Deals and IPOs

Beijing sours on private-sector independence

Pete Sweeney
Wanda Plaza in Tongzhou, China.
Zhang Peng | LightRocket | Getty Images

China's Communist Party has grown overconfident in its ability to micro-manage. Bureaucrats who once encouraged foreign takeovers are second-guessing private deals, and tech stars are being force-fed shares in state dinosaurs. The meddling makes it less likely that Beijing will be granted market-economy status by trade partners. Economic dynamism could suffer, too.

It is unsurprising that politicians would want to take credit for a roaring first-half economic recovery. They can point to a series of moves that have stabilised sentiment, including tougher capital controls and targeted policy tightening.

However, the real driver of growth was the long-awaited reacceleration of private fixed-asset investment, which sped up 7.2 percent in the first half. Private companies are the largest contributors to GDP growth and employment, so this naturally juiced performance.

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Now President Xi Jinping appears anxious about leverage, in particular debt-financed overseas purchases. Banking regulators are looking into overseas investments by swashbuckling private companies Dalian Wanda and HNA, Reuters reported, as well as domestic deals. State planners are monitoring "irrational" investments in sports, media and hospitality.

Acquisitions by private companies should be outside the government's scope. If they were financed by loans, the bankers should worry, not regulators. But in this case it seems the borrowers will be punished retroactively. This feeds into foreign suspicions that all mainland investors are state agents, and it will also discourage Chinese executives from going global.

Private money is also being forced into struggling state firms. Reuters reported Beijing is rallying a tech all-star team – including Alibaba, Tencent and Baidu – to put $12 billion into struggling state-owned mobile carrier China Unicom. This looks a return to the old days, when weak enterprises were propped up via forced transfers from stronger ones.

China has lobbied the United States and the European Union for "market economy" status, improving Chinese access to those markets. Beijing argues its companies are commercially driven, but ordering them to buy this and not that undermines its case.

Bureaucrats, looking at the country's economic track record, don't see a history of private capitalists fighting free of policy shackles; they see a validation of their economic commands. Taking this private-sector revival for granted is probably unwise, but nothing deludes like success.

Commentary by Pete Sweeney, Asia editor at Breakingviews. Follow him on Twitter @petesweeneypro.

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