Wednesday, January 26

China’s financial and technological crackdown is a challenge to Western ideas running through the developing world


China introduced new rules on November 1 restricting the extent to which Internet companies can collect and store user data. Known as the personal information protection law, is said to be among the strictest data protection regimes in the world.

As part of the rules, tech giants must establish external bodies to monitor their data collection, while foreign companies must appoint representatives within China dedicated to compliance. The offending companies risk receiving fines of up to 5% of the turnover.

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These rules are the latest example in China’s annual crackdown on technology and finance. It started with Beijing’s decision in November 2020 to remove the financial giant. Ant Group float, which was expected having been the largest IPO in the world. Billionaire founder and CEO Jack Ma subsequently disappeared from the public eye for three months, And it is still not clear if an initial public offering is made.

Beijing has also gotten tougher on companies, such as DiDi (China’s Uber), whose shares are listing abroad; closing the most famous in China financial bloggers; ban cryptocurrency trading and mining; and introducing new restrictions for entire industries like games. More recently, regulators been pointing that some of the most popular stock trading apps in the country are illegal.

These interventions have consequences not only for Chinese companies but also for the global financial system. China’s financial system is a US $ 45 billion (£ 33 trillion), which boasts the world’s second largest equity and bond market. But when you look closely at the way China runs these markets, you realize that the whole philosophy behind them is very different from that of Western markets. This is helpful in making sense of the crackdown, both why it has happened and how it should look.

Market intervention and China

I am the principal investigator of a new research project known as StateCapFinance, which looks at how emerging economies manage capital markets (ie stocks, bonds, and derivatives). In many cases, these markets are influenced by the state, which means that they operate with a very different logic than the western one.

On western capital markets, the underlying principle is efficiency: investors’ money flows to companies that are considered best, in terms of the prudence with which they are managed, the strength of their business models, their future prospects, etc. This instills market discipline, encouraging everyone to compete as aggressively as possible, or so the argument goes. Capital markets are seen as the epitome of liberal capitalism, with state interference simply serving as a back-up if things go wrong (think 2008).

In state capitalist economies like China, by contrast, capital markets are designed to allow state control and facilitate state goals. For example, the Chinese do not like to see too much speculation in their markets and monitor activity closely to prevent it from spiraling out of control. If the authorities decide that certain traders are too active, they will ask them to cancel operations and may even ban them.

Jack Ma raising his hands
Billionaire Jack Ma is one of the victims of China’s crackdown. Image: Frederick Legrande – COMEO

The state is also careful to restrict international traders, setting limits on how much they can trade, for example. And as Ant Group has shown, authorities are carefully weighing whether the IPOs can go ahead. Decisions may have less to do with a company’s financial capabilities than whether they have political ties or contribute to national development.

As I show in a recent paperThese markets focus on containing financial risk, maintaining social stability, and directing financial activity towards more productive avenues. Everything is geared towards state control and the achievement of national development goals, and here we see the overlap with the recent repression.

Some of Beijing’s interventions, such as controlling financial bloggers or restricting Ant Group, with its peer-to-peer payment system and a wealth of consumer data, are part of the same market management tradition. As finance increasingly permeates Chinese life, authorities use it as a lever to govern economic activity. Meanwhile, other interventions, such as data protection and restriction of games, have to do more broadly with the management of society, but with the same approach of putting the state before the company.

Other emerging economies

Part of our work in the StateCapFinance project is to recognize this Chinese approach as an alternative, and even a challenge to the contemporary global financial order. Interestingly, we see this not only in China but in all emerging markets. In Brazil, Russia, India, South Africa and South Korea, which together with China count for 25% of the global stock market capitalization and 50% of the trading in the global futures markets – States facilitate national control and development in a similar way.

In most of these nations, it is more common for the state to own listed companies and stock exchanges, and private and foreign ownership tends to be more restricted. Speculative trading is much more curbed, while states tend to try to control the price of key commodities by setting rival benchmarks in the west. porcelain has done this with raw materials such as crude oil, iron ore, copper and gold.

At StateCap’s latest research, we place different countries on a continuum, with the neoliberal approach at one extreme and the state capitalist approach at the other. China is the closest to state capitalism, but India is quite a long way in the same direction and, perhaps surprisingly, so is South Korea. On the other hand, Brazil and South Africa are more in favor of the neoliberal approach and, again, contrary to what one might think, also Russia. But to emphasize, this is all relative: Russia’s rules on the extent to which foreign companies can invest in strategically important industries are stricter than in most Western countries, for example.

Seen in this context, China’s regulatory crackdown is essentially a state management exercise in which the authorities aim to establish greater control over what they perceive as large and unproductive economic sectors that should facilitate national development goals. Whether these interventions are progress is debatable, of course, but it helps to understand the fundamentally different philosophy behind them.

I leave you with two final observations. Wall Street is still aggressively venturing into China. In 2020 alone, global investors funneled more than RMB 1 trillion (£ 115 billion) into their capital markets, while global financial players have been fighting for increase its operations in China. And while the West worries about the power of its own tech companies within a system that is designed to give them as much leeway as possible, it is perhaps not surprising that some have. been asking if some of China’s toughest interventions are the right way to go.

With the center of the global economy gradually shifting east, we can probably expect an intensification of this clash of philosophies on how to organize the relationship between state and markets.The conversation

Johannes petry, CSGR Researcher, Warwick University

This article is republished from The conversation under a Creative Commons license. Read the Original article.


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