Towards a new regulatory tightening in China

Already tough on its digital companies in recent months, China is preparing to tighten regulations in many other economic sectors by 2025.

A new turn of screw-in China, on the economic front this time. A document detailing China’s policy directions for the next five years – released jointly by the State Council and the Communist Party Central Committee on Wednesday – says Beijing is “actively” preparing new regulations in a number of areas, including national security, technology, and anti-monopoly.

A “strengthening of law enforcement” is also expected in other sectors deemed “vital” by the government, such as health, education, transport, and financial services.

“The growing aspiration of the population for a better life imposes on us new and higher requirements for the establishment of governance under the rule of law,” the document states. This mode of governance will be based on “a long-term vision”, capable of “filling the gaps” and able to promote “the construction of a rule of law at a higher level”, explains the press release.

Digital giants in the firing line

This toughening is nothing new. The private tutoring sector is the latest to have been targeted. Noting the excessive enthusiasm of many Chinese families for these school aids – which also benefit from considerable private funding – the Chinese government decided at the end of July to prohibit profits from them. The rapidly growing market was estimated to be worth more than $100 billion. “Behind these regulations, there is always a mixture between the will to defend a public good, which is not necessarily a bad thing, and a political control,” analyzes François Godement, advisor for Asia at the Institut Montaigne.

In this respect, the treatment of digital companies in recent months symbolizes this desire for control. Several legal actions have been launched against Alibaba. The VTC platform Didi Global, which was listed on the New York Stock Exchange at the end of June, was immediately put in difficulty by new Chinese government regulations concerning companies listed abroad.

Avoiding foreign dependencies

After a period of flexibility on foreign investment and fundraising outside the country, China has been going the other way for some time. “There is always the fear that foreign IPOs will lead to greater dependence on foreign shareholders,” explains François Godement.

This turn of the screw is all the more encouraged since China is in a very favorable position. With a trade surplus of $535 billion in 2020, exports broke records last year. More importantly, the economic recovery in the second half of 2020 has been confirmed this year.

“With the incredible influx of foreign capital in recent years, the government feels it can afford to tighten regulations in many sectors,” says François Godement. “Foreign companies are afraid of losing the Chinese market, so they are somewhat at the mercy of the Chinese government,” he says.