Alvaro Martin // 16 December 2021

The Chinese real estate giant Evergrande has been a popular topic of conversation in recent weeks. It is not only the company’s liabilities of more than 300 billion dollars that make this case relevant, but also its weight in the Chinese real estate sector, which already accounts for 30% of China’s GDP. Many analysts have assessed how Evergrande’s situation will affect Europe or the United States, or whether it will mark a turning point in the unparalleled economic growth of the Chinese economy. However, many of these analyses miss a fundamental point, which is to forget or neglect the other risks and dangers currently facing China’s economy.

For some time now, the Chinese government has been engaged in a regulatory battle with the country’s technology giants. It is trying to avoid an excessive accumulation of power, mainly because of the consequent loss of effective power that such a situation would mean for Xi Jinping’s government.

The innovation, dynamism and growth driven by China’s major technology companies are a fundamental and basic piece of the puzzle of the digital revolution. These companies have expanded at rates unparalleled in the current century, triggering the flow of foreign capital into the Chinese economy and providing robustness to the private sector. It is this situation that has caused Xi Jinping to fear that the expansion of Alibaba, Didi, and Tencent could act as a counterweight to the power of the Chinese executive on certain occasions.

The dominance of these technological giants stems mainly from their control over the data of millions of people, converted into economic and social power. The Chinese Communist Party’s fears have led the Chinese government to toughen its behaviour towards these companies in recent months, imposing greater regulatory pressure on them. For example, in July, the Chinese government proceeded to remove the Didi app (a ride-sharing app) from all mobile app stores in the country, depriving 377 million users of access to its services. The value of the company’s assets decreased more than 20%, a significant drop for the technology sector.

There are many similar cases, starting with Alibaba, which the government forced to downsize by blocking the IPO of one of its financial subsidiaries, Ant Group. In addition, the Chinese government is very concerned about the enormous power that some of these companies exercise over the media. Alibaba, for example, was forced to get rid of any hint of participation in the media market. It was forced to sell the South China Morning Post, one of the most important newspapers in the country, which had published some criticisms of decisions made by the government.

These actions by regulators and the government do not stem from a natural concern to maintain certain levels of competition in the market – i.e., measures to prevent the formation of large oligopolies. Rather, the concern stems from the effect that the formation of such monopolies may have on the prevailing power relations in the country. The problem with the government’s new attitude towards its technology companies is the paralysis of the growth of many of these companies could have on innovation and aggregate growth. These companies, at least so far, have shown a dynamism in terms of innovation and technological progress that is unparalleled in Europe and almost unparalleled in the United States. Thus, by shifting from supporting and protecting them to attacking them to reduce their power, the Chinese government may be jeopardising some of the country’s growth potential and its relevance in certain sectors on a global scale.

In fact, many international investors have seen the latest moves of the Chinese government (together with the Evergrande crisis) as a disincentive to invest due to the increasingly hostile atmosphere for private activity, which has been growing strongly over the last decades. The situation described above is not just a wild thought but is perfectly backed up by data. According to data from the People’s Bank of China itself, the volume of loans to private SMEs grew by 6.7% in 2019, while the volume of loans to wholly state-owned enterprises grew by around 14% annually. What this situation shows is a very clear intention of the Chinese government: to try to gain economic and social power by driving growth through large wholly state-owned enterprises, concentrating most economic power in the hands of the Communist Party.

A clear trend over the last few years in China demonstrates that fully state-owned enterprises have significantly lagged behind private ones in terms of innovation, development, and domestic growth, with many of the latter expanding into other countries and continents. The latest moves are therefore a very strong and dangerous gamble on the Chinese government’s part, as they risk losing the high dynamism of one of its leading sectors, with the significant collateral effects this could have on experimentation and innovation and its consequent aggregate effect on economic growth and the current geopolitical tussle.

We will therefore have to pay close attention to the possible restructuring of the Asian giant’s productive fabric in the coming years, paying special attention to how this might affect the development of its productivity and, consequently, its growth rate. Let us remember that one of the pillars on which the stability of the Chinese political system is based is the constant rise in the country’s standard of living. If economic growth were to slow abruptly it could lead to significant political instabilities. We shall see.

This article was originally published on Civismo’s blog. The article was translated by Andrea Vilaplana.