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China’s Communist authorities are reinventing state capitalism

The Economist | Hong Kong | Nov 14, 2021

Xi Jinping - China’s Communist authorities are reinventing state capitalismTheir shareholdings in tech firms and other private companies are soaring

IT MIGHT BE confused for one of the world’s savviest tech investors. The portfolio of China Internet Investment Fund (CIIF) is the envy of venture capitalists everywhere. It owns part of ByteDance, the Beijing-based parent of social media group TikTok, and Weibo, the Twitter-like platform. It has a stake in SenseTime, one of China’s most advanced artificial intelligence (AI) groups, and Kuaishou, a popular Chinese short-video service. The firm’s investment list reads like a who’s who of the industry.

More stunning are the terms of these investment deals. CIIF’s 1% stake in a ByteDance subsidary gives it the power to appoint one of three board members in a unit that holds key licences for operating its domestic short-video business. A similar bargain has been struck with Weibo, which is listed in New York, with CIIF picking up 1% at a cost of just 10.7m yuan ($1.5m). These companies hardly need more capital. Nor is CIIF , armed with plans for a 100bn yuan fund—enough to rival a major Silicon Valley venture-capital firm—overly concerned with the outsize returns its investments will almost certainly deliver.

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That is because the outfit, founded a mere five years ago, is no typical investor. CIIF is itself mostly owned by the Cyberspace Administration of China (CAC), a powerful internet watchdog. The arrangement is akin to America’s Federal Communications Commission taking discounted stakes in tech groups such as Facebook and Twitter, appointing board members and then steering them in the direction it sees fit.

Bringing the commanding heights of the modern economy to heel might be expected from what is, after all, a communist regime. Nor is state investment in private companies anything new: “guidance funds”, massive state vehicles that direct money towards semiconductors and other favoured areas, have become a fixture of China’s investment landscape. But the extent of such activity over the past two decades has risen sharply.

The jump in private companies invested in by the state since 2000 has accounted for nearly all of China’s increase in new registered capital. Public investments in private-sector companies surged from $9.4bn in 2016 to $125bn in 2020, though looks set to fall this year, according to data from Dealogic, a research firm (see chart 2).

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This means the growth of business in the country is inextricably linked to the state. The tech industry has been a notable focus. Regulation has long hemmed in the sector, as has the occasional bringing down of a tycoon by one or two notches. This is now considered insufficient to ensure entrepreneurs are kept in line.

Government “golden shares”, tiny investments that give a high degree of control over companies, have been rumoured for years

Thus extending the government’s reach directly into more private companies via financial interests is emerging as a mechanism to control them. Government “golden shares”, tiny investments that give a high degree of control over companies, have been rumoured for years; only recently have they been disclosed in the likes of Weibo and ByteDance. It is likely this feature of state investment will expand, says Nana Li of the Asian Corporate Governance Association, an investor interest group.

Unwittingly tagging along for the ride have been global investors who had once spent freely to gain a foothold in the booming Chinese market. Americans and others are unlikely to be comfortable with the new arrangements. More might get snared: CAC, the ultimate power behind the state investments in tech, was recently given the authority to vet the overseas share listings of large Chinese tech groups.

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