Tightening Up

What analysts lump together as a “regulatory crackdown” consists of diverse actions that address three of the Chinese Communist Party’s (CCP’s) biggest concerns: reducing inequality, protecting state/regime security, and maintaining tight control over ideology and culture.

Much effort has gone into rebalancing the economy, easing middle class anxiety, and achieving “common prosperity.” Many measures are not without merit, such as the crackdown on the toxic 996 work culture, but in some cases by picking soft targets in the private sector the government only scratches the surface of a serious problem. We see the banning of after-school tutoring without equally firm measures to address the rural-urban divide or reduce disparities within the state school system. We see moves to cap property prices, but little effort to reform the land-sales model that local governments have relied on for so many years. We see large corporations rushing to make billions worth of “voluntary” donations to show their support for “common prosperity,” even though the major drivers of inequality in China are in fact the disproportionate share of government revenue in the national GDP and what historian Qin Hui refers to as the “negative welfare” system. Until these structural issues are properly acknowledged and addressed, the limited transfer of wealth from the rich to state-sanctioned charity projects is unlikely to make much difference.

China’s tech giants became targets partly because they hold significant troves of data on Chinese citizens and play a vital role in both the U.S.-China rivalry and the state’s quest for “data sovereignty.” The Party has had an uneasy relationship with the private sector for years. Developing the private economy has never been an end unto itself in the grand scheme of reform. When Deng Xiaoping declared that socialism could have a “market economy,” he recognized its utilitarian value outweighed its side effects. 40 years later, that ambiguous space has diminished. The current leadership has a fervent distaste for the private sector and sees it as the primary source of exploitation, inequality, monopoly, and corruption—all quintessentially “capitalist” problems. Therefore, the private sector must be cleansed in the same manner that the Party and the cultural sphere have been cleansed. The goal is to eradicate “capitalist” ills from “capital” to make it more “socialist.” In other words, turning the private sector into a docile tool that helps the Party achieve its social, political, and economic goals.

“Suppressing powerful forces” (抑制豪强, yizhi haoqiang) has long been a top priority for China’s rulers. Failure to rein in local landlords results in weakened central authority, chaos, or even regime collapse. Private sector leaders, among others, are the contemporary incarnation of “powerful forces,” and the CCP does not want them to become alternative power centers. Thus even the mildest form of dissent must be firmly suppressed. Jack Ma learned that lesson all too well.

Finally, recent directives aimed at rectifying social ills can be regarded as part of the Party’s campaign to restore comprehensive control over all aspects of daily life. It started in 2013 with the crackdown on civil society, feminists, artists, and foreign influence, and has contributed to the emergence of a highly nationalistic, patriarchal, socially conservative, and austere social atmosphere.

In sum, we are deep into the “shou” (tightening) phase of the latest “fang-shou cycle” (放收, loosening and tightening cycle) in Chinese politics, with no end in sight. China’s leadership believes that existing problems should be tackled by imposing ever more control—control that flows directly from the small working groups at the central level. This has strengthened the discipline of the Party at the cost of alternative opinions and flexibility within the system. While the Party is likely to achieve many of its goals, including tighter control of citizens through big data and high-tech surveillance, it remains to be seen whether the economy can be successfully rebalanced for long-term growth and whether the increasing rigidity of the system will chip away at the Party’s resilience over time.

By now it should be clear this isn’t just another “regulatory crackdown.” The scale is too vast, the political dynamics too apparent, the implications too significant. Instead, Xi is pushing the political-economic bureaucracy to make changes that, in the aggregate, amount to a paradigm shift in China’s ongoing march to modernity.

But what’s the best way to think about this new model? Yuen Yuen Ang, of the University of Michigan, concludes, “It is clear by now that Mr. Xi wants to end the Gilded Age and move toward a Chinese version of the Progressive Era.” Wall Street Journal correspondent Lingling Wei sees something more severe: “[Xi] is trying forcefully to get China back to the vision of Mao Zedong, who saw capitalism as a transitory phase on the road to socialism.” University of California, San Diego’s Barry Naughton argues that Xi is adopting a system of “grand steerage” to ensure that resources are channeled to preferred sectors and technologies.

I wonder if there’s another possibility: Xi doesn’t quite know where he’s going.

Imagine for a moment you’re Xi. You possess a commanding authority over the Party-state apparatus, including the senior ranks of the People’s Liberation Army. But as we’ve learned from other ex-leaders, it can be lonely at the top. Information flows aren’t as robust as many expect—there are gatekeepers who control what you see and don’t see. All the big decisions are yours alone to make. You can consult with others, but the buck stops with you.

Crucially, you feel a sense of urgency to conclusively deal with a great number of economic, financial, and technological challenges that you inherited, or that have emerged on your watch, from debt to demographics. The old way of doing things wasn’t working. Market reforms aren’t going to do the trick either. (The stakes are too high to hope that the invisible hand allocates resources to the sectors and technologies of the highest strategic importance.)

So you start pushing. There is some low-hanging fruit: tech companies that exist in a regulatory wild west or otherwise churn out content that poisons the minds of China’s youth; entrepreneurs who have gotten too big for their britches; companies that have gotten rich but don’t pay their fair share back to society. You call this a drive for “common prosperity” in an effort to frame your decisions and impel further action working in the same direction.

But now comes the hard part. How do you ensure that “houses are for living in” when most citizens see the real estate sector as one of their only means of experiencing asset appreciation? How do you build a self-reliant semiconductor industry of sufficient technological sophistication when your initial efforts to do so have failed to close the gap with international leaders? How do you repair the damaged relationship with the United States while maintaining the facade of implacable nationalist leader? Did you wait too long to address the demographic headwinds? How can Chinese firms expand abroad given the rising national security scrutiny they face in developed markets?

Any leader would be tested by these dilemmas. No doubt Xi is as well. Given all of the variables at play here, it’s hard to imagine that Xi feels like he’s building off a coherent, long-range blueprint. Rather, I suspect he’s making iterative decisions based on a set of core assumptions (foreign encirclement, Party supremacy, the superiority of authoritarian governance, and a dim view of pure market allocation of resources) and in response to a rapidly shifting strategic environment.

This means that China’s certainly headed in a new direction, but where it ultimately lands isn’t settled yet.

After years of accumulating power, President Xi Jinping appears to be prescribing painful detox to a society addicted to capitalism’s excess. He vows to achieve “common prosperity” by reining in private capital, redistributing wealth to the people, clamping down on social ills ranging from ill-gotten gains to the wrong form of entertainment, while also promoting traditional moral values. Xi vows to push China toward a formidable goal: a high-income country that is held firmly by one-party rule. In other words, the rejuvenated nation in his “China Dream.”

Demonstrating respect for fundamental human rights should be central to any campaign to improve people’s lives, though. That would mean promoting labor rights, such as by allowing independent unions; abolishing the discriminatory “hukou” household registration system; ensuring equitable access to education and health care; and, as the International Monetary Fund recommended, increasing the progressivity of taxation schemes. But there is one problem: respect for rights and economic justice is antithetical to the Chinese Communist Party’s modus operandi, with its monopoly of political power depending on its concurrent capture of economic power.

We have few details on how Xi intends to accomplish “common prosperity,” aside from strong-arming the disfavored ultra-rich to “return more to society” (resulting in tech giants coughing up billions in charitable donations). The Party may adopt some of the above policies by attempting to find a sweet spot between reforms and deepening control, legislating greater social protections while ensuring that people work within the system instead of challenging it. Viewed this way, seemingly contradictory actions, such as new legislation to protect consumer privacy and the rights of gig workers on the one hand and the construction of a mass surveillance system and the arrests of gig worker organizers on the other, are in fact complementary in Xi’s governance model.

Some efforts to address inequality will invariably prove inadequate. It may take generations for people across China to recover from the Party’s exploitative practices: more than two-thirds of children experience discrimination as a result of having rural household registration. Many of them have little education and poor health. Some are even traumatized as they are “left behind” by parents who flock to cities for work.

Ultimately, the Party’s top-down engineering for “common prosperity” will likely fall short of its promise. Success would require the full and inclusive participation of those affected by inequality, a vibrant civil society, and a free press and Internet to expose problems and hold officials and companies accountable to the campaign goals.

The government can be expected to celebrate its success while refusing to discuss its failures, much as it did when it dubiously declared the eradication of extreme poverty. While we should take Xi’s “common prosperity” campaign seriously, it is not likely to be the kind of economic justice, respect for rights, or sustainable development that China’s people deserve.

It’s important to analyze each strand of these regulatory actions in isolation, as each has its own particular logic. Bundling all of them together can obscure the disparate reasons why these actions have been floated or enacted.

Many of the regulatory actions against tech companies had been in the works for some time and their delivery was delayed both by the COVID-19 pandemic and the Party’s centenary celebrations in July 2021. A confluence of factors brought about their implementation seemingly all at once, including the onslaught of sanctions from the U.S., the stresses of the pandemic, and a slowing economy. Some have been reactive. In the case of the actions against Ant Group and DiDi, regulators scrambled at the last minute in reaction to those companies racing toward IPOs before satisfying their regulatory obligations.

Nonetheless, it is likely that many of these regulatory actions will go on to be understood under the emerging and overarching theme of “common prosperity,” a populist policy the Party hopes will shape what officials from Xi Jinping down are referring to as an “olive-shaped” society with a large middle class and a few who are extremely rich or poor.

The concept is fuzzy at the moment, and leftists like Li Guangman have eagerly leapt to frame it as a return to Cultural Revolution-style communist values. The policy platform certainly represents a swing back to the left, but it’s unlikely its implementation will be quite as punitive and unforgiving as some, like Li, might wish. The slogan will become clearer as we head into the upcoming Sixth Plenum in November and will be part of the policy platform that Xi will take into the all-important 20th National Party Congress in October 2022, when he will likely be confirmed as leader for at least another term—if not for life.

Xi’s long-anticipated decision to stay on as leader is such a break from convention that there must be a reason for it. Propaganda is increasingly emphasizing the “unprecedented era of greatness” that China finds itself in and notes this is due to the “firm leadership of the CCP Central Committee with Comrade Xi Jinping at its core.” In other words, only Xi as the core of the CCP can be trusted to guide the country through this crucial moment in history and he needs a big, bold policy agenda to do it.

We are already seeing it start to take shape. Regulatory actions such as those against the 996 work culture in tech firms, the private online education crackdown, online video game restrictions, and the curtailing of group-buying—the competitive pricing advantage of which was squeezing out smaller players—are aimed at combating inequality and social division and providing relief to stressed-out families. Reducing the costs of living and raising children is of particular importance if the government is to have any chance of succeeding in its recently unveiled three-child policy.

Many of the regulations were overdue. China’s regulatory agencies had treated the country’s tech giants with a light touch for most of their history, favoring the pursuit of technological dominance and economic prosperity over the need to regulate their growing monopoly power. But that easy ride has come to an end. Tasked with “tackling monopolies” and “preventing disordered capital expansion,” regulators have set their sights on a fundamental restructuring of tech companies to ensure that they remain focused on technological innovation and align themselves even more closely with the strategic goals of the Chinese Communist Party.