Fri. Jan 21st, 2022


The author is an independent commercial arbitrator at Arbitration Chambers in Hong Kong

In the fall of 2018, an article in Chinese media by a Beijing banker sent shock waves through the Chinese business community. The author stated that the historical mission of private enterprise was about to be accomplished and that communist ideology would no longer support its continued expansion. The article was so widely shared and caused so much consternation that the Communist Party spoke out to calm nerves.

Then, in November 2020, Ant Group’s initial public offering, which would raise $ 37 billion, was suspended following an intervention by the Chinese regulator. And in July last year, the high-profile entrepreneur Sun Dawu was sentenced to 18 years in prison for, among other things, offenses to “provoke trouble”.

These two notable episodes are part of a broader repression of private enterprises in China – one in which Didi Chuxing, the commodity company, has announced plans to delist from the New York Stock Exchange after increasing scrutiny by regulators and education companies such as New Oriental in Gaotu Techedu saw billions wipe out their share prices when it emerged that the government in Beijing was planning to ban academic tutors from making a profit.

The government’s actions undermine what remains of the rule of law in China, as many of the businesses affected are legally established. The speed and ferocity with which it acted surprised both domestic and foreign observers. It is estimated that the repression wiped out more than $ 1 billion from the market value of Chinese companies.

It is true that some private companies have run their businesses in legitimate gray areas. A notable example includes the use of the foreign interest entity structure (VIE) with a foreign shell incorporated in jurisdictions such as the British Virgin Islands or Cayman Islands. It has been used by companies that want to overcome government constraints in sensitive sectors such as value-added telecommunications services.

For years, the Chinese authorities have turned a blind eye to the practice. But now there are moves to increase transparency in the use of VIEs. It is likely that China will ban companies from using it in the future.

The government can say that the repression is being carried out in the public interest and that data privacy, antitrust review and consumer rights are being favored. It must nevertheless be undertaken taking into account due process, transparency and the rule of law.

Leading business figures in China have not yet spoken publicly about the repression or how it will affect their future investment plans. Most simply stated that they would follow government orders. This is perhaps not surprising, although there are clear remedies available for them to challenge the measures in the courts.

In the decades since former Chinese leader Deng Xiaoping’s Open Door policy began the extraordinary transformation of the economy, the equal treatment of private and state-owned companies has been a much-discussed government slogan. The recent hardening of the ideological line in Beijing, and current President Xi Jinping’s “common prosperity”Pressure, such equal treatment can quickly make a thing of the past.

It will not be a surprise if China returns to a version of the joint private-state ownership model adopted under the leadership of Mao Zedong in the 1950s. This would amount to a de facto nationalization of private companies – at least those in sectors such as data collection, national cyber security and financial services.

China’s business landscape is definitely changing. And the prospects for future innovation and economic growth, driven by the private sector over the past four decades, seem bleak.



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