Chinese tech giants generate billions, but have stifled small businesses

Delivery people wait for the light to turn green at a major intersection in Beijing on July 30, 2021.

Evelyne Cheng | CNBC

BEIJING – Investors in Chinese companies have been caught off guard this summer by Beijing’s actions against local tech giants, including comments on overseas listed stocks.

One of the surprises was a mandate in late July that Chinese education companies should restructure and withdraw foreign investment. A separate order early last month called on app stores to remove Chinese rideshare app Didi – just days after its massive New York IPO.

Didi shares have fallen more than 30% since listing. The KraneShares CSI China Internet ETF (KWEB), whose main holdings include US-listed stocks Alibaba and, has fallen 29% in the past 60 trading days.

“It is probably important, especially for international investors, to note that there is a significant and profound change in philosophical thinking on economic policy, which is more important in the Chinese economy,” Zhu Ning said. , professor of finance and vice-dean at the Shanghai Advanced Institute. finances. “Foreign investors need to understand and (prepare for).”

It may seem that Internet platforms give us more opportunities, but it also places more financial burdens on us.

restaurateur in Beijing

In a “very big change,” Zhu pointed out the policy of the Chinese Communist Party commit to ensuring “common prosperity” – moderate wealth for all, unlike the country’s growing income inequality. This contrasts with ensuring that at least some “get rich first,” Zhu said.

Anger against big tech companies

Efforts to fulfill this commitment have accelerated over the past 12 months.

The Chinese government protected Alibaba from foreign competition for years, until the company became so important under its founder Jack Ma that authorities abruptly suspended the massive IPO of its subsidiary Ant Group in November and fined Alibaba 18.23 billion yuan in April.

Resentment towards tech companies is also growing in China, especially from small businesses that feel strangled by digital behemoths.

“It may seem that the Internet platforms are giving us more opportunities, but it also places more financial burdens on us,” said a restaurant owner in Beijing who requested anonymity for fear of retaliation from food services. food delivery online. CNBC translated his remarks into Mandarin.

She initially listed her restaurant on Meituan – China’s dominant food delivery platform – in early 2019 and paid an 18% commission. She said Meituan’s staff told her that since this was the lowest rate available on the site, she could not register with other food delivery sites.

When the pandemic cut income for in-store diners, she listed her restaurant on Alibaba’s food delivery platform. This prompted angry calls from Meituan staff, who said she would have to pay a 25% higher commission fee if she did not opt ​​out of She decided to leave Meituan.

Growing reviews

At the end of July, the Chinese competition regulator ordered food delivery platforms to pay workers the local minimum wage. Earlier this month, the State Council – China’s highest executive body – decided to remove restrictions on the country’s 200 million concert economy workers possibility of accessing health insurance and local pension schemes.

The policy changes come as China’s news media – which itself is heavily influenced by the government – has become more critical of Chinese tech companies and their culture of overwork.

Earlier this year, two employees of e-commerce giant Pinduoduo reportedly died as a result of overworking. The company confirmed one death in an online statement, while a representative was not immediately available to comment on the other death at the time of publication.

This summer, short film companies Kuaishou and then TikTok’s parent company ByteDance reportedly ended a policy of requiring employees to work regularly on weekends.

If all these dailies (needs) are all controlled by one or two companies, how can we have bargaining power?

Yang guang

convenience store operator

China’s anti-monopoly regulations are a good thing, said Yang Guang, who operates a convenience store in a Beijing apartment complex with his wife.

“If all of these day-to-day (needs) are all controlled by one or two companies, how can we have bargaining power? Yang asked, in Mandarin, according to a CNBC translation. He said he didn’t want to list his store on delivery platforms like Meituan or because they would want around 15-25% commission fees.

Instead, he and his wife deliver their purchases to nearby customers on their own, communicating with them through the WeChat messaging app.

Small businesses in difficulty

There are about 139 million small businesses in China, according to an official count. Small businesses are often brought up at government meetings that discuss their operating difficulties and Beijing’s efforts to help them.

But small businesses surveyed for Official index of purchasing managers in July revealed worsening conditions for a second consecutive month, while large companies reported modest growth.

The latest regulatory crackdown focused on limiting monopoly practices, increasing data protection and even encouraging more births.

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The authorities “are trying to solve the problem of income inequality” in a year when they have a rare opportunity to tackle long-term problems without having to worry much about growth, said Zhiwei Zhang, economist in chief at Pinpoint Asset Management.

Officials have set a GDP growth target of more than 6% for this year, which is relatively low compared to the 8% or 8.5% growth many economists predict for China.

“That window, at some point, probably won’t always be open… The intensity of these policies has therefore been surprisingly high,” Zhang said.

While he said it would be helpful if the authorities communicated more support for foreign investment and private entrepreneurs in general, Zhang noted that the latest crackdown has targeted sectors such as education “which the general public is concerned with. has complained in the past ”.

New direction for start-ups

Chinese education stocks listed in the United States plunged to double digits in a single day last month after a new policy forced after-school tutoring companies to become nonprofits and prohibits investment of foreign capital.

Hongye Wang, a partner at China-based venture capital firm Antler, said tutoring companies often take advantage of Chinese parents’ willingness to pay for whatever is needed to give their children a good education.

This meant that for two years, investors like him could earn a five-fold return on education companies regardless of the economic environment, Wang said.

The aim of the new government policy is to reduce the costs of education, especially for the poorest people living in rural areas, Wang said. He added that the state would likely also want to improve people’s access to medical care.

Beijing’s scrutiny of major Chinese tech companies comes as U.S. investors and financial regulators grow concerned about the regulatory risk associated with investing in China. In late July, the chairman of the United States Securities and Exchange Commission, Gary Gensler, announced that Chinese companies should reveal whether Beijing refused them listing on the US stock exchanges.

For Chinese start-ups, perceived uncertainty about their ability to go public could limit their ability to raise capital, said Nick Xiao, vice president of Hong Kong-based asset manager Hywin. “In this context, Chinese start-ups are likely to want to clarify why their business model is scalable in a resilient way and how it creates real value – both business and societal. “

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