| The Global ANALYST | 35| October 2021 |

China’s CommonProsperity Goal

Beijing has launched a sweeping overhaul of its education sector that

includes banning private companies from teaching the school syllabus

during weekends and vacations, and from making a profit, among a host of

other restrictions.

As Beijing turns its focus onedtech, after a sudden andshocking crackdown on the

nation’s Big Tech, it is important to rec-ollect how it all began. The readers mayrecollect from my article “BehindBeijing’s Big Tech Crackdown”, which

appeared in this magazine’s Septem-ber 2021 issue, that it all started withthe perception amongst the authoritiesthat the Big Technology firms mighthave grown their boots!

That may not be totally uncalled forthough. A look at the China tech sector

will show that some of the Mainland’sgiant tech conglomerates have indeedmorphed into national oligarchs. Theyare cannibalizing smaller competitors,spreading socially-destabilizing finan-cial risks, and defying regulatory capac-ity to catch up with them. Concentra-tion of businesses in fewer hands mag-nifies the nation’s already serious eco-nomic inequality, threatening to desta-bilize the country.

Bolstered by their success at reiningin Big Tech, the authorities now turntheir attention to edtech as they feelthat their rise has not done any good tothe education sector, and instead set itback by several years. In the first evercrackdown on the technology firms oper-ating in the segment, the regulatorshave introduced a set of guidelines toease the burden of excessive homeworkand off-campus tutoring for studentsundergoing compulsory education. Itdoes not take much to understand thatcommercial private tuition increasesthe financial and study burden onChina’s hard-pressed students, who aretrapped in the fiercely-competitive Na-tional Higher Education EntranceExam (高考

Gao Kao) that determinesentry to better universities, and by ex-

End of Capitalism?

The authorities now turn their attention to

edtech as they feel that their rise has not

done any good to the education sector.

I N T E R N A T I O N A L

Andrew K P LeungSBS, FRSA

International and Independent China Strategist

| The Global ANALYST || October 2021 |36

tension, chances for a better life. Thedice is loaded in favor of kids of richerfamilies able to afford high private tu-ition fees.

An added, yet important, side effectis aggravating the prevalent disincen-tive to raise a family or to have morethan one child. This exacerbates thecountry’s worsening demographics,making it more likely that China willget old before becoming rich.

The private tuition sector has beenhighly corporatized, with the bigger be-hemoths offering sky-high salaries toattract the best teachers from govern-ment and other private schools. Theoutcome is that corporatized commer-cial schools tend to monopolize the bestteachers, which in turn enables them tocharge higher fees. Some schools may becolluding with these enterprises by re-serving certain competitive topics to betaught through private tuition.

Parents keep the pressure up byoverloading students with extra tu-itions and paid extra-curricular lessonssuch as in violin, ballet, and sports, forfear that they may be outcompeted bythe Joneses. This creates social moresof “educational snobbishness”, worsen-ing the sense of inequality in a countrygoverned with socialist principles.

What is more, it leads to an un-healthy phenomenon of ‘force-fed’ stu-dents, pejoratively referred to as‘chicken babies’ (鸡娃 Jī wá

), spawning

a generation of tired and frustratedyouth. Added to a school system ob-sessed with examination results, stu-dents’ healthy, all-round developmentis called into question.

Published in my previous article is aTimeline showing the wider sectors af-fected by the Big Tech crackdown:“FinTech, e-Commerce, Education,Ride-hailing, Social Media and User-generated Video, Music, Literature andother IPR; Gaming, e-Cigarettes, andInsurance”. Virtually, all of these cat-egories are widely accessible to stu-

dents. When misused in frustration,they could potentially divert their occu-pation or even ‘corrupt’ their morals.

A case in point is the authorities’ re-cent censorship of adoration of popular-ized pop models and ‘sissy males’, asreported in the South China MorningPost of September 10. Tencent, China’siconic multinational tech giant, is nowon cue, restricting how much time andmoney youngsters can spend on itsonline gaming platform.

All of these strictures reflect thecountry’s imperative to realize theChina Dream of becoming a “strong,democratic, civilized, harmonious, andmodern socialist country” by 2049, thehundredth anniversary of the foundingof the People’s Republic of China. A keytheme of this centenary goal is “Com-mon Prosperity”.

In the “Opening Up and Reform”drive in 1978, Chinese Leader DengXiaoping sounded a clarion call “to let asmall proportion of people get richfirst”. Since then, China has neverturned back.

According to Forbes, mainlandChina has now 626 dollar-billionaires,the second highest number in the world.There are also 5.28 million dollar-mil-lionaire households. 50% of all familieshave a household income from $22,400to $48,000. In 2020, the wealthiest 1%

New Regulations for China’s Education Sector

The sector had attracted billions of dollars because it had been expected to generate 491 billion yuan($76 bn) in revenue by 2024. Those lofty expectations groomed a generation of promising startupslike Yuanfudao and Zuoyebang. It’s a stunning reversal of fortune for an industry that had emergedas one of the hottest investment plays in China in recent years. Alibaba, Tencent and ByteDance Ltd.were among the big name backers, along with the overseas players like Tiger Global Management,Temasek Holdings Pte and SoftBank Group Corp. The new regulations are in a nutshell:• Companies and institutions that teach the school curriculum must go non-profit• Such institutions cannot pursue IPOs, or take foreign capital• Listed companies will be prohibited from issuing stock or raising money in capital markets to

invest in school-subject tutoring institutions, or acquiring their assets via stock or cash• Foreign firms are banned from acquiring or holding shares in school curriculum tutoring

institutions, or using Variable Interest Entities (VIEs) to do so. Those already in violation need torectify the situation

• All vacation and holiday curriculum tutoring is off-limits• Online tutoring and school-curriculum teaching for kids below six years of age is forbidden• Agencies cannot teach foreign curriculums or hire foreigners outside of China to teach

Courtesy: Bloomberg

Source: Oxford Research

International

| The Global ANALYST | 37| October 2021 |

Understanding the Variable Interest Entities Structure

In a typical Variable Interest Entities (VIE) structure, a holding company is established in an overseasjurisdiction (e.g., the Cayman Islands) to issue shares to overseas investors. The offshore holdingcompany, through one or more wholly-owned subsidiaries in China, enters into a set of controlagreements with a China-based operating company which is typically set up as a 100% Chinese-domestically-owned company in order to retain requisite operating licenses or approvals in industrialsectors for which foreign investment or ownership is restricted. As such, a VIE structure essentiallyallows the overseas holding company to exercise control over management, financing and opera-tion of the China-based operating company through contractual arrangements even though theoverseas holding company does not hold any equity in the China-based operating entity.Although the VIE structure sits in a grey area of Chinese law, as a practical matter, the Chinesegovernment has been reluctant to take actual enforcement actions against such structure in the twodecades since Sina Corporation completed its IPO in the US using a VIE structure for the first time.Although the opinions prohibit foreign investors from investing in ‘subject-based’ training institu-tions through mergers and acquisitions or VIE structures, it does not necessarily mean that thegovernment has changed its position on the VIE structure itself. Rather, the opinions suggests thatthe Chinese government recognizes the VIE structure as one of the ways for foreign investors toinvest in restricted sectors.As for the VIE structure, it is reported that the Chinese government views VIEs as a necessary andvital part of how Chinese firms engage with global markets. We remain reasonably confident that thegovernment will continue to maintain the status quo of the policies on the VIE structure, at least inthe near term, although the suddenness of regulatory restrictions on particular industries hasincreased investor caution.

Courtesy: jdsupra.com

of Chinese people held 30.6% of thecountry’s wealth, up from 20.9% two de-cades ago, according to a Credit Suissereport. For comparison, in the US, in thefirst quarter of 2021, the share of thetop 1% increased from 23.5% of totalnet wealth to 32.1%.

On the other hand, according to Pre-mier Li Keqiang, China still have 600million people with average monthly in-come of about $160. China’s Gini coeffi-cient (a measure of inequality thatranges from 0 to 1) has reached 0.47. Bycomparison, that of the US is around0.41.

Except a minority of self-made mil-lionaires, the good life seems to elude awhole generation of fresh universitygraduates, now numbering some ninemillion a year. Big bosses, includingJack Ma of Alibaba, embrace the so-called “9-9-6” work culture—everydaywork from nine in the morning to nine inthe evening, six days a week. Limitedpromotion opportunities, relentlesscompetition in the private sector domi-nated by big enterprises, and increasingcosts of housing in big cities where thebetter-paid jobs are, all add to youthfrustrations, let alone financial hurdlesto raise a family. Many are debatingwhether to press on (euphemisticallyreferred to as 内卷 – curling inwards) or togive up (躺平 – lying flat).

Chinese leaders have insisted a num-ber of times that inequality above 0.40 ispotentially destabilizing, as reported by

Branko Milanovic in Foreign Affairs of 11February, 2021. He also predicted in hisarticle that the oligopolies resulting fromdecades of mixed capitalism could only betackled by the government as their cre-ator in the first place.

Beijing is now rising to thechallengeThe above ‘crackdown’ or course-correc-tion signifies that ‘Common Prosperity’is being achieved through a three-

pronged economic redistribution.The first is poverty eradication. Af-

ter lifting 800 million Chinese peopleout of poverty, representing 60% of theglobal total, China now claims to havelifted all of its people out of extremepoverty, using the poverty line of $2.30 aday, slightly above the World Bank’slowest threshold of $1.90. Nearly every-one completes compulsory schooling,matching the average level in high-in-come countries. There is almost univer-sal access to electricity and safe drink-ing water. The child mortality rate hasplummeted, according to the UN.

The second prong is rejigging theeconomic model from excessive depen-dence on exports and capital invest-ments, which tend to favor large enter-prises, to a more balanced and higher-quality model towards services, domes-tic consumption, and the ecology, whichshares the cake more evenly.

This shift is reflected by the new‘Dual Circulation’ economic strategy,setting greater store on the domesticeconomy, including grassroots con-sumption, self-reliant high-technolo-gies, the green economy, including suchitems as new-energy vehicles, andinterconnectivity with external trade

China’s Common Prosperity Goal

| The Global ANALYST || October 2021 |38

Structuring Before Private Education Law Structuring AfterPrivate Education Law

Reference # 20M-2021-10-09-01

and exports.Government spending will also shift

more towards equality instrumentslike education, housing, and welfare, re-ducing the barrier to child-bearing, animportant remedy for the nation’s wors-ening demographics.

Additional measures to enhanceproductivity include gradual extensionof the retirement age, promoting the useof robotics, a digitized economy, and ex-panded urbanization by doubling theworld’s most extensive high-speed railsystem to 70,000 km over the next 15years. This will connect all cities overhalf a million people, while an addi-tional 200,000 km of modern railwaywill connect all towns, however remote,of 200,000 people and above.

Added to this is a new “Third ChildPolicy” to encourage fertility. Mean-while, a reformed household registra-tion system (hukou) is beginning to turnmillions of village migrants into fullcitizens, hopefully ushering in an evenlarger middle-class in the coming de-cades.

China has about 400 million peopleliving on income between $15,000 and$77,000 for a family of three. This num-ber of middle-class consumers is todouble to 800 million people in about adecade, according to the DevelopmentResearch Center, a think-tank attachedto China’s State Council. The ultimateaim is to create an “olive-shaped” eco-

nomic profile with fewer richer people atthe top and far fewer poor people at thebottom with a huge majority in themiddle.

The third prong is to expand philan-thropy, not merely to dole out cash butto help more people to become economi-cally self-reliant and to spread wealth-creating capacities. On cue, the giant

Alibaba Group proposes to launch a$15.5 bn ‘common prosperity fund’ by2025 in Zhejiang, the Group’s homeprovince, with ten initiatives, includinginvestments in technology, supportingsmall businesses and fostering devel-opment in rural areas.

There were initial alarms in somequarters that ‘Common Prosperity’may signal return to a ‘communist’model of planned economy and coerciveredistribution. President Xi and histeam were quick to dispel such irratio-nal fears with open elucidations. Afterall, why should China reverse course toa much less successful past?

Indeed, such initial fears are typicalof misreading China from a fixatedWestern perspective, that the ChineseCommunist Party (CCP) leopard can-not change its spots. This fails to real-ize that the CCP has become highlyadaptive in tune with the times, servingthe Chinese people much better thanthe performance of many Western de-mocracies, according to a HarvardKennedy School Ash Center report ofJuly 2020. �

International