Foreign investors could be forgiven bewilderment at the range of explanations being put forward for the current wave of crackdowns on private businesses in China. Fortunately, most analysis appears to be coalescing into two schools of thought. They contend that what is happening is either the manifestation of Machiavellian intrigue at the top of the Party, or a simpler case of well-crafted bureaucratic actions poorly communicated.
Superior analyses combine the two approaches to suggest that the crackdowns might actually be necessary and could indeed be better presented, but they would not be happening unless they also strengthened the hand of President Xi Jinping against opponents of his agenda – and his drive for a third term.
Better yet would be to step back from the fray and consider bigger, longer-term forces shaping the current bureaucratic and political imperatives.
The school focused on Party politics is easier to believe, but harder to support. Built mostly by academics and journalists, it posits that the Education Ministry took a cane to after-school tutors because Higher-Ups wanted to get a better grip on the minds of children, and that the State Administration for Market Regulation cracked down on the tech giants because some Bigger Bosses had grown worried about certain billionaires becoming too rich to restrain rather than too big to fail. Such thinking also holds that the Party swooped on these sectors now because the President needed to throw some scalps at the feet of his challengers this past week on the beaches of Beidaihe.
The difficulty with accepting this analysis is that anyone not named Henry Kissinger would struggle to provide hard evidence to back their hunches at the moment. It requires reading tea leaves that are being jumbled all the time. The smartest American scholars would be the first to admit how much tougher that has become since Xi came to power, as this report from the National Committee on US-China Relations outlines.
The same goes for other, better paid masters of corporate intelligence, whose predictive capabilities have also dimmed in recent years. A prime example comes from a McKinsey podcast produced back in March, in which the consultancy’s best minds can be heard relishing the money to be made in China’s private education sector.
The CIA, meanwhile, has only just decided to create a special China Unit, as this report says. Langley might not be the best source of intelligence leaks for western media in the meantime.
This is not to say that output from the political school is worthless. On the contrary, it is essential. It is just that it would be risky to take it without giving some benefit of the doubt to the accused.
The second way of looking at current events in China, as being driven purely by a bureaucracy inexperienced at conveying its objectives to Western observers, is also plausible but even more challenging to accept on its own. The SCMP’s Wang Xiangwei and private-equity star Shan Weijian are two of the most outspoken of this school, but there are many others pushing similar lines on LinkedIn.
There is nothing wrong with their basic thrust. These rectification campaigns have a lot of good, logical objectives that have not been properly explained to the international investment community, which has resulted in a haze of misunderstanding. Corporate PR is not a subject taught by the Central Party School. Top-down directives are usually not rolled out with the expectation of fielding questions from disgruntled foreign investors. They should be.
The weakness of this argument is that it cannot explain why private school owners are being asked to hand over their keys to local cadres. That is not a communication problem. It is a policy problem with implications that investors are justified fearing, no matter how well the rationale is explained. Neither does this school help foreigners to understand why a new document aiming to ground all crackdowns in a bigger drive to strengthen the rule of law has a key paragraph stating that its objective is “strengthening the Party’s leadership” over the rule of law.
Combining elements of the two schools provides a more holistic narrative. Xi’s campaign for a third term is probably adding zeal to the current regulatory mission. It is striking how many people humbled in the crackdown might have previously been deemed untouchable because of connections to powerful rivals of the president. Yet the meticulous detail of the instructions being handed down in the campaigns, especially the new directive on strengthening the rule of law, similarly leave little doubt that this has all been a long time in the making and that it is defensible as a well-planned effort to improve China’s governance. Recent events have simply allowed Xi’s ambitions to align with the bureaucracy’s to-do list.
Still, a key question nags: If the politics of Party leadership succession is driving the scope and timing of well-planned regulatory campaigns, what is driving the politics? It cannot be only the desire of one man, or his faction, to shape history. There must be larger forces at work.
Some clues as to what these forces might be emerged from media reports this week. They point to a worrisome bending of the country’s socio-economic development curve back toward a historically conservative mean.
Chief of these is the way the country’s top virologist was shouted down for suggesting it might be time to learn how to live with the virus. The president himself took a break from his sun bed to weigh in, ending any momentary speculation over whether containing the Delta outbreak was a scientific or political priority. Trust people to do the right thing and be careful with social distancing and mask-wearing? Surrender the thought.
Another clue came from crackdowns on the country’s drinking culture, the music played at karaoke clubs, and the general sphere of “inappropriate online content”. A patriarchal, paternalistic snowball is gathering speed, it seems.
Combined with the rule of law document, these actions are hard to interpret as anything but harbingers of a bigger socio-economic shift, the potential consequences of which are more important to understand than who will sit in the next Politburo, or why the tech sector is being cleansed of monopolists, or how the after-school tutoring industry is being de-privatised. China appears to be going back to the basics of Legalism and Confucianism.
There is not enough space here to get into detailed explanations of what these are. Suffice to say that one stipulates how members of society must act, the other how they should act, and they have traditionally been argued in opposition to each other. The Party seems to want to use Confucianism to underpin its definition of Legalism.
It would probably be fair to say that neither the pre-1978 nor post-1978 periods of Party rule had much of either. Mao’s era was Rule by Man, while Deng’s was Rule by Whatever Works. Morality was less of a consideration in policymaking than trying out radical new ideas to see what could move the needle, and laws were mostly written up after trials had proved to be effective. If China now is to start putting principle strictly before pragmatism again, as it has so many times in its long and ancient history, it raises concerns about what this portends for the business environment foreign investors have grown accustomed to.
Observers such as former SCMP staffer Cary Huang might whoop at this (if they are reading) and rightly claim to have predicted years ago this would happen. Back in 2014, when he was parsing the new President’s speeches and observing his behavior, he saw the signs. But this is clearly not just Xi’s personal preferences playing out here. There must be a broad consensus already built at the top of the Party.
Will more evidence of this conservative morality snowball keep rolling out in the coming week, almost as if to show how much of a non-event Beidaihe has become? Or will there be a pushback by market-oriented forces which have seen their interests reduced by a trillion or so in the past two weeks?
Investors had best be watching and listening carefully. Now is probably not the time to be shifting into sectors that might be the next big thing, as Blackstone and Warburg Pincus did this week in deciding to dive into rental property markets across the country. Now is the time to think like Jeremy Irons’ character in the classic movie, Margin Call, and try to judge if the music has stopped. All other considerations should be secondary.