shorted developers and education firms.
“This is the most forceful reform I’ve seen over many years, and the most populist one,” Yuan said. ”It benefits the masses at the cost of the richest and the elite groups.”
With the crackdown on the big tech companies smaller ones will have a chance to grow. Workers will get better wages. Consumers will no longer have to spend on much too expensive services.
Now what are the real reasons why you think that is bad, Mr. Roach?
Posted by b on July 29, 2021 a