Chinese tech entrepreneur Jack Ma hasn’t been seen in public for a couple of months, apparently, and it’s equally uncertain what this is telling us about China and the regulation of Ma’s internet behemoths, Alibaba and Ant.
In December 2020, China cracked down on Alibaba’s business practices, having blocked the stock market flotation of Ant Group in October. This riddle wrapped in an enigma comes in three flavours of worry. Something, certainly, is changing in the government attitude to those large companies, but exactly what it is can only be surmised, not proven as yet.
One possibility is simply that the Chinese authorities are doing exactly as we in the West are at present. The irruption of the internet – especially online shopping – was perhaps best allowed to happen without worrying overmuch about antitrust and competition worries. In its early days the sector was so small, and in the mid-stages there was so much capital available to potential challengers, that it just wasn’t an important issue.
With the maturing of the sector, even if there’s still a lot more physical-world retail for it to eat, then this is righteously something to worry about. So, looking at Alibaba is similar to the current looks at Google and Facebook taking place in the EU and US.
It’s also possible to be more cynical about this, and just note that no one goes into politics to leave an important sector of the economy alone, so maturity brings political examination in its wake. But even then it’s true that Alibaba has policies that we would look askance at – demands for exclusivity, the use of only the one online shopping portal, for example, which would not be allowed in the West.
A second possibility is that this is just politics. Ma has been notably outspoken recently, insisting at a conference that the regulatory system was “stifling growth”. This might not be wise in a system that is still notably centrally run.
The Communist Party does, after all, insist that it is the guiding light of the society, deriving its legitimacy from said insistence. To say that they’re getting it all wrong – even, as some intimate, that Jack Ma might be a better guide – could be the cause of a putting someone back in their place.
There is a third and more worrisome, for China as a whole, possibility here. As with the hammer and nail story – to anyone economically minded, everything looks like an economic story – yet there is a deeper point to be made. It’s about “financial repression”.
As we know, the internet disintermediates around blocks, chokepoints and intermediaries in an economy or market. This is one of its great joys to most of us. This is less joyful to those interested in retaining some of those forcing points.
One such is this idea of financial repression. This can have wider meanings – insisting that Britons did not invest abroad was a way, post WWII, of pressuring them into doing so at home. China does this still – permission is required to move capital out of the country – something that aids in explaining the interest in bitcoin there, since it’s a useful manner of tunnelling funds out. But the system is more, in the economic sense, repressive than this.
Savings options are extremely limited for Chinese citizens. The stock markets exist but they’re still very Wild East, to be as polite as possible about them. In terms of savings, rather than gambling, until recently the only game in town was the state-owned banks. This was deliberate too. There’s little in the way of a state pension or healthcare system – although both are getting better – so savings as a portion of national income are huge. Currently it’s 23% of all income and that’s down, significantly, in recent years. By comparison the UK, pre-Covid times, was 7%.
This flood of cash really only has one home – those Chinese state banks, which take significant advantage by offering deposit rates of perhaps 1.5% when inflation is 3%. This enables them to feed cheap loans into state-owned companies which then go on to, largely, waste that money.
This is what is meant by financial repression. Options are deliberately limited to reduce the cost of capital to those state-owned industries. This is not a mistake, it’s a plan, one that has its attractions in a system that insists on the primacy of state-led activity in economic development.
More market-minded economic types tend to concentrate upon the waste and insist that market prices for savings are a necessary adjunct to further economic development. There’s even a way to argue that higher returns to savers will lead to less being saved.
The point about Jack Ma, though, is that his Ant Financial offers exactly those market-priced “wealth management” tools. Money market funds, peer-to-peer loans into the private sector and so on.
These probably are good things, except if you’re a Communist Party running a system of financial repression to feed investment in state-owned industry. And this is what that third explanation for the current crackdown could be. Ant is being successful in breaching the current restrictions on savers, therefore it must be curbed.
Disrupting the system
One buttress to this argument is that this is what the Central Bank is actually saying: Ant would have to “return to its origins” as a payment services provider and “rectify” many of its fastest-growing and most lucrative consumer credit and wealth management operations.
Or, as we might put it, stop raising the cost of funding for the state-owned companies. Even, stop undermining the financial repression upon which the system works, for that internet disintermediation works too well.
None of this tells us when we’re going to see Jack Ma again nor which of the reasons for the renewed regulatory interest is paramount. But it might not be that he’s a monopolistic capitalist, nor a too bumptious one, but just that he’s a good one. Disrupting the old system, innovating, to the benefit of his customers.