An economy stuck in a cage

Young Chinese entrepreneurs think, “No matter how we pursue innovation, we’ll be stuck in a cage in the end.”

HAN WOO-DUKThe author is a senior reporter of the China Lab. A Chinese friend who runs an IT company in Shanghai came to me. It’s been more than four years as we could not meet due to Covid-19. Asked how his business is doing these days, he said, “We used to have more than 100 employees before, but now we downsized to 40.” He said it is the worst ever. “Only state-owned companies flourish.” I could read the reality of private companies in China from his face.

The numbers tell. In the first half of the year, Chinese state-owned enterprises’ investment in fixed assets increased by 8.1 percent, while that of private companies decreased by 0.2 percent. In other words, private companies are not pushing new projects. In China, people talk about the “56789 economy,” which means that private companies make up 50 percent of the total tax revenue, 60 percent of GDP, 70 percent of innovative technologies, 80 percent of urban employment and more than 90 percent of all companies in China. When they shrank, the economy cannot thrive.

The Chinese also mention the “birdcage economy,” which obligates private companies to engage in economic activities within the boundaries set by the state, just like the birds kept in cages. As opening and reform was a process of expanding the cage, private companies could do business more freely, enabling China to realize the “56789 economy.”

But it changed in the Xi Jinping era. The cage has gotten smaller and tighter. Since 2017, Beijing has pressured private companies to set up party organizations in them with no exception. So, employees must follow the instructions of the CEO while trying to please their party branch. It is a two-tier command system. Then, the state bought a small stake to attend the board meeting and intervene in management. The intervention was especially serious in IT companies.

In late November 2020, Alibaba CEO Jack Ma harshly criticized the vulnerability of Chinese finance. “A system does not exist in China’s finance,” he said. This move was interpreted as an attempt by a bird to fly out of the cage.

But the consequences were harsh. The listing of Ma’s Ant Group, which was to be the world’s biggest, was canceled. That was when regulations on big techs such as Alibaba and Tencent surfaced. IT companies were inevitably discouraged. As quality jobs are gone, youth unemployment is on the rise.

The Chinese government recently announced private sector stimuli measures, promising to treat state-owned and private companies equally by expanding the cage. My friend from Shanghai said that even if the economy recovers, the energy of the past cannot be expected. The regulations of the last three or four years have ruined China’s IT ecosystem. Having realized the limitations of the system, young Chinese entrepreneurs think, “No matter how we pursue innovation, we’ll be stuck in a cage in the end.” If so, they cannot but keep their wings folded.