DiDi and Ali Baba, is Strategic Shaming Strategic?

September 19, 2021
Editor(s): Thomas Sinclair
Writer(s): Luke Chen, Kaiyue Chen, Haiyue Ma

China’s digital economy accounts for about 40% of the countries GDP. “The story of Chinese tech companies over the last 15 years is, they grew quickly and became innovative because they existed in this space that the state did not regulate and did not fundamentally understand, [but] now it has clearly laid down the marker and said: That era is over.” China imposes greater regulation on various sectors including tech-related market capitalisations. There are tighter rules on anti-trust, fin-tech and data security that seek to contain systemic risk and prevent a disorderly expansion of capital. Domestic tech giants such as Tencent and Alibaba have been significantly affected by the stricter regulations. In the light of China’s decisions on imposing these regulations, the next question is: what would be the smartest and the most efficient regulation approach?

China’s Regulation Rationale:

An underlying motivation for the regulatory crackdowns is the Chinese government’s technocratic mentality. Bill Walton famously said that “China is led by engineers, America by lawyers”. Walton’s sentiment rings true, especially considering that China’s current leader Xi Jinping, and almost all members of the standing committee of the politburo from 2007-2012, studied engineering in university.  In other words, Chinese leaders prefer to leverage their authority to implement structural, decisive, top-down policies – like an engineer seeking to fix a machine. 

The most forceful example of such an attitude is when China sought to reduce its birth rate in the late 1970s. Instead of using a voluntary family planning program, the government enforced a one-child policy via mandatory contraception, sterilization, and blood tests – preventing over 400 million births. And instead of increasing water prices, the Chinese government instead opts to construct a $62 billion system of canals that transports tens of billions of cubic metres of water each year from Southern China to the arid northern regions. Such radical proposals are possible only in places like China, where almost no bureaucratic red tape nor checks and balances constrain the power of policymakers. Conversely, Western governments are more inclined toward using incentives and persuasion to encourage desirable behaviour. 

The movie poster for “One Child Nation” – Amazon Studios

Another underlying factor is the collectivist and utilitarian attitudes that pervade Chinese society and culture. In his book “Justice: What’s the Right Thing to Do?”, the moral philosopher Michael Sandel asks the reader to consider whether a blissful, utopic and prosperous city, whose existence depends on confining a “feeble-minded, malnourished and neglected” child to a dungeon, ought to exist. The question at hand is whether we ought to value certain individual rights deontologically, i.e., valid independent of the interests or welfare of the collective. According to the social psychologist Geert Hofstede, “China is a highly collectivist culture where people act in the interests of the group and not necessarily of themselves.” Hence, Chinese leaders justify the adverse impacts blunt and large-scale policies may have based on the extent to which such decisions benefit society on aggregate. They would agree that you must ‘break a few eggs to make an omelette.’

Consider that since certain Chinese provinces have more university positions available to local students than others, some families sought to migrate to regions with seemingly more favourable university admissions policies. However, since certain provinces have custom exams, Gaokao scores are weighted based on the past performances of each province to ensure equitable outcomes. Exam migration would dilute applicant pools and upset this setup. So, to prevent and discourage parents from migrating for the Gaokao, the government banned hundreds of “exam migrants” from taking the university entrance exam in 2018, indelibly hampering their economic opportunities and professional prospects. 

The Chinese Communist Party (CCP) also enacts policies that impact Chinese citizens and businesses in radical ways to signal its absolute authority. More specifically, the government seeks to convey that no level of wealth, fame, or prestige permits anyone or any entity to oppose their interests. Consider that government established supervisory commissions can detain and investigate Chinese citizens without due process for indefinite periods. Under such schemes, the billionaire investor Xiao Guanhua, movie star actress Fan Bingbing, and former head of Interpol Meng Hongwei vanished from the public eye without a trace in 2018. Fan reappeared on social media three months later and issued a public apology. 

When I visited China a couple of years ago, the government had replaced many advertising posts with banners featuring propaganda slogans espousing values such as patriotism and dedication. The message was clear: the values and ethos of the party are the objective standards that determine whether certain attitudes and behaviours are virtues or vices. Consequently, Chinese citizens are unlikely to fail to heed the notion that, in Chinese society, the CCP is above all.

Reputational mechanisms, a modern solution to a modern problem?

In order to understand the recent crackdowns on Didi and Ant Financial, foreign commentators must look towards historical precedents in China’s unique regulatory environment. Importantly, we must understand the background against which “reputational mechanisms” as a regulating tool are used.

In China, regulatory bodies have wielded “reputational mechanisms” to achieve policy objectives. This refers to state-sponsored acts of public shaming that take place before the regulatory agencies formally impose legal sanctions. In turn, the imposition of such a sanction is conditional on the speed and effectiveness of the firm’s cooperation.

“Reputational mechanisms” were exercised in 2011 in coordination with the launch of investigations into large telecommunication firms – China Telecom and China Unicom – for allegedly conducting price discrimination against rival companies. A surprise announcement was made through China Central Television (CCTV) exposing allegations of such practices. In leaking this information, the National Development and Reform Commission (NDRC) – the primary regulatory body responsible for price discrimination investigations during this time – aimed to turn public favour against these two SOEs, thereby exerting pressure on the firms and their respective shareholders. By acting as a whistle blower, the regulatory body exposes firms to high levels of negative publicity and adversely influences their stock performance.

While this practice may not surprise foreign commentators given the widespread exposure of the recent Ant Financial and Didi investigations, it must be noted that as a policy strategy, the use of “public shaming” is far less common than one might expect. Indeed, the high-profile televised announcement in 2011 stands in sharp contrast to its past practice. Previously, investigations have proceeded without any prior disclosure, and in many cases, they have been concealed altogether. The Price Supervision and Check (2009-2013) revealed mysterious omissions by the NDRC of its antitrust investigations. These cases involved a wide range of domestic targets, including regional monopolies and large central SOEs. As later acknowledged by an agency representative, the NDRC kept a low profile in many investigations out of concern of “double penalty” for the investigated firms.

As such, the surprise announcement through state televised media against China Telecom and Unicom was a deliberate tactic adopted in response to the perceived lack of cooperative willingness displayed by these two SOEs. It is reasonable to conclude that the differential disclosures by the regulatory bodies are determined by the firms’ cooperativeness, rather than the actual transgression.

DiDi, a case study:

Beijing’s policy concerns have largely evolved since 2011. At the same time, its use of strategic “public shaming” to bring domestic companies like Didi and Ant Financial into line are analogous with the aforementioned example. To provide a refresher, below is an outline of Didi’s crackdown:

FT montage; EPA-EFE

Didi crackdown timeline:

July 6: State Council issues document to crackdown on securities-related crimes, primarily those using offshore markets as safe havens.

July 7: Central Commission for Discipline Inspection pens an article on data security as national security and singles Didi. 

July 10: the draft on Cyber Security Investigation Measures was released. Companies owning the data of more than 1 million consumers will need to have overseas listings approved by CAC. DiDi Chuxing’s official app taken down from online app stores. The crackdown later intensified, with a further 25 apps run by DiDi Global purged from online stores. 

The most prevalent rationale in Didi’s case is based on related data security concerns. In 2015, Didi’s researchers even used its data to analyse the travel patterns from China’s ministries to try to compare the productivity of different ministries. While big data is a much-prized commercial asset, it can also turn into a liability, especially amid rising U.S. antagonism toward China and the commercialisation of products such as Didi offshore.

In addition, shifts in the American approach towards China has also shaped this crackdown. The Holding Foreign Companies Accountable Act specifically targets Chinese companies by demanding tougher audit requirements. This tightened U.S. scrutiny has put Chinese regulators on high alert on cross-border data transfer issues. This may explain why Chinese regulators reportedly nudged Didi to postpone its IPO in the U.S., in order to conduct a thorough self-examination of cybersecurity risks, to little avail.

Data security concerns:

In combination, data security concerns, pressures from changes in US policy and Didi’s apparent disregard for regulatory demands meant that China’s cyberspace authorities faced intense public pressure to intervene. Still, Didi rushed ahead to complete the IPO at lightning speed. Didi and its foreign shareholders may have underestimated the regulatory leverage possessed by the Chinese government, and as such failed to demonstrate the level of complicity demanded by regulators. This lack of compliance motivated the state to widely publicise its crackdown on Didi, thereby using “public shaming” to disrupt its IPO process and diminish its appeal to the wider market.

In the case of Ant Financial, a similar tactic of “reputational mechanism” was utilised to damage its prospects at an IPO. In 2021, a hefty $2.8 billion fine on the company in April for anti-monopoly violations, fuelling its first loss in nine years. The regulator had previously penalized Alibaba for not properly declaring a past investment in Intime Retail Group Co., on top of the $2.8 billion fine levied as part of a wider anti-monopoly investigation.

The rationale behind this crackdown ranges from macroeconomic concerns to private grievances between Jack Ma and traditional bankers. First, China faces significant systematic credit risk in its economy. In 2008, corporate China rapidly increased its debt issuance due to low-interest rates and loosened government regulation. China’s corporate bond default nearly quadrupled in 2020 to 120.96 billion yuan from a year earlier. Microlending is the fastest-growing profit centre in Ant Group; however, Ant is dependent upon traditional lenders to offer credit. Given existing systematic credit risks, private lending – especially at the volume and velocity which Ant was offering – creates another volatile variable in China’s debt equation.

Second, it was Jack Ma’s overt display of discontentment towards Chinese traditional banking that triggered the crackdown. Prior to Ant’s launch on 24th of October, Ma accused Chinese banks of operating with a “pawn-shop mentality”. He had also claimed that the authorities were trying to “use the way to manage a railway station to manage an airport” when it came to regulating the new world of digital finance. In the aftermath of this statement, the IPO was called off and Ma was not seen in public again until late January.

According to the efficient market hypothesis, the price of the stocks reflects the value of all the publicly available information about the company to investors. Therefore, any news about the fundamentals of the company is immediately absorbed and reflected in the share price. The subsequent announcement of anti-monopoly investigations into Ant, and the accompanying criticism personally addressed towards Ma across major state-sponsored networks, served as the catalyst for a swift free-fall of Ant’s IPO valuation by 60%.

Jack Ma – Wang He, GETTY images

What can we expect moving forward:

China has greatly supported various domestic companies ranging from high-tech companies such as semiconductor technology, to LONGi Green Energy Technology, all the way to media firms such as ByteDance.

Its rationale is simple; push and promote Chinese firms up the global value chain and mitigate Western companies’ dominance. It seems that the national champions strategy has produced prominent effects that assists the companies’ growth. However, as they gain a larger market power, the concerns about disrupting regular market operation and marginalising SMEs arise, which has in turn called for greater regulation. For regulatory agencies, public shaming strategies can be a cheap, efficient and economic means of enforcement as it can widely disperse information through inexpensive press releases and online publications and apply pressures on the business, altering its image and reputation among customers. The negative impacts on a company’s reputation and stock price, the traditional marker of financial health, also serve as a warning to other businesses to act with moral integrity (or at least the predefined CCP moral integrity that is in line with social and political objectives of the CCP. However, while utilising reputation mechanisms, policymakers need to pay attention to methods for shaming, such as the technique and timing they use, so as to ensure that these companies pay a reasonable cost, instead of incurring excessively heavy losses that affects future operations. Also in the future, other possible unintended impacts of public shaming, for example businesses may adopt rent seeking and lobbying to hamper regulatory agencies’ ability to disclose information, also need to be considered.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Thomas Sinclair
Luke Chen

I am a second-year Bachelor of Commerce student majoring in economics and finance and work part-time as a maths tutor. My interests include history, geopolitics, as well as both micro and macroeconomics. I hope to make substantive contributions to the publication and expand my intellectual horizons while working alongside my fellow writers.

Kaiyue Chen
Haiyue Ma

I’m a first year Commerce student majoring in Finance and Economics. My primary interests are developing markets, macroeconomics and financial crime. As a writer at Cainz, I aim to use an interdisciplinary approach in addressing today’s pressing economic and financial issues.