China’s tech giants generate billions for investors — but small businesses are being squeezed

BEIJING — Investors in Chinese companies were caught off guard this summer by Beijing’s actions against homegrown tech giants, including comments about overseas-listed shares.

One of the surprises was a mandate in late July that Chinese education businesses should restructure and remove investment from foreigners. A separate order earlier last month called for app stores to remove Chinese ride-hailing app Didi — just days after its massive IPO in New York.

Didi shares have dropped more than 30% since the listing. The KraneShares CSI China Internet ETF (KWEB), whose top holdings include U.S.-listed stocks Alibaba and JD.com, has fallen 29% over the last 60 trading days.

“It’s probably important, especially for international investors to note, there is a big and deep change of philosophical thinking on the economic policy, what’s more important in China’s economy,” said Zhu Ning, professor of finance and deputy dean at the Shanghai Advanced Institute of Finance. “Foreign investors need to understand and (brace) for that.”

In a “very big shift,” Zhu pointed to the Chinese Communist Party’s political pledge to deliver “common prosperity” — moderate wealth for all, in contrast to the country’s growing income inequality. That contrasts with ensuring that at least some “get rich first,” Zhu said.

Efforts to achieve this pledge have accelerated in the last 12 months.

The Chinese government shielded Alibaba from foreign competition for years, until the company grew so large under its founder Jack Ma that authorities abruptly suspended its affiliate Ant Group’s massive IPO in November and fined Alibaba 18.23 billion yuan in April.

Resentment toward tech companies is also growing in China, especially from small businesses that feel squeezed by the digital behemoths.

“It may sound like internet platforms provide us with more opportunities, but it also puts more financial burdens on us,” said a restaurant owner in Beijing who requested anonymity out of fear of retaliation by the online food delivery services. CNBC translated her Mandarin-language remarks.

She initially listed her restaurant on Meituan — China’s dominant food delivery platform — in early 2019, and paid a commission fee of 18%. She said Meituan staff told her that since it was the lowest fee available on the site, she could not list on other food delivery sites.

When the pandemic cut off revenue from in-store diners, she listed her restaurant on Alibaba’s Ele.me food delivery platform. That prompted angry calls from Meituan staff, who said she would have to pay a higher 25% commission fee if she didn’t delist from Ele.me. She decided to quit Meituan.

In late July, China’s anti-trust regulator ordered food delivery platforms to pay workers the local minimum wage. Earlier that month, the State Council — China’s the top executive body — decided to remove restrictions on the country’s 200 million gig economy workers’ ability to access local health insurance and pension plans.

The policy changes come as Chinese news media organizations — which are themselves strongly influenced by the government — have become more critical of Chinese tech companies and their culture of overwork.

Earlier this year, two employees at e-commerce giant Pinduoduo allegedly died due to excessive work. The company confirmed one death in an online statement, while a representative was not immediately available for comment on the other death as of publication.

This summer, short-video companies Kuaishou and subsequently TikTok parent ByteDance, reportedly halted a policy of asking employees to regularly work on weekends.

China’s anti-monopoly regulation is a good thing, said Yang Guang, who operates a convenience store in a Beijing apartment complex with his wife.

“If all these daily life (needs) are all controlled by one or two companies, how can we have bargaining power?” Yang asked, in Mandarin, according to a CNBC translation. He said he doesn’t want to list his store on delivery platforms such as Meituan or Ele.me because they would want about 15% to 25% in commission fees.

Instead, he and his wife deliver purchases themselves to nearby customers, communicating with them through the WeChat messaging app.

There are roughly 139 million small businesses in China, according to one official tally. Small businesses are often talked about at government meetings that discuss their operating difficulties and Beijing’s efforts to help them.

But small businesses surveyed for the official Purchasing Managers Index in July revealed worsening conditions for a second-straight month, while large businesses said they saw slight growth.

The latest regulatory crackdown has focused on limiting monopolistic practices, increasing data protection and even encouraging more births.

Authorities are “trying to address the income inequality issue” in a year when they have a rare opportunity to tackle long-term problems without needing to worry much about growth, said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

Officials set a GDP growth target of over 6% for this year, which is relatively low compared with the 8% or 8.5% growth that many economists predict for China.

“This window, sometime down the road, probably will not always be open … So the intensity of these policies came in surprisingly high,” Zhang said.

While he said it would be helpful for authorities to communicate more support for foreign investment and private entrepreneurs overall, Zhang noted the latest crackdown has targeted sectors such as education “which the general public complained about in the past.”

U.S.-listed Chinese education stocks plunged double-digits on a single day last month after new policy forced after-school tutoring companies to become non-profits, and banned investment from foreign capital.

Hongye Wang, China-based partner at venture capital firm Antler, said tutoring companies often took advantage of Chinese parents’ willingness to pay whatever necessary to give their children a good education.

That meant for two years, investors like himself could get a 5-fold return on education companies, regardless of the economic environment, Wang said.

The purpose of the new government policy is to lower education costs, especially for poorer people living in rural areas, Wang said. He added that the state would likely want to improve people’s access to medical care as well.

Beijing’s scrutiny on big Chinese tech companies comes as U.S. investors and financial regulators are increasingly worried about the regulatory risk for investing in China. In late July, U.S. Securities and Exchange Commission Chair Gary Gensler announced that Chinese companies need to disclose whether Beijing denied them from listing on U.S. exchanges.

For Chinese start-ups, perceived uncertainty about their ability to go public could restrict their ability to raise capital, said Nick Xiao, vice president at Hong Kong-based asset manager Hywin. “In this context, Chinese start-ups will probably want to sharpen their pitch on why their business model is resiliently scalable and how it creates genuine value – both commercial and societal.”