China’s tech giants generate billions, but squeezed small businesses

on Aug12
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Delivery workers wait for the light to turn green at a major intersection in Beijing on July 30, 2021.

Evelyn Cheng | CNBC

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.”

It may sound like internet platforms provide us with more opportunities, but it also puts more financial burdens on us.

restaurant owner in Beijing

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.

Anger at big tech firms

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.

Growing criticism

If all these daily life (needs) are all controlled by one or two companies, how can we have bargaining power?

Yang Guang

convenience store operator

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.

Struggling small businesses

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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.”

New direction for start-ups

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.”



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