Mixed Signals

I started my work last week to a blood bath in the Chinese stock market. The Chinese government announced a slew of regulatory measures banning private tutoring firms from making profits, raising capital and going public. The resultant stock market selloff sent shockwaves across continents, triggering a three-day rout that wiped off nearly $1.5 trillion from mainland China and Hong Kong markets. The calamity did not end there, as the government targeted more industries, including food delivery platforms as well as the property sector.

It’s no surprise that the Chinese government has been binging on a tech industry crackdown for months now. From the 11th-hour suspension of Ant Group’s IPO (which would’ve been the world’s largest IPO had it gone ahead), to the ride hailing giant Didi’s app block (days after its mega U.S. IPO), and now the ed-tech giant Tencent as well as food delivery behemoth Meituan, many corporate giants who are market leaders in their respective industries have been at the receiving end of government wrath.

One might easily allocate the reasons for the crackdown to the authoritarian nature of the Chinese government. A smart cookie might even suggest it’s President Xi doing the PR rounds to secure his unprecedented and ambitious third term, the prospects for which, is conveniently looking not too bright right now. Xi, who has been navigating the world’s second-largest economy for the past nine years, has not only emerged one of the most pivotal world leaders in history but also has amassed both admirers and critiques alike for some of his controversial, hard-line policies.

Whatever the reason may be, why would a government be suicidal to cripple its own market leaders in the height of a global cut throat competition? The answer is most likely embedded in the country’s 72-year-old communist heritage. The latest ban on edtech companies come as the government sought to reform an industry it said that had been “hijacked by capital”. Students are pushed into academics at an extremely young age and are overwhelmed by the sheer pressure of excessive after-school tutoring, while the parents endure sky-high costs in order to grant their child the best opportunity possible. The result? A money-minting industry that has ballooned to over $100 billion in valuation, fuelled by investments from all over the world, while the students and the parents continue to be crushed by the pressure to perform. Regulations for the food delivery platforms were announced under similar circumstances, with the intention of defending the riders who are ill-treated by their gig-economy employers. Among a set of reforms, delivery companies are now forced to pay their riders insurance and wages above minimum pay, and relax delivery deadlines. A range of reforms in the real estate sector were also introduced in order to reign in property prices that have been soaring at breakneck pace; in President Xi’s own words, “houses are for living in, not for speculation”.

From a citizen’s point of view, what the Chinese government did was remarkable. In fact, isn’t that one of the biggest roles of a government? To interfere when the free market gets out of hand and make sure the capitalist forces do not end up exploiting the public? As veteran Harvard economist John Kenneth Galbraith explained in his visionary 1952 book American Capitalism, “it was the competition of many sellers that protected the consumer and also the individually powerless wage earner from the full economic effects of monopoly”. Therefore when free market fails and a few corporations act like monopolies, it is the government’s job to interfere and save the consumer and the powerless individual wage earner - which is what the Chinese government rightfully did last week.

But what grabbed my attention was the reaction of the investor community. Investors too, are a part of the general public at the end of the day. So shouldn’t they be more approving when a government takes tough decisions to stand by its citizens? But instead of being encouraging and approving, investors reacted with a selloff after corrective government action, causing turmoil in an economy. In fact, if it’s not for a strong, authoritarian leadership, such detrimental moves most of the time end up pressuring most governments to reverse the tough decisions they took. The financial cost of right decisions has now become too expensive due to increased globalization now. Isn’t this our own society we’re punishing? In our quest to hunt for the most profitable companies, we are essentially sending a message to the whole world: profit is the most important thing. Abuse all stakeholders as much as you want, but oh! -make all the profits you can! It doesn’t matter who gets exploited on the way.

If the investment community reacted to corrective government action positively, maybe more governments would be encouraged to make tough decisions without having to worry about drastic financial repercussions. If the stock market responds to a cost increment of a company positively, because now it is looking after its employees better financially, more companies will stop treating employees just as balance sheet items and start looking after them better.

It then becomes apparent that if we want to be looked after well in our work places, we need to be prepared to accept the notion that the cost of a company is going to go up. That it may most likely translate into lower profits. The higher price we pay for a product may reflect how well that company is looking after the employees who work hard to produce that product. If we want to incorporate well-being into our lives, we first need to adopt a different value system that goes well beyond cost and profit ourselves.