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Hard lesson for U.S. investors: Chinese companies don’t make the rules in China

Beijing office towers, including Alibaba’s, are illuminated with Chinese characters reading ‘blessing to China’ to celebrate National Day in October 2020.

Zang Zhihao | Visual China Group | Getty Images

BEIJING — American investors’ shock at an ongoing regulatory crackdown in China points to a fundamental difference between the two countries that many didn’t seem to grasp: When it comes to making the rules, corporations don’t have as much influence in China as they do in America.

U.S. investors in Chinese companies have been caught off guard this summer by a slew of actions Beijing has taken against homegrown tech companies, including several whose shares trade in the United States. Among the surprises was an order that app stores remove Chinese ride-hailing app Didi, just days after its massive U.S. IPO. in late June.

Authorities then suspended new user registrations for Chinese job search app Boss Zhipin and subsidiaries of Full Truck Alliance, which both listed in the U.S. in June. In late July, two U.S.-listed after-school tutoring companies plunged after a mandate telling the industry to restructure its businesses and remove foreign investment through a commonly used overseas listing structure.

Behind the dramatic shift is emerging political rhetoric around “common prosperity,” which analysts say means companies will be scrutinized for their contributions to the broader population, rather than rapid creation of wealth for a few.

Big corporations in both countries work to build political connections and influence government policy. But whereas the U.S. system is designed to let corporations influence the government, China’s system is designed to bring corporations in line with government goals. Recent government campaigns have focused on the protection of Chinese data, stemming monopolistic practices — even increasing the birth rate.

In China, the party-state wants the business community to serve its development objectives and is willing to sacrifice corporate profits to make that happen.

Gabriel Wildau

senior vice president, Teneo

“In the U.S., the government often acts as a servant to business interests, whether it’s tech or other sectors,” said Gabriel Wildau, senior vice president at Teneo, a firm that does consulting for corporate clients. “In China, the party-state wants the business community to serve its development objectives and is willing to sacrifice corporate profits to make that happen.”

Political risk for Chinese companies has increased significantly, according to Zeren Li, whose doctorate studies at Duke University focused on China’s much more limited version of the “revolving door” — the American practice of regulators and lawmakers flipping back and forth between working for government and working for the lobbying industry.

Chinese entrepreneurs found it easier to obtain subsidies, cheap land or other benefits from local governments in an earlier era, when China’s central government was judging those officials by their ability to deliver GDP growth, Li said.

But since Chinese President Xi Jinping took office in 2013, local officials are measured more by how well they help advance Beijing’s goals: contributing to what it calls “common prosperity,” hitting pollution targets, and the like.

“Now officials are reluctant to collude with local entrepreneurs,” said Li, who added that it’s more difficult for companies to do business as a result.