At the center of his recent conflict is a refusal to hand over data to Beijing and a disagreement with banking regulators. However, Beijing’s heavy-handed and targeted response highlights a major weakness in China’s economy: a lack of regulatory consistency — or, in other words, a frequent willingness of the Chinese government to engage in hefty market interventions and to punish the companies of public dissenters.
Regulatory consistency is what turned Hong Kong into the largest financial center in Asia, and what has historically set the United States apart from the rest of the world, building multiple trillion-dollar companies.
However, the Chinese Communist Party (CCP), while flexing its muscles to the tune of President Xi’s state capitalist model, has cast off any semblance of fairness or consistency. With a long history of disparate treatment of foreign firms, draconian mandates requiring companies to incorporate party units into their internal governance, direct government intervention halting Ant Group’s initial public offering (IPO) and now the disappearance of Ma, the Chinese regime continues to prove to the world that no one is exempt from bending the knee to the party.
While Ma’s fate is uncertain, circumstances surrounding his disappearance are reminiscent of similar high-profile disappearances tied to the Chinese government. Most recently, Fan Bingbing, one of the most famous movie stars in the world, disappeared without a trace only to later reappear with a post swearing fealty to the party and apologizing to the Chinese government.
Ma had been at odds with Chinese regulators, having previously criticized the Chinese banking system, which has generally trended conservative in its capital and liquidity standards, and whose regulatory and supervisory requirements are notably stringent.
Regulator concerns were not entirely unfounded. Ant Group reflects one of the largest sources of loans in China, drawing heavily on interest income from consumer lending and sporting a high amount of leverage on its balance sheet.
However, Ma’s Alibaba and Ant both reflect two of the largest and most innovative companies to come out of China. In September 2014, Alibaba boasted the largest IPO in history, raising $25 billion. It was only the second Chinese company to exceed a valuation of $500 billion. Ant’s own IPO valuation would have raised $35 billion, exceeding that raised by Saudi Aramco, before it was quashed by Chinese regulators. Ma’s fall from grace with the Chinese government will stand as a warning to would-be entrepreneurs and innovators that no one is safe from the doctrinal enforcement of the Chinese regime.
But it also shows a crack in China’s armor.
Innovation is among the U.S.’s biggest strengths, reflected in the global confidence of investors who drove up the market caps of the seven largest tech companies alone by $3.4 trillion in 2020. The combined market caps of these companies dwarf that of any stock exchange outside of the U.S.
The dynamism of the U.S. economy is supported by the most robust financial and banking sector in the world, an unmatched concentration of human capital and widespread wealth and, most importantly, a legal and regulatory system that is by global standards, consistent and fair. Business owners are generally protected from extrajudicial actions and asset seizures in contrast with the heavy-handed actions of more authoritarian regimes, particularly those responding to criticism of their governments.
China, for all of its growth and influence, lacks the same reputation among investors, which is why Hong Kong, and not Shanghai, became the most important financial center in Asia.
In competition with China, the U.S. should press this advantage, constantly reflecting on the procedural justness of its regulatory state, and cautiously evaluating (and when necessary ignoring) populist demands for heavy-handed regulations and sweeping market interventions that, while politically popular, only prove harmful to long-term welfare. The incoming administration faces much pressure from all sides of the political aisle to take a tough approach in regulating industry, but in order to compete, the U.S. must not handicap innovation and economic growth.
Ultimately, the regime’s own sensitivity to criticism could be the key to bounding China’s expansionary ambitions. The U.S. must capitalize on its own historical strength — rule-of-law and regulatory consistency — so that innovation and the center of the global economy remains proudly, free, democratic and American.
Hugo Dante is a Young Voices contributor and is banking policy analyst. Follow him on Twitter @hugodantejr.