What Xi Jinping has done for Chinese business

Xi Jinping's decade in power has ushered in sweeping changes for the Chinese economy. When the country's powerful leader spoke for two hours to the Communist Party's national congress on Sunday, he hailed a "historic rise in China's economic strength" and said the country had "joined the ranks of the world's innovators."

For some business leaders and entrepreneurs, the past 10 years have brought unprecedented wealth. But shifting political priorities have also brought huge challenges. Above all, China's government has sought to remain firmly in control of corporate activity.

Here is a reminder of what has changed in China's most significant business sectors over a decade under Xi -- and a look at what the next years will bring.

China's consumer-focused tech and internet companies grew into some of the world's biggest corporate names under President Xi Jinping's watchful eye, flourishing in a Beijing-controlled 'walled garden' that limited competition from U.S. rivals.

Alibaba Group Holding's $25 billion initial public offering in New York in 2014 was then the world's largest, confirming founder Jack Ma as a global business figure. Alibaba and Tencent Holdings have spread into almost every corner of life in China, providing consumer entertainment, payments and loans, social media, cloud storage and all kinds of government services. Other companies, such as Pinduoduo and JD.com, also grew into Chinese versions of Amazon.

But the tide has turned amid signs that China's Communist Party leaders felt increasingly threatened by a powerful private tech sector.

A sweeping crackdown on the industry starting in 2020 has sent share prices tumbling. After Ma voiced criticism of financial regulators, Chinese authorities forced his company, Ant Group, a fintech arm of Alibaba, to halt an expected record-breaking IPO. Ride-hailing company Didi Global was forced to delist from New York and fined 8 billion yuan ($1.1 billion at current exchange rates) for breaking data security and personal information protection laws. Multiple companies have been hit by antitrust fines or restrictions, such as limits on computer gaming.

In response to this pressure, tech companies have been stepping up donations, aiming to meet Xi's call for "common prosperity."

Chinese companies are also under scrutiny in the U.S. as the world's two largest economies decouple. Dozens are at risk of being booted off American exchanges unless Chinese regulators allow full U.S. access to these companies' audit records.

Even video app TikTok has had U.S. pushback over whether user data was accessed from China. Plans for a stock exchange listing by Bytedance, TikTok's Chinese parent and one of the world's hottest private companies, have been delayed.

"The old venture capital way of investing a lot of money for cash-burning businesses focused on consumers is probably not something that the Chinese government is encouraging. I think the government now is looking at having real technology development, what I call a focus on real core technologies," said Thomas Tsao, co-founder of Gobi Partners, an Asian venture capital group. He said Beijing's policies were set to be a catalyst for investors to look for openings in other parts of Asia.

Under Xi's leadership China's banks have been clearly directed to serve political priorities for the fast-growing economy. In 2013, premier Li Keqiang said the banking sector needed to "utilize both growing and existing assets" to serve the economy, including lending to small and medium enterprises.

But the mission has not always been good for their balance sheets and the banking sector has become a source of political and economic concern, with bad debts piling up as growth has slowed. Nonperforming loans grew almost fivefold between the end of 2012 and mid-2022.

In particular, banks have been caught up in the changing fortunes of China's property sector, where demand was stoked from 2014 by loose monetary policy. Authorities tried, starting in 2019, to rein in lending for real estate, but the problem of bad debts in the sector has forced regulators to shift course again and ask banks to "enhance credit financing" for property projects in need of help. The central bank has directed the six largest banks to each offer at least 100 billion yuan of financing support to homebuyers and developers.

Bank of China's nonperforming loans to the property sector grew 20.13% in the first half of this year.

China's struggling economy has made conditions even more challenging for smaller lenders, such as rural commercial banks, where bad debts have grown more than twelvefold since 2012, data from the China Banking and Insurance Regulatory Commission shows.

Four such banks in China's central Henan province were at the center of rare sporadic protests this July when they failed to repay depositors. China's top banking watchdog had to step in to reimburse customers. Officials said illegal fundraising was the cause.

Two rural banks in China's northeastern Liaoning province entered bankruptcy proceedings in August.

Gary Ng, an economist at Natixis in Hong Kong, said smaller banks have fewer resources than big lenders and a higher concentration, meaning their lending portfolios are not as diversified as those of bigger banks.

There could be more divergence between big and smaller Chinese lenders, as the former have more state support, said Ng. Many have pointed out that Xi's speech during this month's party congress has suggested a more state-led economic approach.

Xi himself delivered the telling phrase that triggered the end of the breakneck rise of mainland China's property sector: "Houses are for living, and not for speculation."

His message, delivered during a year-end conference to set China's economic agenda in December 2016, has become the core of Beijing's real estate policy to clamp down on highly leveraged developers. Xi's comment was reaffirmed in various other cornerstone documents, including his keynote speech at the Communist Party congress five years ago and the five-year plan to 2025 established last March.

The policy turnaround has had a dramatic impact, especially on private developers, which relied heavily on external debt financing. A number of private homebuilders, including Evergrande Group, emerged over the past couple of decades, based on robust demand for decent housing, but also coupled with strong expectations of rising prices, fueled by speculation.

Some leading real estate tycoons used to be regulars on the country's rich list. The year Xi assumed the top party post in 2012, half of Forbes's China top 10 were from the property sector, including Evergrande's Xu Jiayin and Country Garden's Yang Huiyan. On the latest list, published in April, they were all gone from the top 10.

The turmoil in the property sector is causing serious collateral damage to local government coffers. Since a 1994 tax reform, local governments lost a range of revenue sources to the central government. In return, they were granted full access to income earned from land auctions. For years, this served as the main revenue source for local governments, but as developers have lost purchasing power, sales have dwindled and pushed some local governments into a critical financial position.

Certain state-owned players have begun to lead a gradual rebound in recent months, but the overall outlook remains bleak. Sean Darby, chief global equity strategist at Jefferies, believes the Chinese real estate market is going to shrink quite rapidly "over the next five to 10 years."

The semiconductor industry lies at the heart of the U.S.-China tech tensions that escalated during Xi's second term.

Washington began ramping up pressure on China's tech industry under President Donald Trump. Huawei Technologies, once the world's second-biggest smartphone maker, was put on a trade blacklist that restricted its access to key American technology, and even its ability to work with global partners like chipmaker Taiwan Semiconductor Manufacturing Co. Today it is barely among the top 10 smartphone brands worldwide.

China's top chipmaker, Semiconductor Manufacturing International Co. (SMIC), and other national champions have joined Huawei on the trade blacklist, with Washington accusing them of having ties to the Chinese military. The pressure has only intensified under Trump's successor, Joe Biden, with the latest restrictions on Beijing's tech ambitions announced early this month.

But tensions with the U.S. have not been all bad for China's chip sector. Coupled with a global chip shortage, Washington's crackdown has pushed Chinese companies to embrace domestically made semiconductors. For years, homegrown chips were seen as a second-best choice.

The tech trade war also loosened Beijing's purse strings. The central and local governments have poured billions of dollars into subsidizing chip plants and suppliers, largely through the "Big Fund."

SMIC has been a major beneficiary of these trends. Its revenue jumped from $1.7 billion in 2012 to $5.44 billion for 2021, while its net profit grew from $22.8 million to $1.7 billion over the same period. SMIC co-CEO Zhao Haijun has repeatedly cited robust domestic demand for the strong performance.

Many tech manufacturers have also climbed up the value chain during Xi's tenure. Luxshare Precision Industry has become Apple's most important Chinese supplier, making iconic products such as iPhones, the Apple Watch and AirPods.

Back in 2012, Luxshare was a small connector maker, with revenue of just 3.14 billion yuan. Last year, it raked in 153.94 billion yuan.

But there are more clouds on the horizon. The most recent U.S. trade restrictions take aim at the very heart of China's ambitions for building an advanced chip industry. The new rules restrict shipments of cutting edge chip tools to China, and even who can work for the country's semiconductor sector.

Foreign investment has undergone changes in recent years, as China shifted its focus away from growth based on low-value manufacturing in favor of boosting high-technology sectors to cushion the blow from a slowing economy.

Restrictions in selected sectors have also been eased under President Xi Jinping, allowing foreign investors to take a greater share of ownership of ventures in the country.

For example, U.S. automaker Tesla was allowed to set up a wholly owned production hub in Shanghai without equity restrictions in 2019. China has become Tesla's most important market outside the U.S., with consumers rushing to buy its electric vehicles.

In the financial sector, too, 50% foreign ownership limits were removed in 2020 to enable the likes of JPMorgan to participate more fully in asset management in China.

High-tech sectors' share of foreign direct investment (FDI) grew to 28%, up from 11% in the period between 2014 and 2019, data from Fitch Ratings showed in a report in September.

But China's relationship with foreign investors has also grown more complex, aggravated by the country's adherence to a zero-COVID policy and its souring ties with major Western countries, which has started a decoupling of the Chinese and U.S. economies.

Furthermore, a large portion of high-tech FDI originated from funds raised offshore by Chinese companies, said Fitch Ratings. It added that restrictions remain, for example, in the telecom sector, where operating license approvals are still required, despite the removal of the 50% limit on foreign ownership.

Foreign business sentiment in China has dived due to the impact of mass lockdowns and no sign of a policy to shift toward living with COVID, as has been adopted by many countries.

U.S. companies' confidence in China's further market opening over the next three years dropped to 47% in 2021, compared with 61% in 2020, according to a March survey by the American Chamber of Commerce in China.

Still, Beijing's message is that it remains open for business. China's commitment to market opening over the next five years remains "unwavering," Sun Yeli, a media spokesman for the ongoing national congress said Saturday.

But Xi himself warned at the congress the following day of "roaring waves" and "violent storms" ahead designed to suppress China's rise, signaling his readiness to continue China's competition with the U.S. as Beijing looks to increase still more its growing influence in the developing world.

"With the balance of priorities tilting toward security and away from growth, China's policymakers could end up tolerating more cyclical weakness as they try to restructure the economy to better manage external challenges and the competition with the U.S.," said Andrew Batson, director of Beijing-based research specialist Gavekal Dragonomics.