How China’s Crackdown Economy Is Counterproductive to Growth and Innovation

During my time studying in Changzhou (China), many weekends were spent at bars looking for somewhere to drink. In fact, all of the city’s clubs would be closed. Why? These nightclubs were targeted by police. They would be mostly drug-related, but there would also be other reasons like prostitution. They seem to move in cycles. After the crackdown, things would slow down for a time, then slowly build up again until reaching a climax at which point another crackdown would occur.

Similar to the nightclubs of Changzhou, crackdowns are an important theme in China’s economy.

Today, any search on the Chinese economy will return results that include the term crackdown. It seems that every once in awhile, the Chinese government will crack down on one of the major sectors, certain companies or even individuals. While the reasons might be different, the story remains the same. Sometimes a random company is deemed incompliant by some regulatory agency’s decision. Sometimes, a prominent business person is too vocal and criticizes government. In many cases, a scapegoat may be needed to bring about peace, as the government might be forced to deal with a crisis.

There are many ways to crackdown on illegal activities. One common form is the introduction of new regulations. Another is a stricter enforcement for existing regulations. There is another option, however. Whatever happened Jack Ma. Sometimes, it’s been a good idea for the leaders of the country to let go of their grip on the economy and allow some economic freedom. These relaxations are also influenced by corruption, which is a result of personal interests. I think the libertarian in my mind also believes that sometimes it’s just government incompetence and inability enforce regulations on everyone all the time.

China was once the world leader in crypto mining. The Chinese government pledged to end mining operations and trade in China by May 2021. This was illegal from a regulatory standpoint since 2019. Soon enough, videos of hundreds of processors being destroyed—some using road rollers—were released. Data from the Bitcoin Electricity Consumption Index It tracks IP addresses of miners-facility operators connecting to the servers of Bitcoin mining “pools” shows that China’s mining operations hash rate went from 75.73 percent on September 19 to 21.11 percent as of January 22. Similar crackdowns are ongoing since 2013. The case was made for cryptocurrency as a means of protecting the stability of China’s economic growth, but with the growing state surveillance on transactions, the crackdown seems to be caused by the growing fear of the government and the central bank losing their grip on monetary sovereignty.

This was the first time that the Beijing-based regulators and the central bank had joined forces to ban all crypto activity. This is not something to mess with. Moreover, with the sovereign digital yuan in the advanced pilot stage, cryptocurrencies would be in direct competition–something not preferred by the government.

DiDi, the Uber-like app, fell under the regulators’ radar when it tried to list its shares at the NYSE and most likely did not have the blessing of Beijing bureaucrats. The app had 500 million users at that time, more than its US counterpart. This seems to have upset government officials who sent their regulatory force against it. The accusations began to surface, such as the assertion that DiDi had violated personal information rules. These allegations were sufficient to ban the app from all China’s mobile app stores. The regulations were in place for some time and the government decided to crack down. The stock of DiDi fell by more than 20%. Nearly all the biggest Chinese tech companies followed this path, listing in America or Hong Kong. There are many startups who are still trying to follow in the footsteps of the giants and list their shares on foreign Stock Exchanges. Companies now have to be concerned about following the DiDi path.

This is the path that Jack Ma, the famous Chinese entrepreneur, took. Once he mildly criticized China’s financial sector, he seems to have lost more than anyone. Ma was a former English teacher who led the tech boom that forever transformed China’s economic sphere and built an incredible empire. Alibaba Group began as a B2B marketplace and expanded later to include many other areas. His story inspired a whole generation of Chinese entrepreneurs. Alibaba includes e-commerce, technology, and online payment companies, the most important of which is The Ant Group, owning AliPay, the world’s largest payment platform, which serves more than 1.3 billion users and 80 million merchants with total payment volume (TPV) reaching ¥118 trillion RMB in June 2020.

Ma was planning for Ant Group’s stock exchange flotation in a $37 billion IPO. It would have been the biggest ever. But on October 24, 2020, weeks before the listing, Ma gave a now-infamous speech at the Bund Finance Summit in Shanghai in which he compared China’s state-owned banks to pawn shops and blamed Chinese regulators for stifling innovation.

“The game in the future is about innovation, not just regulatory skills,” Ma, a vocal opponent of government intervention. On November 3, about a week after his speech, Chinese regulators suspended Ant’s IPO. The company was penalized $2.78 billion and required to undergo a restructuring plan. Ma was forced to resign.

The speech cannot be ruled out as the reason for all this. It’s possible the time had simply come for Ma’s ever-growing influence in China to diminish. However, we know that the Chinese government will not permit any person to hold such a high level of power. In the past years, many of China’s top tech chiefs have been stepping down from their leadership roles amid Beijing’s sweeping crackdown on the sector.

These crackdowns can have a variety of effects, from being unable to access your favorite pub to causing billions of dollars to be wiped out. The state of uncertainty in China’s private sector and entrepreneurs is most alarming. Jack Ma’s era is over. What is happening in China right now could close all doors to innovation. China’s question in the West is growing and will likely dominate all geo-political and economic discussions.

Peter Robinson sums it up in A recent interview Peter Thiel says America cannot out-manufacture China. America also cannot outspend China. Only way to beat it is to innovate. This is an accurate assessment, even though China has four-times the population of its main competitor and will most likely have a large GDP within the next few years. All indicators suggest that China will be the leader of the 21st century. But, in order to be the leader of the technological era a country needs to be an innovator in technology. China has copied the West in every positive step, but smartly avoided the negative ones.

What happens when there are no copies? China will continue to stagnate both technologically and economically.

China’s future is not bright for Chinese entrepreneurs and China with its crackdown cycle.

However, even if the Asian giant abandons this approach, there is every chance for a rebound. Silicon Valley is the epicenter of wokeism. Despite all the failures in California’s politics, entrepreneurial spirit seems to shine brightly.