In 2013, Chinese Partners, a movie based on the stories of the three co-founders of China’s largest private education company New Oriental, captured the upbeat sentiment in the country’s business circles.
In the movie, three ambitious university graduates, one of them modeled off New Oriental chairman Yu Minhong, achieved their rags-to-riches dream by launching English tutoring schools across China and eventually listing their company in the US. Partly thanks to the production, Yu, a kid from the countryside who became a billionaire, turned into a living symbol of the “Chinese dream.”
“The movie has conveyed a message: the US is not the ideal land…the success of the Chinese people can only take root in the soil of China,” a commentator wrote about the movie that year on China’s version of Quora, Zhihu.
A decade later, China’s billionaires are facing a harsh reckoning in their country.
Driven by a renewed focus on social equality amid concerns about China’s “unbalanced” recovery from the pandemic, and fears about private entrepreneurs’ increasing wealth and influence, the Chinese Communist Party is suddenly putting in place new boundaries for its largest companies, many of which are seen as having developed too “savagely” in the eyes of the authorities. The regulatory storms unleashed on sectors from tech to education have wiped out billions of dollars of their wealth overnight.
This month alone, Pony Ma, the founder of social media giant Tencent saw his fortune sink from nearly $60 billion to under $50 billion, according to the Bloomberg Billionaires Index, as the value of his stake plunged—the company lost $170 billion of market cap after it suspended new user registrations this week. Jack Ma, the founder of e-commerce giant Alibaba, saw his fortune decline by a similar amount this month. Others are barely clinging on to billionaire status.
Education billionaire Yu, appeared to have fallen out of the billionaire ranks, according to a Bloomberg tally on Monday, after his stake in New Oriental shed $870 million in value following a 61% plunge in the company’s shares on the New York Stock Exchange on July 23. Similarly, Larry Chen, the founder and CEO of online tutoring firm Gaotu Techedu, also left the billionaire club, and saw his wealth shrink to around $235 million, after shares of the US-listed firm sank more than 60%. The companies didn’t respond to requests for comment.
“The reduction in the number of billionaires is just a result [of the regulatory crackdown], not its purpose. The purpose is to enhance anti-monopoly push, and preventing ‘disorderly capital expansion,'” said Shen Meng, director of Beijing-based boutique investment bank Chanson and Co, referring to one of the priorities raised at an agenda-setting economic conference presided by president Xi Jinping in December.
How China became the world’s billionaire factory
At times in China’s recent history, being wealthier than others was dangerous, potentially exposing you to being targeted during mass ideological campaigns. But in 1978, Deng Xiaoping ushered in China’s era of reforms with a speech that told the country it would develop faster if those who made more contributions were allowed to become richer than others.
Rong Yiren, who founded the Citic conglomerate a year later and was often referred to in English-language coverage as the “red capitalist,” may well have been one of China’s first billionaires. As the economy liberalized, manufacturing and real estate seeded new wealth. Later, as new tech companies were founded and listed overseas, China arguably became the most active producer of billionaires among all countries.
The transformation is captured in China’s official surveys on income, according to a paper by economists including Li Yang, of the Paris School of Economics. In 1988, state and collective sources counted for 80% of the income of the country’s top 5% of earners, but by 2013, private sources had overtaken public sources of income, and elite groups were dominated by professional and business owners.
Even during the pandemic, the country managed to add 257 billionaires as of August last year, for a total of 878, ahead of the US’s roughly 700, according to the Hurun China Rich List.
Of course, China has periodically aimed blows at specific tycoons, via sudden detentions or prosecutions, such as when China sought to prevent “irrational” overseas investments, as in the case of Wu Xaohui, former chairman of Anbang Insurance Group. This week it sentenced Sun Dawu, an agricultural tycoon who often expressed support for rights activists, to 18 years in prison, months after issuing a similarly long sentence to property tycoon Ren Zhiqiang, who had sharply criticized Xi’s coronavirus response.
Since last year, though, the ranks of China’s billionaires have become financially volatile due to broad regulatory action.
Putting the private sector in its place
There are a range of legitimate reasons for the Party’s sweeping regulatory crackdowns—protecting consumers, guarding crucial user data, and preventing systematic financial risks, among others. In the case of its crackdown on education, it appears that Beijing hopes that by controlling mounting educational costs, it might slow its dropping birth rate.
But there’s also a unifying theme—insecurity in the face of the power of private firms over everything from how people shop and move about, to how they make payments, borrow, and invest.
Take for example the role of tech billionaire Jack Ma, whose Ant Group fintech giant drew the first regulatory fire. It pioneered and now dominated mobile payments in China through its Alipay wallet, then branched out into loans and investing, traditionally the domain of large state-held banks, and last year was about to go public. In October, Ma delivered a bold speech criticizing regulators as out-of-touch with innovations in finance, remarks seen as playing a major role in Beijing’s suspension of the IPO. The Party has since launched a regulatory overhaul of the tech sector, forcing Ant to meet similar rules as traditional banks, thwarting mergers, fining companies for monopolistic practices, launching cybersecurity reviews, and ordering delivery firms to enhance their protection of gig workers.
In recent days, Beijing extended its regulatory focus from tech to education, announcing new rules that ban most private tutoring companies from raising capital, going public, or allowing foreign investors to hold stakes in the firms—leading investors to broadly flee Chinese stocks. At a meeting yesterday, China’s securities regulator assured bankers that its scrutiny of the education sector won’t hurt companies in other industries. But it’s unclear how successful the reassurance will be.
“The [regulatory crackdown] has led to investors’ worries and suspicion about the continuation of China’s market policies,” said Shen, the director.
An apparent turn away from market policies has been taking place for about a decade now, after the government carried out enormous stimulus efforts to keep the economy going during the financial crisis, a trend that deepened under Xi, who seems more distrustful of markets. Last year, the Party said private entrepreneurs must align themselves more closely with Party goals.
In this new phase, it appears that China is clarifying its ideas about how to regulate new internet businesses after a long period when tech businesses experienced relatively more relaxed regulation.
The harsh scrutiny on tech makes those in more traditional sectors, or with more diversified holdings, look safer in their seats in the billionaire club—for now. Zhong Shanshan, the chairman of bottled water company Nongfu Spring who also has investments in the medical sector, remains China’s richest person with a net worth of around $70 billion, with his wealth relatively unchanged this month, according to the Bloomberg Billionaires Index.
Not a fix for inequality
By knocking a few billions off the net worth of high-flying moguls—though not the main aim of its actions—the Party is also acknowledging rising discontent from the public.
Many on the Chinese internet have increasingly been criticizing the evil ways of “capitalists” like Ma, whom they say exploit ordinary workers by forcing them to work excessive hours. Recently, a newspaper under China’s top political advisory body urged tech firms to refrain from “limitless exploitation” of employees’ labor. Regulators have just ordered food delivery companies to make sure the gig workers they rely on are earning in line with minimum wage, suggesting the government will pressure the private sector to shoulder more social responsibilities.
But circumscribing what private firms can or can’t do, won’t by itself solve China’s growing inequality.
According to the paper from economist Li, the share of income going to top earners went from 13% in 1988 to about 20% in 2013. These high earners also became better educated over time. Yet the ratio of government spending on education and healthcare as a percentage of Chinese GDP remains lower than countries with a similar level of development, which means that there’s uneven access to top-notch education and the advantages that can come with it. On top of that, long standing regulations, such as the hukou household registration system, to which social benefits are linked, create additional divisions between urban and rural Chinese.
Without added input from the government itself to expand social welfare, and reform the unfairness built into the registration system, just how much private companies can bridge the country’s widening wealth gap is in question.