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Reflecting on China’s “Year of the Crackdown”: Uncertainty (and opportunity?)

2021 was the “Year of the Crackdown” in China; the year was marked by a series of wide-ranging regulatory and economic reforms and crackdowns on Chinese industry, popular culture, and technology. The economic impact of these crackdowns has been significant and wide-ranging, leaving few untouched, not even China’s wealthy and elites. Furthermore, this wave of repressive policies has had deep societal and social impact. Some commentators have even argued that, through these crackdowns, Xi Jinping seeks to not only impose greater regulatory control on the economy, but to fundamentally reshape Chinese society.  Regardless, China shows little sign of abating its reforms going into 2022. Investors, businesspeople, and other observers should expect continuing uncertainty in multiple sectors in the coming months and years because of Chinese crackdowns and regulatory actions. However, the tightening regulatory environment may also prompt some Chinese firms to look overseas for alternative opportunities for investment or growth. Chinese crackdowns within its domestic economy may present an accidental opportunity for overseas markets. 

A comprehensive accounting of every Chinese regulatory action in 2021 would be beyond our scope. Let us, however, highlight a few of the most significant moves made by the Chinese government to demonstrate the deep and wide economic, societal, and social impacts of these crackdowns.

One of China’s aims has been to impose greater regulatory mechanisms and to seize tighter control of its economy and largest corporations; this is exemplified by China’s actions in the digital technology sphere. New technological regulations include a sweeping blanket ban on cryptocurrency that has ended all crypto activity in the country; in place of decentralized cryptocurrencies,  China looks to introduce a state-controlled digital yuan. The Cyberspace Administration of China (CAC) has drawn up plans to strictly regulate algorithms, providing the government potential new tools for censorship. A new data security law promises users more control over their personal data and greater data security from the tech giants that store that data.

In addition to crackdowns on specific technologies, China has gone after its largest corporations. The State Administration for Market Regulation (SAMR) fined several major companies for antitrust violations, including internet shopping and technology giants MeituanTencent and Alibaba (which was fined a record 18 billion yuan ($2.75 billion USD)). This was followed by the first ever amendment to China’s Anti-Monopoly Law, which increased both the size of fines and the power of the SAMR over companies. China’s crackdowns in the technological sphere are an excellent example of economic consequences of China’s regulatory actions. For instance, ride-sharing app Didi debuted its New York IPO in June 2021; just a few days later, the CAC announced an investigation and a suspension of Didi’s app, sending the stock price plunging. The dramatic collapse of Didi’s IPO is just one example of how markets have reacted to China’s crackdowns and the subsequent economic uncertainties created in many sectors (including digital technology) moving forward.

The Chinese government has targeted society as well, reshaping the day-to-day lives of its citizens. Children have been one of the primary targets of these efforts, and industries that serve children (and their parents) have acutely felt the economic consequences. China’s massive multi-billion dollar private education and tutoring sector has seen a series of crackdowns throughout 2021. Among the new polices are strict new limits on off-campus and online tutoring, authorities no longer approving new tuition centres, edtech firms not being able to raise capital through IPOs, and listed companies and foreign investors being forbidden from investing in education firms. This has been a major intervention into Chinese society, where education is highly prized and where parents have long heavily relied on private education to give their children a competitive edge. Moreover, private education has been big business in China and a major destination for investment; this crackdown has wiped out millions of dollars in value for many leading Chinese education and edtech companies, pushing some of them to close down altogether. In short, China’s private education sector, once a premier destination for investment and promising growth, has been radically overturned by this aggressive government intervention into Chinese society.

China has also pursued social and even moral goals through its crackdowns. China’s entertainment industries have been a prominent target in this respect. Chinese celebrities were handed strict new moral regulations for their productions and private conduct. China’s video game sector experienced a further tightening of content restrictions in addition to other crackdowns on the industry. The government has restricted fan culture surrounding celebrities, shutting down fan groups and banning popularity lists. All in all, it appears that China seeks to regulate the moral fiber of Chinese society and popular culture. This has also introduced a great deal of uncertainty for individuals and businesses involved in the entertainment sectors; the video game industry, for example, saw a dramatic fall in revenues throughout 2021.  

China’s “year of the crackdown” has been far reaching, touching on the economic, societal, and social fabrics of the country. The long-term effects of these actions are yet to unfold, but millions of Chinese already felt their immediate impacts on their daily lives.

For those interested in investing or conducting business in China, China’s crackdowns create continuing uncertainties. The most visible effect has been the deep and continued uncertainty within multiple above-mentioned sectors of the Chinese economy. Investors and other observers will need to continue carefully watching Chinese regulatory policies in the months and years to come.

On the other hand, Chinese crackdowns on its domestic economy may push Chinese firms to seek opportunities overseas. For example, the CIUA Investment Tracker shows increased Chinese investment within Canadian companies involved in cryptocurrency and the blockchain. Another opportunity may lie in China’s video game giants who are already heavily invested in the foreign markets and studios; continued regulatory pressure may push these companies towards increased overseas investment. Taken together, continued crackdowns by the Chinese government may be a boon for industries looking for new sources of investment from China.

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