Killing the Goose

By Ichiro Suzuki

China’s President Xi Jinping is becoming muscular every year since he rose to power in 2012, tightening his grip on every part of the world’s second largest economy. To begin with, he did it on sprawling state-owned enterprises (SOEs) that churned out a half of GDP at the time of his ascent to power. For the communist party SOEs play an important function of letting the intention of the party go down to every level of the economy directly associated with the government, in addition to providing jobs to tens of millions of people. Then he intensified surveillance on the internet. The already heavily regulated system prior to Mr. Xi’s ascent became less and less free, as the internet moved to the next stage from simply exchanging emails and visiting websites to the age of social media that enables users to ‘freely’ express their thoughts, exchange ideas and share what they see, hear or read. Most recently, Club House, the newly popular social media platform in the West, is reportedly added to China’s banned list, on top of Google, Facebook, Twitter, etc. In the age of big data proliferation, every citizen’s digital footprint can be easily monitored. Then, Mr. Xi’s penchant for control has moved onto private corporations that have been outside of the reach of Beijing. According to The Center for Strategic and International Studies (CSIS), Washington DC-based think tank, “On September 15, the General Office of the Central Committee of the Chinese Communist Party (CCP) issued the Opinion on Strengthening the United Front Work of the Private Economy in the New Era, calling on the nation’s United Front Work Departments (UFWDs) to increase CCP ideological work and influence in the private sector. . . .. Of important note, the opinion calls for UFWDs to ‘guide’ private enterprises to ‘improve their corporate governance structure and explore the establishment of a modern enterprise system with Chinese characteristics.’ Xi Jinping has used similar language to signal an increased party role in state-owned enterprises (SOEs). “ Here we go. Mr. Xi Jinping never stops. The control freak sees no limit on how far he goes. In the old days when China was opening up its economy to the rest of the world, Vice Premier Deng Xiaoping famously said “It doesn’t matter whether the cat is black or white, as long as it catches the mice.” Mr. Deng was remarkably flexible putting economic development on top of everything else. And it worked.

Now, 20 years into the 21st century, China’s president no longer believes it doesn’t matter whether the cat is black or white. Mr. Xi thinks the cat has to be red. As it turned out, Alibaba founder Jack Ma was not a kind of cat that is in Mr. Xi’s preferred color. Mr. Ma infuriated Mr. Xi by telling what he believed was truth. Since that conference at the beginning of November, Mr. Ma was not seen in public over two months, and his whereabouts was widely speculated. When was seen at last, it was no more than a token appearance. Then, Mr. Ma was found to be left off the list of the country’s top entrepreneurs compiled by China’s state-controlled newspaper. He is purged. This is not something to be expected from country that aspires to be a champion in information technology.

Ironically, speaking in defiance of the CCP, Mr. Ma has accidentally uncovered weak spots in financial regulations. Original regulations on Ant Group as a lender were too lax, and this is why Ant is going to be allowed to go public in the future on more stringent terms. If it went public as originally planned, Ant might have sowed the seeds for a next crisis. If Mr. Ma didn’t speak that way in that conference, potential risks might have gone unnoticed. Since all the entrepreneurs and management people would behave in a manner deemed appropriate according to the communist party, such an episode of accidentally spotting a risk factor might not be heard again. This could be a cost of everyone behaving so well. Worse, an environment everyone listens to the communist party diligently could suppress disruptive changes, as entrepreneurs play it safe so as not to touch the nerve of the party boss, making sure that every step is carefully made. Japanese engineer Soichiro Honda once defied an order of the Ministry of International Trade and Industry not to enter automobiles by expanding his motorcycle company. He just did it making Honda Motor a wildly successful car maker, especially outside of the country. (And Mr. Honda didn’t have to go into hiding by proving bureaucrats wrong.) There are always rebels who make it while politicians and bureaucrats do not always make right calls. Mavericks who challenge authorities could bring real change and progress. Mr. Ma is one of those mavericks, and the communist party has semi-officially shown their lack of affection for those kind of people. A tamed maverick would be less spectacular than what he or she really could be, quite possibly staying away from taking an extra risk. In any case, there is zero empirical evidence that more red tapes and greater compliance costs have enhanced growth and innovation. Most likely, China would still move forward under bureaucratic overreach, growing faster than the rest of the world for the foreseeable future. It would definitely not repeat the plight of the former Soviet Union that sank amid monolithic bureaucracy. Nonetheless, there is a reasonable chance that the People’s Republic could be held down to lower growth and and slower pace of innovation than its full potential. The stock market that underperforms the U.S., despite higher economic growth, might be presenting a symptom of a problem. About the author: Mr. Suzuki is a retired banking executive based on Tokyo, Japan.


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