[Global Focus] Unprecedented Regulation... End of 'Chinese-style Capitalism' or Innovation?

Western Media Criticizes "No Free Market"
Calls Grow to Limit Investment Due to Corporate Risks
Professional Investors Say "Must Understand China's Specifics"
Need to Watch Further to See if State Capitalism Succeeds

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Suhwan] On July 1st, marking the 100th anniversary of the founding of the Chinese Communist Party, China declared that it had achieved the establishment of a Xiaokang (小康) society, meaning a moderately prosperous society where all people live comfortably and abundantly, and set the new goal of building a society of common prosperity (共同富裕, a society where everyone prospers together). Since then, the government has been unleashing antitrust regulations targeting companies and capitalists.

The sudden change in attitude by Chinese regulatory authorities has left the Western world bewildered. Opinions are divided on whether to continue trusting China and maintain investments and business there. Is the "Chinese-style capitalism" that drove China's rapid growth no longer valid?

China Unleashes a Regulatory Bombardment

"Until now, Chinese companies have grown dramatically without much regulation. Now the government is clearly signaling that this era is over."

This is how the American weekly magazine Time recently evaluated the Chinese government, which has been intensifying regulatory pressure across the capital markets, including technology companies.

Since last year, China has been implementing unprecedented regulatory measures on its capital markets.

In November last year, authorities blocked the stock market listing of Ant Group, a fintech (finance + technology) company under Alibaba Group, and in April this year, imposed the largest-ever antitrust fine of 18.2 billion yuan (approximately 3 trillion KRW).

In July, after removing the country's largest ride-sharing company Didi Chuxing from app stores, antitrust investigations were launched.

They also ordered all companies in the $100 billion (approximately 116 trillion KRW) private education market to convert into non-profit organizations. This move caused the stock prices of major private education companies such as TAL and New Oriental Group to plummet by over 70%.

Western Media: "China Is Far from Capitalism"

Mainstream Western media have harshly criticized these recent measures as signaling the "end of Chinese-style capitalism."

The Wall Street Journal (WSJ), in an editorial titled "State Capitalism Is Not Capitalism," stated, "China has begun imposing regulations to enhance social equality to strengthen the legitimacy of its power," adding, "This ultimately means a return to the early Communist Party ideology of expanding workers' rights and limiting capital's profits."

The outlet further emphasized, "Capitalism does not function simply because private enterprises exist," and "In this sense, China is a state far removed from a capitalist system. Chinese-style capitalism is merely a means to realize the Communist Party's goals."

Bloomberg News also pointed out, "Chinese-style capitalism fundamentally differs from other forms of capitalism because its ideology is deeply internalized," adding, "In China, the market is merely a tool to advance communism. This contrasts with the capitalist ideology that markets should be respected to the greatest extent."

Jim Cramer, a well-known American analyst who hosts investment-related programs on CNBC, offered even stronger criticism. He said, "The free market no longer exists in China," and "China itself is showing that capitalism no longer works there."

Consequently, there are growing calls in mainstream media for the U.S. government to restrict its investors' investments in the Chinese market.

The Washington Post (WP), in an editorial last July, stated, "The government has failed to protect American investors from the Chinese Communist Party," and urged, "The recent actions of the Communist Party show increasing risks in investing in Chinese companies. Measures to protect U.S. capital markets must be implemented promptly."

Institutions Say "Understand China's Uniqueness"

On the other hand, professional investors are more cautious about the controversy over Chinese-style capitalism compared to mainstream media. The view that capitalism is ending is based solely on traditional capitalist systems from Western countries' perspectives and fails to understand China's uniqueness.

[Image source=EPA Yonhap News]

Ray Dalio, chairman of Bridgewater, the world's largest hedge fund, said in an interview with CNBC on the 25th of last month, "The perception that China's regulations are anti-capitalist is wrong," adding, "Western investors are missing patterns in the Chinese government's policies. (Investors) are misinterpreting government policies."

He emphasized, "Over the past 40 years, China has been leaning toward a market economy more than ever," and "It is trying to introduce appropriate regulations amid rapid capitalist growth."

Dalio also noted, "It is true that recent regulations have caused confusion because they happened too quickly," adding, "The important thing is not to expect Chinese capitalism to follow Western capitalism exactly."

Cathie Wood, founder of ARK Investment, known as the "Money Tree Sister" whose assets surged elevenfold last year, also said, "I am not pessimistic about China," emphasizing, "The government is not trying to stop market growth itself."

Professor Eli Friedman of Cornell University's School of Industrial and Labor Relations wrote in a Spectator Journal article titled "Why China Is a Capitalist Country," "Ferraris and Gucci stores are everywhere on the streets of China's major cities, and there are numerous ultra-high-rise residences for high-income earners," highlighting that "especially noteworthy is Chinese President Xi Jinping's declaration at the 2017 Davos Forum that the market should play a central role in resource allocation."

Furthermore, Professor Friedman pointed out that the fact that the Chinese government awarded commendations to Alibaba founder Jack Ma and Tencent founder Ma Huateng at the 2018 40th anniversary of reform and opening-up ceremony reflects a favorable view of companies, which also proves that Chinese capitalism has not ended.

'State Capitalism' Undergoing Surgery

Recent regulatory measures are also seen as a major overhaul of Chinese-style capitalism. The U.S. investment media Seeking Alpha analyzed, "The Chinese government has been experimenting with capitalism for economic development," and "As the unregulated capital market grew rapidly, concerns about side effects began to emerge."

In fact, according to the Hurun Report, known as the "Forbes of China," China has become the first country where the number of billionaires with assets exceeding $1 billion has surpassed 1,000 worldwide. Meanwhile, Chinese authorities estimate that the monthly income of about 600 million Chinese people remains at around $154.

British think tank Chatham House reported, "After 40 years of adopting capitalism, China has become one of the most unequal countries on Earth, shaking the Communist Party's legitimacy," adding, "If the status quo is maintained, the people's trust will collapse." The unprecedented regulatory pressure and emphasis on common prosperity both signify that the government has begun direct intervention to minimize the side effects of capitalism.

Among experts, there is a forecast that China will continue to achieve capitalist growth in its own way. Global asset management firm Aberdeen stated in a report released last July, "(China's regulations) do not signify the end of capitalism," and "The market sector will remain a key role for innovation and development in the Chinese economy going forward."