China's Regulatory Storm: Individually, many of the rules make sense. But taken together, it's a clear expansion of the government and Communist Party.

"China's authorities attracted the world's attention during 2021 with a series of abrupt and unanticipated regulatory and policy changes. With several strokes of the pen, regulators wiped out hundred of billions of dollars of equity value, and imposed new and more restrictive regulations on a range of sectors, from internet finance to education.

The reality is that many of the Chinese actions have a reasonable regulatory rationale, and can be easily defended on an individual basis. But taking a broader view, there is no question that the latest government actions represent a substantial expansion of the power of the government and the Chinese Communist Party. Every company that operates in China -- including foreign companies -- will from now on have to figure out what President Xi Jinping and the party want, and be prepared to respond nimbly. This new hyperpoliticized reality is likely to do long-term damage to the performance of the Chinese economy and certainly poses new risks to investors and business operators.

Let's take a closer look at some of the new regulations, which not only were plausible, but also, at least in terms of timing, put China ahead of the world. For example, a series of restrictions have been placed on China's internet giants' use of data and monopolistic practices. Internet companies face strict new limitations on their ability to exploit data gathered from their myriad commercial activities in other kinds of business, including finance.

National data security has been intensified as well, which will almost certainly lead to the delisting of Chinese companies from U.S. stock exchanges since U.S. regulators are requiring more access to Chinese data by auditors, while Chinese regulators are now permitting less access. These measures are controversial, but they also directly tackle issues that developed countries, including the U.S., recognize, but have so far failed to act on.

Moreover, Chinese actions address real issues in the Chinese domestic economy. Chinese internet giants have practiced exclusionary practices even worse than U.S. internet giants; and internet financial services were expanding rapidly into financial gray areas with only the flimsiest of regulatory covers. Chinese policy makers can thus be seen to be addressing their own problems, while also stepping forward as a supplier to the world of regulatory standards, an alternative to the U.S. and the European Union.

If the measures China was proposing stopped here, it would be reasonable to treat them as a new and expansive regulatory regime. But they don't. President Xi also has proposed a whole host of new political objectives, the pursuit of which involves substantial expansion of the power of the government and the Chinese Communist Party.

New targets immediately relevant to business include technology self-reliance, data security, de-risking the housing market, and getting on a path to carbon neutrality. But other broad new goals will quickly affect business as well. Consider the order de-licensing tutoring companies and requiring them to re-register as nonprofit organizations. This wasn't for any business reason. It was because President Xi was growing concerned that excessive costs and stress were discouraging Chinese families from having more children.

While new objectives have surged in importance, they have not displaced the overarching goal to which China has been dedicated for a decade: building a world-beating high-tech industrial base. China has already poured hundreds of billions of dollars into industries embodying the technological revolution trinity of data, artificial intelligence and high-speed telecommunications. China has been gambling that total commitment to these new general-purpose technologies will power it on a path to global leadership.

China's commitment to these high-tech goals has not wavered an iota, but the new policy measures have definitely muddied the waters. A couple of years ago, private businesses knew what the state wanted from them: push high tech and be part of the China team. But now the state is demanding allegiance to a much broader, diverse -- and constantly changing -- set of objectives. No private business can afford to ignore them, especially since the state has demonstrated its willingness to be capricious and abrupt.

The "summer storm," in other words, wasn't just a regulatory storm. Instead, it represented a major expansion of the Chinese state's reach, which was -- to put it mildly -- already considerable. While almost everyone can find something they like among the new regulations, it would be foolish to miss the big picture: The Chinese Communist Party is now asserting its right to directly steer behavior in virtually unlimited swaths of Chinese society.

Moreover, nearly all these measures have a direct security motivation: data security; financial security; technological security; supply-chain security; biosecurity. And ideological security. All of the limitations on information implied by the summer's changes lead directly to tighter control by the Communist Party of ideology and culture. China, at a minimum, is hunkering down for prolonged divergence from the U.S.-dominated world order, ensuring control over its home base, and seeking the ability to survive long-term tension, hostility or even worse.

To be sure, modern states must legislate over a broad spectrum of policy arenas, and national security is a legitimate concern of every government. However, it is also striking that the expansion of the scope of Chinese state power in 2021 has often occurred without appropriate and reasonably effective policy instruments. For example, Mr. Xi has also decreed a push for "common prosperity." Serious moves to lessen China's yawning income gaps would require major changes in tax and social-security policy, which do almost nothing to ameliorate inequality in China today. Such policy changes would be effective, and would imply modest costs for business, which could adapt easily to long-term tax reforms.

But Chinese policy makers have declined to push for major tax reforms, and instead have instituted a vague program of "tertiary distribution," which in practice means coercing businesses to raise their "voluntary" charitable donations. Companies in China -- foreign and domestic -- have had to scramble to initiate and expand programs of social giving. Nobody can afford to be caught out with nothing.

The proliferation of state goals and lack of effective instruments has created a fundamental new reality within China. Every business in China finds itself looking over its shoulder to comply with, or even to anticipate, the changing goals of the supreme authorities. As for state-owned enterprises, they no longer have to worry much about their ability to compete with private companies: They can always claim that their losses were due to their outsize contributions to other government goals.

Real regulatory changes rely on evenhanded and nondiscriminatory rules. By this standard, it is obvious that China's summer storm wasn't just a regulatory storm, but something bigger. The winds are still blowing, and citizens -- and investors -- should brace themselves for more." [1]

 

1. Year in Review (A Special Report): China --- China's Regulatory Storm: Individually, many of the rules make sense. But taken together, it's a clear expansion of the government and Communist Party.
Naughton, Barry. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 16 Dec 2021: R.8.