Is China Abandoning Greed-Driven, Unfettered Capitalism?

A few days ago, I had a routine dinner/meeting with my investment advisor. "You made a lot of money on Alibaba; let's sell it," she said, and explained a better place to put the money. I said OK and yesterday, Chinese stocks, Alibaba among them, crashed. I got out with 3 days tp spare. Whew! Chinese stocks led the way down yesterday, but everything turned down... because, wrote CNN Business reporter Anneken Tappe yesterday, American investors turned "uneasy" over Chinese real estate conglomerate Evergrande's debt crisis. "t was the worst performance since May for the S&P and the Nasdaq, while the Dow logged its worst day since July...Evergrande, which is struggling to manage its $300 billion mountain of debt, was supposed to pay the interest on some of its bank loans Monday, according to Bloomberg. The company will also have to pay interest on two of its bonds worth more than $100 million later this week, according to Refinitiv. Shares of Evergrande fell more than 10% in Hong Kong. Why are global investors so worried about something that's happening in the Far East? Everything is connected in the world of financial markets and the massive amount of money borrowed by Chinese companies has long been considered a looming threat to market stability. Now investors fear the exposure that banks might have to Evergrande and companies like it."

Reporting for the Wall Street Journal, Lingling Wei wrote that China claims to be turning away from capitalism and moving back towards Mao-era communism. "Xi Jinping’s campaign against private enterprise, it is increasingly clear, " she wrote, "is far more ambitious than meets the eye. The Chinese President is not just trying to rein in a few big tech and other companies and show who is boss in China. He is trying to roll back China’s decades long evolution toward Western-style capitalism and put the country on a different path entirely, a close examination of Mr. Xi’s writings and his discussions with party officials, and interviews with people involved in policy making, show."

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For most of the 40 years after Deng Xiaoping first unleashed economic reforms in China, Communist Party leaders gave market forces wider room to flourish. That opening helped lift hundreds of millions of people out of poverty and created trillions of dollars in wealth, but also led to rampant corruption and eroded the ideological basis for continued Communist rule.

In Xi’s opinion, private capital now has been allowed to run amok, menacing the party’s legitimacy, officials familiar with his priorities say. The Wall Street Journal examination shows he is trying forcefully to get China back to the vision of Mao Zedong, who saw capitalism as a transitory phase on the road to socialism.

Xi isn’t planning to eradicate market forces, the Journal examination indicates. But he appears to want a state in which the party does more to steer flows of money, sets tighter parameters for entrepreneurs and investors and their ability to make profits, and exercises even more control over the economy than now. In essence, this suggests that he aims to rewrite the rules of business in what could someday be the world’s biggest economy.

“China has entered a new stage of development,” Xi declared in a speech in January. The goal, he said, is to build China into a “modern socialist power.”

Xi’s overhaul has generated more than 100 regulatory actions, government directives and policy changes since late last year, according to a Journal tally, including steps aimed at breaking the market dominance of companies such as e-commerce behemoth Alibaba Group Holding Ltd., conglomerate Tencent Holdings Ltd. and ride-sharing leader Didi Global Inc.

The government’s recent measures to tame housing prices are worsening a cash crunch at China Evergrande Group , a heavily indebted real-estate developer, sending chills across global markets. Beijing is unlikely to bail out Evergrande the way it has rescued many state firms, analysts say, and could further tighten the regulatory screws on other private developers.

Xi has signaled plans to go much further. During a leadership meeting in August, he emphasized a goal of “common prosperity,” which calls for a more equal distribution of wealth. This would be achieved in part through more government intervention in the economy and more steps to get the rich to share the fruits of their success.

An Aug. 29 online commentary circulated by state media called it a “profound revolution” for the country.

“Xi does think he’s moving to a new kind of system that doesn’t exist anywhere in the world,” said Barry Naughton, a China economy expert at the University of California, San Diego. “I call it a government-steered economy.”

A number of countries closely regulate industry, labor and markets, set monetary policy and provide subsidies to help boost their economies. In Xi’s version, the government would have a level of control that would allow it to steer the economy and industry along a path of its choosing, and channel private resources into strengthening state power.

The big risk for China and Xi is that the push winds up suppressing much of the entrepreneurial energy that has powered China’s boom and years of innovation.

For foreign businesses, the campaign likely means more turbulence ahead. Western companies have always had to toe the party line in China, but they are increasingly asked to do more, including sharing personal user data and accepting party members as employees. They could be pressed to sacrifice more profits to help Beijing achieve its goals.

“Supervision over foreign capital will be strengthened,” said a person familiar with the thinking at China’s top markets regulator, “so it won’t be able to obtain ultra-high profits in China through monopoly and capital-market operations.”

The Information Office of the State Council, China’s top government body, didn’t respond to questions for this article.

Before this year, Xi was distrustful of capital, but he had other priorities. Now, having consolidated power, he is putting the whole government behind his plans to make private business serve the state.

A once-in-a-decade leadership transition due for late 2022, when Xi is expected to break the established system of succession to stay in power, provided an impetus to act and show he is doing something big for the people to justify longer rule, officials involved in policy making say.

At internal meetings, some of them say, Xi has talked about the need to differentiate China’s economic system. Western capitalism, in his view, focuses too heavily on the single-minded pursuit of profit and individual wealth, while letting big companies grow too powerful, leading to inequality, social injustice and other threats to social stability.

Early this year, when Facebook and Twitter took down Trump's accounts, Xi saw yet another sign America’s economic system was flawed-- it let big business dictate what a political leader should do or say-- officials familiar with his views said.

A few months later, when the Chinese Communist party celebrated its centenary on July 1, Xi donned a Mao suit and stood behind a podium adorned with a hammer and sickle, pledging to stand for the people. After the speech, he sang along with “The Internationale” broadcast across Tiananmen Square. In China, the song, a feature of the socialist movement since the late 1800s, has long symbolized a declaration of war by the working class on capitalism.

Such gestures, once dismissed as political stagecraft, are being taken more seriously by China watchers as it becomes evident Mr. Xi is more ideologically driven than his immediate predecessors.

The difference between his vision and Western-style capitalism, he has said at internal meetings, is that in China, “Capital serves the people.”

Industries that Xi views as being led astray by a capitalist spirit, including not only tech but also after-school tutoring, digital gaming and entertainment, are bearing the immediate brunt.

A policy aimed at turning private education companies into nonprofit entities all but killed New Oriental Education & Technology Group Inc., which has provided English lessons to generations of students studying abroad. Its shares have plunged about 90% this year.

Founder Yu Minhong, nicknamed “Godfather of English Training” in China, broke into tears during a recent company meeting, according to an employee. “It’s devastating to him, and to all of us,” the employee said.

Xi’s policy changes have dashed more than $1 trillion in stock-market value and erased over $100 billion of wealth for entrepreneurs such as Alibaba founder Jack Ma and Tencent’s Pony Ma. Private companies and their owners are being encouraged to donate profits and wealth to help with Mr. Xi’s common-prosperity goals. Alibaba alone has pledged the equivalent of $15.5 billion.

State-owned companies, having already bulked up under Xi’s rule, are marching into areas that were pioneered by private firms but are increasingly seen as crucial to national security, such as management of digital data.

And no one thinks this is just about Mainland China. Hong Kong is the least-affordable housing market in the world for the 11th consecutive year. Everyone knows Beijing’s newly interventionist stance is going to come down hard on the mechanism-- unfettered, greed-driven capitalism-- that has tripled home prices in the past 15 years. Everyones know that "skyrocketing housing prices are one cause of wealth inequality in the city, where homeownership is lower than in many developed economies. Real estate billionaires in the city of seven million are some of the richest people in the world. State media have seized upon unaffordable home prices as a reason for the 2019 protests. With Beijing getting more assertive in the city, it is unsurprising that more aggressive policies to tackle the issue appear to be in the pipeline. Property tycoons have long been influential under the city’s political system. Deflating the property bubble requires shaking up the city’s political economy and tax policy, however. More than 20% of Hong Kong’s total government revenue in the past five fiscal years came from land sales, twice as much as from income taxes. That is partly how Hong Kong has managed to keep its taxes so low. Hong Kong’s housing market has produced immense wealth for some people. Leaner times," predicted the Wall Street Journal, "could be ahead." Yesterday, stock prices in Hong Kong’s biggest property developers started correcting-- plunging. Shares of billionaire Li Ka-shing’s CK Asset fell 9.3%, while Henderson Land lost 13.2%.

Questions to ponder: Is this the real thing? Or an election ploy? And if it is real, will any other countries-- starting in East Asia-- follow? I wonder what Putin is thinking today-- aside from his massive election victory yesterday.