As the first major economy to recover from Covid-19, China has demonstrated its resilience and stability to drive global economic growth. Yet, the rise of market-dominating e-commerce companies benefiting from the pandemic has widened the wealth gap and posed a potential threat to the long-term growth prospects of the second-largest economy.
Demand-side reform, which aims to lower living costs and bolster retail consumption by controlling the price inflation of consumer staples, was first introduced by the Politburo of the Chinese Communist Party in December 2020.
Data from the National Bureau of Statistics show that total retail sales volume dropped 4.8% year-on-year for the first 11 months in 2020, and it is likely that the annual figure will also drop.
As consumption has become an increasingly critical driving force of China’s GDP growth, encouraging retail spending has a bigger implication for China’s economy as it would affect millions of small and medium-scale businesses.
“Growth normalization and employment are the priorities for the government because 2021 is the 100th anniversary of the Communist Party. Political stability is very important. How do you ensure that? You need to have social stability. To ensure social stability, you need economic stability,” says Mo Ji, chief economist, Greater China, at AllianceBernstein.
It is in this context that recent actions of Chinese regulators affecting leading technology companies could be viewed. In December, the State Administration for Market Regulation imposed penalties on Alibaba, China Literature and SF Express for M&A transactions that could strengthen their market monopoly status, noting that e-commerce companies are not exempted from China’s anti-trust law. In a recent closed-door meeting with Ant Group, the People’s Bank of China raised five requirements, including not exploiting its market-leading position to unfairly compete with peers.
Price makers
Technology giants have become so large as to become price makers for the goods and services they offer. That is, in fact, what their investors who are seeking higher profits expect them to do: that they raise their prices once they reach a certain size with economies of scale.
China’s efforts to discourage large technology companies from acquiring monopoly status are also evident in the community group buying sector, which has been booming recently. In the community group buying model, a leader is designated to coordinate food orders on behalf of other members of the community. This results in lower delivery costs than if they are to order individually from a grocery chain or supermarket.
All e-commerce giants are investing in community group buying, but policy makers are now sending out signals that they will not allow unfair competition between large tech companies and small fresh food vendors. Their objective is to prevent a situation where business dominance leads to unaffordable food prices.
There is rising concern among policy makers over the adverse impacts that tech giants could have on retail consumers which could outweigh the benefits that they bring. And such negative consequences would bear more heavily on the less well-off segments of the population, whose livelihood has not materially benefited from the technology boom.
In other words, in some new economy sectors which are more relevant to the livelihood of ordinary people such as fresh food, China is unlikely to allow consolidation that will give rise to behemoths that could stifle the growth of small businesses and eventually manipulate market prices.
TMT Goliaths
“Even though this is supposed to be a new batch of entrepreneurs, it is still being controlled by a vanguard of a few TMT (technology, media and telecom) Goliaths. It is a race against the clock for a lot of young TMT companies to secure the funding of these giants or risk being left behind,” says Joseph Lang, chief executive officer of DL Securities and partner of DL Holdings, in an interview with The Asset.
“These TMT behemoths not only provide financing but also life-or-death synergies within their own ecosystem and platforms. That is also a part of the reason why regulators are stepping in and questioning whether or not these TMT giants are exhibiting monopolistic practices with leverage of their platform economy,” Lang adds.
In 2015, Beijing undertook supply-side reform to address the issue of overcapacity and strengthen the competitiveness of the manufacturing industry. Large consolidation deals involving state-owned enterprises, such as the merger of Baosteel and Wuhan Iron and Steel in 2016, were completed to rationalize the supply of industrial goods.
Over the past two years, China has openly supported the technology sector amid rising trade tensions with the United States. Yet, the suspension of Ant Group’s initial public offering suggests that the government’s attitude towards technology companies has changed significantly.
In 2021, the technology sector is unlikely to see large M&A deals as such could be seen as efforts by the big players to secure market dominance. And as they may involve huge financing, such transactions could go against China’s deleveraging agenda.
