The Chinese government has gone “too far” in cracking down on large technology companies — that will hurt innovation and slow down economic growth, an analyst said Tuesday.
Regulators in China have in the last few months ramped up scrutiny on the country’s tech giants such as Alibaba and Tencent. The companies now face fines and new rules aimed at reining in monopolistic business practices.
“There’s certainly a logic to clamping down on monopolies and some of the abuses of power that we see from some of the companies. But they’ve gone too far and basically scared innovators from innovating,” said Scott Kennedy, senior advisor and trustee chair in Chinese business and economics at the Center for Strategic and International Studies.
Kennedy explained to CNBC’s “Street Signs Asia” that the private sector is an important source of productivity gains that fuel much of China’s economic growth.
But the regulatory crackdown may hinder the formation of new companies, while existing firms — particularly small ones — may be scared to make investments in the future, he added.
“That’s where all of China’s important, good, high productivity growth lays, and which we may never see as a result of the clampdown that we’re seeing right now,” said Kennedy.
That potential hit to China’s growth prospects adds to the economic challenges confronting the ruling Chinese Communist Party, which this week marks its 100th year since its founding. China — the world’s second-largest economy — is also grappling a mounting debt pile, an aging population and widening inequality.
China’s economic growth outlook
The World Bank on Tuesday raised its 2021 economic forecast for China, citing an “effective suppression” of Covid-19 as helping the country’s recovery. The bank expects the Chinese economy to grow 8.5% this year, higher than its previous forecast of 8.1% expansion.
Last year, China’s economy grew 2.3% from a year ago — making it the only major economy that recorded growth as the coronavirus spread globally.
Kennedy said China will likely “primarily depend” on state-led investments to boost growth in the next decade. That’s because consumption, while growing, has not bounced back from the pandemic to levels seen in investments, he added.
To boost consumption, China needs to liberalize parts of its services sector so that consumers have additional ways to spend their money, said Kennedy.
“We all have seen this coming, but … it’s still a bridge too far in the short term at least,” said the analyst.
Chinese authorities want to reduce the economy’s reliance on debt-fueled investments for growth. But their multi-year effort to deleverage took a pause last year due to the pandemic, sending China’s debt-to-GDP ratio to an all-time high of nearly 290% in the third quarter, data by the Bank of International Settlements showed.