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Missing Banker Reignites Fear of Xi Among China’s Tech Bosses (Bloomberg)

11 March 2023


Bloomberg title: Missing Banker Reignites Fear of Xi Among China’s Tech Bosses
Bloomberg subtitle: “We just have to wait for the government to punish whoever it thinks is doing the wrong thing and accept that there isn’t anything you can do,” one founder says
By: Jane Zhang and Sarah Zheng
Date: 6 March 2023

“After a two-year crackdown on the private sector, Xi Jinping is trying to persuade China’s entrepreneurs they can safely return to founding tech startups and rebuilding the country’s economy. It’s a tough sell.

The Communist Party’s assault on private enterprise began in late 2020 with the silencing of billionaire Jack Ma and sweeping restrictions on real estate, and then traumatized wide swaths of the economy. Each time Beijing showed signs of backing off, the crackdown spread to new sectors, from games to online education to ride-hailing. Venture capitalists slammed the brakes on investments. Founders retreated from the limelight.

In the latest sign of trouble, Bao Fan, the tech industry’s star banker, disappeared, with his firm issuing a terse statement that he is cooperating in an unspecified investigation. The eerie vanishing may have more influence on the psyche of China’s corporate class than any encouraging words from state media.

“It’s rule by fear: There is a feeling that Beijing can always come after you,” says Alicia Garcia Herrero, chief Asia Pacific economist at Natixis. “Of course, the private sector will be much more cautious.”

Interviews with more than a dozen Chinese entrepreneurs, venture investors and analysts found widespread concern about Beijing’s approach to private enterprise, just as the country is trying to recover from three years of Covid lockdowns. Despite reassuring comments from Communist Party leaders, they worry China’s pro-market stance won’t last. 

There’s a direct line between business confidence and economic growth: Herrero estimates that if Beijing’s crackdown continues, the fallout could shave about 1% off economic growth. Gross domestic product rose just 3% last year, far off its historic average, and is projected to climb about 5% this year, according to data compiled by Bloomberg.

“Investors will be conservative, the private sector will be conservative because the shape of the future has changed,” Herrero said.

One venture capitalist who had been very active in China didn’t invest in a single deal in 2022 because of government-related risks — and doesn’t plan to back any startups this year either, despite sitting on more than $200 million in undeployed capital. Another investor in Shenzhen made only two investments in 2022, one tenth the level of normal years. Overall, venture deals plummeted 45% last year to $82 billion, according to the research firm Preqin. 

There’s reason for the reticence. Even in sectors where Beijing has ostensibly backed off, entrepreneurs are struggling to navigate extra-jittery bureaucrats. 

Take gaming. Regulators began to approve new titles last year after a nearly one-year freeze, in what investors viewed as an acquittal of the long-persecuted industry. But Sherry, co-founder of a Hong Kong-based gaming studio, said her firm remains in regulatory limbo. She’s had two games removed from the country’s app stores over licensing issues, and has yet to win the greenlight for new titles.

“Doing business in China means you are going into an information black box,” said Sherry, who asked to be identified by her first name only due to the sensitivity of the topic. “It’s gambling.” 

Ray Xiao, founder of the Shenzhen-based e-cigarette startup SnowPlus Tech, closed all of his 400 direct-sales stores in China and slashed his workforce by 60% after regulatory changes in the industry. He’s now focused on markets like Southeast Asia and Russia for growth.

“For China, we just have to wait for the government to punish whoever it thinks is doing the wrong thing and accept that there isn’t anything you can do,” Xiao said.

Much will depend on Xi and a new cadre of politicians taking power with this year’s National People’s Congress. New projections by Bloomberg Economics forecast that if China’s leaders push through just the right mix of reforms to raise worker productivity, steady trade and technology ties with the US, and offset the effects of an aging population, China could reach annual growth near 5% through 2030. If they fail to deliver on those key areas, backtrack on market liberalization and mishandle the property crisis, growth could slump closer to 2% a year.

On Sunday, as China set a growth target of around 5% for this year, outgoing Premier Li Keqiang said the country should encourage private capital to collaborate on major government initiatives and projects aimed at addressing areas of weakness. Having “effectively countered external attempts to suppress and contain China’s development” in the past five years, China should “pool quality resources and make concerted efforts” to achieve breakthroughs in key technology fields in the future, he said.

Note LO: see Bloomberg article for diagram on China Investment Chill

Beijing stepped up its rhetorical support for the private sector in December after the tech crackdown raised questions about the party’s stance. It named growth of the private sector as a top priority — in part because senior leaders want to re-enlist a traditionally super-charged sector in their effort to resuscitate a Covid-ravaged economy. Xi replaced the ominous slogan to “prevent the disorderly expansion of capital” with the more encouraging to “guide the healthy development of capital.”

Investors cheered every hint of a return to normal. China’s internet giants, Tencent Holdings Ltd. and Alibaba Group Holding Ltd., added more than $200 billion in combined market value from early December to late January. Even Didi Global Inc., the ride-hailing startup that drew Beijing’s ire for going public over regulatory objections, was allowed to return to Chinese app stores. 

But China’s giants are shadows of their former selves. Alibaba, once a juggernaut ready to invade every business adjacent to its e-commerce operation, grew just 2% in the latest quarter as it concentrated on cutting costs.

Note LO: see Bloomberg article for screenshot on China’s Twin Tech Giants Are Losing Momentum

Entrepreneurs and venture capitalists are similarly cautious. They are focusing on sectors with Beijing’s clear blessing, like semiconductors, artificial intelligence and biotech. One popular approach is invest in or join “little giants,” a designation the Ministry of Industry and Information Technology bestows on strategically important startups. 

Wen Shuhao has seen growing support for his pharmatech startup, Xtalpi, which uses AI for more efficient drug discovery. Right after the Chinese New Year holiday ended in January, he zipped between Shenzhen, Guangzhou, and Hong Kong by high-speed rail to nail down the expansion plans in Hong Kong. “People’s confidence is coming back,” Wen said, adding that he expects his revenue to more than double in 2023.

Foreign investors aren’t. Historically, venture firms have made US dollar investments in startups when they think those companies are likely to go public abroad, while they made investments in Chinese yuan when they think those companies will hold their initial public offerings in the smaller mainland market. In 2022, US dollar investments in Chinese startups dropped to a record low 19% of total capital put into new companies, according to data from ITJuzi. The total amount of US dollar deals plunged 74%.

Foreign investors have “begun to ask fundamental questions about whether China is even still investable,” Duane Kuang, founding managing partner of Qiming Venture Partners, wrote in a post on the company’s website in January.

Rising tensions with the US have added to the risks. The Biden administration is preparing an executive order that would restrict investments in certain parts of the Chinese economy, including advanced technologies like artificial intelligence that could bolster the country’s military and intelligence capabilities.

Note LO: see Bloomberg article for diagram on Funding Dries Up

The signals of Beijing’s unpredictability go well beyond one banker’s disappearance. Last week, Chinese media regulators said they are studying measures to curb “excessive” addiction among youths to short videos, the format popularized by tech giants like ByteDance Ltd. and Kuaishou Technology. Shares plunged on the news. 

“Markets have no reason to think that Beijing has permanently retreated from its tech crackdown,” said Brock Silvers, managing director at private equity firm Kaiyuan Capital Ltd. “There is also no reason to think that, once immediate concerns have been ameliorated, Beijing won’t return its attention to corporate titans.” “

Note Bloomberg: With assistance by Zheping Huang, Nasreen Seria and John Liu



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