In the past week, Naspers has fallen 15.9% and in the past six months 35.12%. This takes investors back to a share price last seen in December 2019 (aside from the blip in March 2020) and wipes out any gains made during the tech fiesta of the past year. That Naspers has been hit with a sledgehammer has more to do with its underlying investment in Tencent than the recent share swap between it and its operating company, Prosus, which has resulted in a substantial rebalancing of indices on the JSE.
First published in the Daily Maverick 168 weekly newspaper.
The Chinese state’s crackdown on its domestic technology industry began with the suspension of the Ant Group’s IPO in November, which has affected companies from food delivery (Meituan), to ecommerce (Pinduoduo), ride-hailing (Didi), freight logistics (Full Truck Alliance), recruitment (Kanzhun) and online private tutoring (New Oriental Education and TAL Education). Oh, and don’t forget the crackdown on cryptocurrencies. Last weekend, Beijing filed a civil suit against Tencent “over claims its messaging app WeChat’s Youth Mode does not comply with laws protecting minors”, according to the BBC – causing its share to drop further.
I’ve argued in this column before that big tech in China has been regulated with a light touch and as long as companies were growing and investors were making profits the regulator stood back, sometimes at a cost to consumers. Tighter regulations to curb anti-competitive behaviour and to protect the rights of citizens were probably overdue.
But measures so draconian that they wiped $130-billion off the Nasdaq Golden Dragon Index of 98 Chinese companies traded in New York in one week in early July? With more regulations coming? I can’t help wondering what else is going on. This goes beyond reining in technology companies that have become too powerful. It goes beyond the battle for global financial supremacy or even technology dominance. The reality has to be more complex.
This goes to the heart of culture. And control. The ANC is not the only party facing an elective conference next year. So too is Chinese president and Communist Party leader Xi Jinping. He is supposed to hand over power in 2022, after serving two terms. But he axed the two-term limit on the Chinese presidency in 2018, which was introduced in 1982 to prevent the rise of a dictatorship. Along the way he has reformed the party, purging it of weak leadership, intense infighting, rampant corruption, lax discipline and faltering faith. In the process he silenced internal dissent – and more recently, external dissent – and concentrated his own power.
This is not the way to engender anything but the most obsequious loyalty and his position at the helm of the party is not universally celebrated.
With this in mind, does the government’s spotlight on the tech and education sectors seem coincidental or even altruistic? The moves in education are wide-ranging. In January this year, China’s Ministry of Education published regulations calling primary and middle schools to stop using imported or self-published textbooks in their curriculum, unless they have been reviewed and approved by the city education bureau’s textbook review committee. In some cities there has been a clampdown on English, with primary school children prohibited from taking English language exams. There are also talks about dropping English proficiency as a requirement to enter universities.
Attention has also shifted to the 186,700 private schools, which are responsible for educating one-fifth of students in China. A small number of educators were forced to hand their schools over to the government without compensation (one wonders if this was just a pre-emptive warning) and Beijing has made noises about reducing the proportion of primary and junior school students attending private schools by half, possibly by the end of this year.
Overseas investment is now prohibited in companies that teach school subjects. In addition, restrictions have been imposed on the private, edtech sector, which is no longer allowed to operate at a profit, in the process reducing a $137-billion industry to rubble. All of this is apparently to reduce the academic burden on children and reduce the financial burden on parents who are determined to advance their children academically.
That may be the case. But it also looks like an attempt to bring a sector to heel that the Communist Party believes has been hijacked by capital – and by independent thinkers. This is by a government that believes in liberally rewriting history. Scary stuff. If it’s any comfort to investors, Chinese entrepreneurs are adaptable and accustomed to working around the rules of a dictatorship. The dictatorship, for its part, has grander ambitions than regional dominance. Between them they will work it out. But this will make investing in Chinese companies suitable only for those who have their eyes wide open. Unless they choose not to see. DM168
This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.