Are We Entering “Cultural Revolution 2.0”?

For over a year, official China seems to have been on the warpath against its own tech industry. Just a few of Xi Jinping’s moves: the suspension of Ant Financial’s IPO, the apparent house arrest of Jack Ma, the anti-monopoly drive and fines imposed on tech companies, large “voluntary donations” made by Alibaba, JD, Meituan, and others to the Common Prosperity drive, the investigation and pending delisting of Didi Global, repression of popular actors and singers, “rectification” of Macau’s gambling industry, and much more. Share prices of Chinese tech stocks have naturally reacted.

Why? To put it simply, this is part of a campaign to reduce the power of private companies and make sure that billionaires don’t win political influence as a result of their wealth.

There’s a secondary goal. The property sector, which has provided a generation of Chinese with either the reality or the illusion of unimagined wealth, has crashed. Now China needs to bring home the benefits of asset appreciation in the stock market and build public markets into the system of political patronage.

So much has changed in a year:

·      Cyber security: A new Cyber Security Law implemented June 2021 has been used to squelch speech in Hong Kong, squeeze private companies like Didi Global, and generally cast doubt over the ownership and management of personal data by private companies. Among other things, it represents the apotheosis of the process of developing individual credit records. They turn out to be for keeping tabs on all sorts of undesirables, including debtors.

·      Anti-monopoly: The State Administration for Market Regulation (SAMR) has several times imposed fines on companies for making acquisitions without seeking approval. Alibaba attributed loss from operations in March quarter to a $2.8 bln fine, 4% of its 2019 China revenues. Other companies fined include Tencent, JD.com Inc., Suning Ltd., Didi, Meituan, Pinduoduo, Ctrip, Bytedance, and Baidu Inc. 

·      VIEs: The Variable Interest Entity (VIE) structure that has been deployed to evade restrictions on foreign ownership in the tech sector has often been the subject of speculation. In early December, the CSRC denied a Bloomberg report that China would prohibit VIEs from listing overseas.[1] Nevertheless, restrictions will very likely be imposed, at least for VIEs listed outside of China.

·      Casinos: A crackdown on casinos and the junkets that bring them customers from Mainland China may be related to currency-control efforts and an interest in promulgating a traceable, digital Renminbi.[2] The head of Suncity, which is estimated to represent up to 45% of all junket operations, was arrested in late November. Alvin Chau’s arrest effectively halted the business of the junkets, which organize and finance Mainland gamblers to visit Macau.[3] Chau had long been presented in the official press as a visionary. Now, the Mainland government wants more control over gambling in Macau and hopes the tables will ultimately use the Renminbi, especially the digital Renminbi. The junkets typically create currency risk by taking Renminbi deposits against hard-currency loans used for gambling. Many gamblers seeking to launder and move ill-gotten gains have used manufactured “losses” at the tables to take cash out of China.

·      Celebrities: China’s Cybersecurity Administration has issued new rules designed to de-emphasize the popularity of social influencers, lowering them in search rankings and placing more controls on talent agencies. Influencers are to be quieted, and their agencies controlled. Promoters may not use inducements or “enticing language.”

·      Income taxes: Authorities have been focused on taxing the wealthy—but only those who became wealthy by private means. The actor Zheng Shuang, for example, was found to have underpaid income taxes and was assessed unpaid taxes plus fines reaching nearly ¥300 mln. Zheng Shuang’s TV drama has been removed from Mainland broadcast lists. Similar punishment was meted out to actors Zhao Wei and Zhao Xiaosong for apparent political mistakes in their films.

What’s going on?

Liu He, consigliere to Xi Jinping, had to come out in the Chinese press in September to deny that China is entering “Cultural Revolution 2.0.” Liu He is viewed by foreign observers as generally sensible and trustworthy, as he speaks perfect English and attended the Kennedy School.

The comments appeared to respond to an essay by the writer Li Guangman that was published August 29 and promptly deleted from the internet. Li argued that “Everyone can feel that a profound change is under way\ in the economic, financial, cultural, and political arenas. On September 2nd, \Global Times\ Editor-in-Chief Hu Xijin wrote a counterpoint, saying that the commentary was \seriously misleading.\

Ultimately, this is about unwinding the Dengist reforms, which the CCP believes have gone too far. It is also about securing new streams of patronage. SASACs at every level are buying control of A-listed companies.

Deng Xiaoping, architect of China’s “socialist market economy,” likely never imagined that private enterprises would grow more powerful and glorious than the state sector. From Xi Jinping’s point of view, it is high time to correct that. An essay that appeared in several news outlets in late August republished from the WeChat account of someone called Li Guangman. The article proclaimed, in rough translation:

“This revolution will cleanse the dirt. Capital markets will no longer be a paradise where capitalists can get rich overnight. Cultural markets will no longer be a paradise for nymphomaniac stars. News and public opinion outlets will no longer be a place to worship Western culture. Red will return, heroes will return, and blood return.”