It was once said by a writer that socialism cannot produce innovation. Well, maybe I was wrong. In the truest sense of a Marxist economy, which I was referring too, is planned by a central government, with product pricing and means of distribution coordinated as well. However, in modern communist China, a hybrid economy has surfaced that to some degree allows the free flow of capital to innovation without a heavy government hand, thus far.
If we start with the premise that technology, including artificial intelligence, will be the primary force that becomes ubiquitous across all industries, then yes, China is a player. Silicon Valley was the cradle of technology, but now Beijing’s booming entrepreneurial scene is becoming the new mecca of technologic innovation. This has forever been the crux of American enterprise, with our virtually free market system giving anyone the ability to create wealth and own property to their best ability. This is no different in China. Socialism is a soul crusher to the worker, who Marx sought to advance. Just ask the modern day Chinese laborer. Jobs at Chinese banks and state-run enterprises were and still are the pinnacle for college graduates, albeit grinding and unfulfilling. In a 2012 Gallup survey, 94 percent of Chinese respondents said they were unengaged with their jobs.
While entrepreneurship and a taste of wealth have come to Beijing, it has not gone totally unnoticed. China has sat by begrudgingly while its largest companies are listing their stock on foreign exchanges. Two of the country’s leading tech companies, Alibaba (BABA) and Baidu (BIDU), trade on New York Stock Exchange. Another, Tencent (TCEHY), is listed in Hong Kong, whose markets are largely separate from those on the mainland. Alibaba’s IPO in the United States in 2014 was the biggest in history, raising $25 billion, and Xiaomi just filed its own IPO in Hong Kong, which is expected to raise $10 billion.
In steps the heavy hand. The “C” in communism also stands for control. This and the fact that the Chinese want to become the world’s leader in technological innovation have initiated a decree to bring these large companies back to China. “It basically comes down to pride and control,” said Andrew Polk, founding partner at research firm Trivium China. “Chinese regulators don’t like the fact that some of their marquee companies have listed overseas.” As one would expect, China has made its own stock markets less attractive due to regulation and the lack of institutional capital. With that said, Chinese stock exchanges valued at $8.8 trillion, making it the second largest in the world. Foreign companies who list their stock on American exchanges like the NYSE do so as American Depository Receipts or ADR’s. China is looking to do the same. They will use China Depository receipts, or CDR’s to bring shares back to list in Shanghai or Shenzhen. They can do so while maintaining any existing overseas listings.
In China it is not so much about the money, but about control. If current firms listed abroad and new IPO’s in China stay in China, it will of course give the government more control. The CDR initiative is “intended to further subject large Chinese corporates to Beijing’s bureaucratic control,” said Brock Silvers, managing director at Shanghai-based investment advisory firm Kaiyuan Capital.
The bottom line here is that this move to bring back technological investment is just a policy ploy, and the big players like Alibaba realize it. This is a somewhat subtle way of saying that you need to be careful in what you do, and that the Chinese government in the end will ultimately decide their fate.