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

Delivery staff are waiting for the traffic light to turn green at a major intersection in Beijing on July 30, 2021.

Evelyn Cheng | CNBC

BEIJING – Investors in Chinese companies were surprised by Beijing’s actions against domestic tech giants this summer, including comments on overseas-listed stocks.

One of the surprises was a mandate in late July for Chinese education companies to restructure and remove investment from foreigners. In a separate order early last month, app stores were asked to remove the Chinese ridesharing app Didi – just days after its massive IPO in New York.

Didi shares have fallen more than 30% since they were listed. KraneShares CSI China Internet ETF (KWEB), whose top positions include US-listed Alibaba and JD.com, is down 29% in the past 60 trading days.

“It is probably important to note, especially for international investors, that there is a great and deep shift in philosophical thinking about economic policy, which is more important in China’s economy,” said Zhu Ning, professor of finance and deputy dean of the Shanghai Advanced Institute of finances. “Foreign investors have to understand that and be prepared for it.”

It may sound like internet platforms offer us more options, but it also puts more financial burdens on us.

Restaurant owner in Beijing

In a “very big shift,” Zhu pointed out the Chinese Communist Party’s political promise to create “shared prosperity” – moderate prosperity for all as opposed to the country’s growing income inequality. This is in contrast to making sure that at least some “get rich first,” said Zhu.

Anger at big tech companies

Efforts to deliver on that promise have accelerated over the past 12 months.

The Chinese government shielded Alibaba from foreign competition for years until the company, under its founder Jack Ma, grew so large that the authorities abruptly suspended the massive IPO of its subsidiary Ant Group in November and fined Alibaba 18.23 billion yuan in April .

Resentment towards technology companies is also growing in China, especially among small companies that feel pressured by the digital giants.

“It may sound like internet platforms give us more options, but it also puts more financial burdens on us,” said a Beijing restaurant owner who requested anonymity for fear of retaliation from online food delivery services. CNBC translated their notes into Mandarin.

In early 2019, she initially listed her restaurant on Meituan – China’s dominant food delivery platform – and paid an 18% commission. She said Meituan staff told her they couldn’t list on other grocery delivery sites as it was the lowest fee on the website.

When the pandemic hampered diners’ income in stores, she listed her restaurant on Alibaba’s Ele.me grocery delivery platform. That sparked angry calls from Meituan employees saying they would have to pay a higher commission fee of 25% if they don’t delist by Ele.me. She decided to leave Meituan.

Growing criticism

In late July, China’s antitrust agency ordered food delivery platforms to pay workers the local minimum wage. Earlier this month, the State Council – China’s top executive body – decided to lift restrictions on access to local health insurance and pension plans for the country’s 200 million gig economy workers.

The political changes come as Chinese news media organizations – heavily influenced by the government themselves – have become more critical of Chinese tech companies and their culture of overhaul.

Earlier this year, two employees of e-commerce giant Pinduoduo allegedly died of excessive work. The company confirmed one death in an online statement, while a representative on the other death was not immediately available for comment at the time of publication.

This summer, short video companies Kuaishou, and subsequently TikTok parent company ByteDance, reportedly dropped a policy requiring employees to work regularly on weekends.

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

Yang Guang

Operator of convenience stores

China’s anti-monopoly regulation is a good thing, said Yang Guang, who runs a grocery store in a Beijing apartment complex with his wife.

“If all of these daily (needs) are all controlled by one or two companies, how can we have bargaining power?” Yang asked, according to a CNBC translation in Mandarin. He said he didn’t want to list his shop on delivery platforms like Meituan or Ele.me, as they charge around 15 to 25 percent commission fees.

Instead, he and his wife deliver purchases to nearby customers themselves and communicate with them through the WeChat messaging app.

Struggling Small Businesses

According to an official record, there are around 139 million small businesses in China. Government meetings often feature small businesses discussing their operational difficulties and Beijing’s efforts to help them.

But small companies polled for the official purchasing managers’ index in July showed worsening conditions for the second consecutive month, while large companies reported slight growth.

Recent regulatory crackdowns have focused on restricting monopoly practices, increasing privacy and even encouraging more births.

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Authorities are “trying to address the issue of income inequality” in a year when they have the rare opportunity to address long-term problems without worrying too 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 to the 8% or 8.5% growth that many economists are predicting for China.

“That window will probably not always be open at some point … So the intensity of this policy was surprisingly high,” said Zhang.

While he said it would help the authorities to communicate more overall support for foreign investment and private entrepreneurs, Zhang noted that the recent raid targeted sectors such as education “that the public has complained about in the past.” .

New direction for startups

US-listed Chinese education stocks fell double digits in a single day last month after a new policy forced after-school tutoring companies to become nonprofits and banned foreign capital investment.

Hongye Wang, a China-based partner at Antler venture capital company, said tutoring companies often took advantage of Chinese parents’ willingness to pay for whatever is necessary to provide their children with a good education.

That meant investors like him could earn 5x the return on education companies for two years regardless of the economic environment, Wang said.

The purpose of the new government policy is to reduce the cost of education, especially for poorer people living in rural areas, Wang said. He added that the state is also likely to want to improve people’s access to medical care.

Beijing’s scrutiny of large Chinese tech companies comes as U.S. investors and financial regulators become increasingly concerned about the regulatory risk of investing in China. At the end of July, the chairman of the US Securities and Exchange Commission, Gary Gensler, announced that Chinese companies would have to disclose whether Beijing had refused to list them on the US stock exchanges.

For Chinese startups, perceived uncertainty about their ability to go public could limit their ability to raise capital, said Nick Xiao, vice president of Hong Kong-based wealth manager Hywin. “In this context, Chinese start-ups will probably want to sharpen their minds about why their business model is resiliently scalable and how it creates real added value – both economically and socially.”

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