Chinese tech shares slipped to start the new week, as the latest news from Beijing’s regulatory crackdown and accompanying societal overhaul weighed on the heavyweights.
Late last week, The Ministry of Human Resources and Social Security ordered platform operators to conduct reviews of working conditions for gig economy workers whose rights must be ensured and whose safety must be guaranteed. The statement followed a meeting between multiple regulators and at least 10 platforms, including Meituan, Alibaba, Didi and Tencent. Those companies are expected to become leaders in the broader push to create a more equitable distribution of income across the country.
It didn’t help that Fitch downgraded Meituan one notch to BBB-. “The downgrade reflects the greater regulatory uncertainty facing Meituan, which increases volatility in its profitability and investments,” Fitch said, adding that “regulations enforcing delivery-rider benefits [may] pressure the operational efficiency and margin of Meituan’s food-delivery operation.”
Meituan fell 4.5% Monday, as investors digested both the gig worker decree and the Fitch news. They’ve moved 4% or more in four of the last five sessions (figure below).
Alibaba, meanwhile, put in a similarly poor showing following reports that Beijing intends to break up Alipay. The shares were down more than 6% at one point in Hong Kong.
Also Monday, PBoC policy committee member Cai Fang told the Securities Times that tech companies’ expansion plans should be controlled by the government. “The new technological revolution with more prominent properties of increasing returns will inevitably produce an unprecedented tendency toward monopoly,” Cai said, deriding what he called a “winner takes all” environment.
Meanwhile, The Ministry of Industry and Information Technology on Monday cautioned Chinese tech titans against banning links to rivals. A spokesman for the ministry said platforms have been “summoned” to yet another meeting, where officials will instruct them (again) to cease and desist from blocking each other’s services.
Bloomberg wrote that “it’s unclear what actions regulators want the big tech firms to take, and by when.” While the specifics may be as yet difficult to discern, the bottom line is that Tencent, Alibaba and ByteDance will open their closed ecosystems or else face the consequences.
The gravity of this (still) isn’t resonating with market participants, mostly because their only frame of reference is democracy and capitalism. Exactly none of this is optional in China. It’s not just that the companies in question are required to comply under threat of fines and draconian regulatory actions. Open defiance is unthinkable because, depending on the circumstances, it could result in consequences that go well beyond threats to the businesses themselves. I won’t elaborate. Because I don’t think I have to.
More broadly, Americans are still in denial about capitalism. It’s exploitative by nature. Crucially, the notion that it works best when markets are totally “open and fair” is a patent falsehood.
The system needs quasi-monopolies to function. Without monopoly profits, the incentive structure falls apart. What do you think a patent is? Why do you think intellectual property is so jealously guarded even when sharing it would clearly benefit society as a whole?
As the PBoC’s Cai put it Monday, the market mechanism “is the mother and breeding ground of monopoly.” He continued: “Market fundamentalism often deliberately downplays the existence and harm of monopolies.”
Of course it does! Because if monopolistic practices and profits are strictly disallowed, the whole thing breaks down.
In a totally free market, buyers could always bargain sellers down to the thinnest of profits. That, in turn, would render the whole game pointless for the capitalists. As Immanuel Wallerstein put it, totally free markets would “remove the basic social underpinning of such a system.”
Little wonder, then, that PBoC advisors are now keen to emphasize that the Chinese government should remove all “obstacles to competition from technological progress and the expansion of enterprises.”
One way to kill “free market” capitalism is simply to make the market totally free.
Minor quibble, but by inferring that Americans are unaware of the dynamic you so succinctly describe I think you have to be specfic. I think a large-ish majority of the working class certainly understand it, as do the policy-makers that buttress these burgeoning monopolies, and the court system that refuses/has refused to pursue action against the really big fish in tech and communications for anti-trust violations, FCC violations, FISA violations (which were de-criminalized post facto – if only marijuana-related charges were so easy to dodge!). How do you think we arrived at such an ugly place, politically? Awareness, without the ability to act – no, I think it is well understood by most of those that struggle under the weight of the thing. It is the top 10% that remains willfully, and blissfully, ignorant.
Thanks for your comment, Mr. G. I own a share of resentment for that top 10%. But the Chinese actions lately and H’s column today remind me of utterances from Biden late last year, some references he made to monopolies and reviewing the anti-trust laws.
Biden is a busy guy, but I wonder to what extent he may still has these questions in his back pocket. Even more, though, I wonder how he would leverage anti-trust law to benefit him politically for 2024. This is obviously a known issue with a broad swath of blue constituents. If I were Joe, I would certainly look closely at the option of confronting our economic Goliaths. Furthermore he could manage the timing and the exercise as a potential winner politically. If he even provided some form of perceived, meaningful impact in regard to the monopoly power by just placing certain business in check, he could symbolically (at the very least) magnify the power of not only the presidency and, more importantly, the law.
And I must say, Amazon and Jeff Bezos would be an absolutely superb Guinea pig.
“Everybody Knows”
Leonard Cohen
The best common man singer since Woody Guthrie
It’s a shame he’s gone. One of my favorites.
There shall be no monopolies in China other than The Party, and it shall be supreme.
The rest of the players, deprived of walled gardens, proprietary customer data, or low cost labor, shall subsist at the zero marginal gross profit line.
The S&P 500 minus the FANGMANs is a sorry chart, trailing even the sclerotic Eurozone and the shambolic LatAm – uninvestable really. Why would global equity investors send capital to such a stock market?
China’s debt is excessive, opaque, and subsists on government support. With the primary source of investable debt – property development – in the “common prosperity” crosshairs, bond investors should fear the experience of their equity counterparts. Why would global bond investors send . . . ?
Perhaps this is the lasting China credit impulse risk: that the price of Xi’s political control is the redirection of foreign capital flows.
“Crucially, the notion that it works best when markets are totally “open and fair” is a patent falsehood.” My dissertation chair and I argued about this point constantly. I’m lucky I managed to graduate. What you say is right on. “One way to kill “free market” capitalism is simply to make the market totally free.”
It used to be fashionable to study something called “industrial organization” in Economics. Michael Porter, the great Harvard strategy maven was a devotee of this subject field. In that sub-discipline we identified four ways of organizing an industry (defined as a group of companies producing products or services that are close substitutes for one another: technology, for example, is NOT an industry). The modes of organization ranged from Monopoly, one firm controlling an industry and able to extract excess profits from its customers; to Oligopoly, a few firms controlling most of an industry (most of the US economy is controlled by large oligopolies in food, autos, industrial goods, defense, etc.); Monopolistic Competition, a bit of a fringe mode; and lastly, Pure Competition. What most people don’t realize is that when an industry is organized as purely competitive, it contains huge numbers of firms which can easily enter and leave and which enjoy little or no sustainable competitive advantage in the market. As a result no one in such industries can actually make what is known as an excess economic profit. Most of the participants in a purely competitive industry make little or no profit above sustenance. Historically, the US economy was built by monopolists who could build and serve huge basic markets and who could, because of their large profits, create the capital base to support the growth necessary to meet consumer and industrial demand. Through innovation many monopolistic industries eventually see new entrants and become oligopolies, a generally self controlled, efficient form of industry organization. Sadly, it’s no longer fashionable to speak of such things and because the US lacks any real form of industrial policy, politics alone will increasingly rule our economy, strictly for the benefit of those in power, most of whom, regardless of part affiliation, are now or soon will become multi-millionaires.
I see it as a great political and economic experiment. A large country in one hemisphere with government controlled by corporations juxtaposed with a large country in the other hemisphere with corporations controlled by the government. It’s very interesting to watch this one play out but difficult to separate facts from propaganda.
Our experiment has been running about 250 years, their country has been running for 5000.
Per Wikipedia: “The earliest known written records of the history of China date from as early as 1250 BC”. That would be 3,271 years back. But they also note that “What is now China was inhabited by Homo erectus more than a million years ago.” and “the Lithic stage (12,340–10,800 BCE) was the earliest period of human occupation in the Americas…”. So, you are right – no comparison. Thanks for enlightening me.