In the last two years, the Shanghai and Beijing Municipal Governments have been on a steady mission to, ostensibly, formalize the economy. Government officials sweep district-by-district, stopping at small restaurants, home-based noodle joints, local clothing stores, Hongmu furniture outlets, and key-copiers, practically every business lining their cities’ busy streets. The stunned small business owners are forced into compliance, reluctantly posting the sign of their closing date. At the same time, digital markets are expanding to nearly every aspect of daily life, from public transportation to food delivery, leaving small, locally-owned stores unable to compete with their massive online rivals. Yet, as the immediate intentions behind formalizing the economy of the Central Government remain vague, it is clear that China is entering a new era of monopolization by digital conglomerates.
In the traditional Chinese top-down approach of governance, this policy has zero tolerance. Officials ask for small business’s certifications and, if their owners cannot produce them, they are promptly given a day to close their business. When business owners ask where they can relocate, officials list new development plazas and other, “more appropriate” places available in their district. Often, these are properties in China’s already dominating and continuously growing mega-malls, properties owned by increasingly fewer individuals and companies.
Most small business owners find all potential alternative locations far too expensive and, as a result, many decide to stay open and face demolition, only rebuild their shops and face demolition again. After a few cycles, business owners are handed two options, jail time or a hefty fine.
One reason the government may be pursuing this mission is to better organize how a district will be zoned for commercial or residential use, reversing the clock on the organic formations that characterized the cities’ initial growth of private, often family-owned and family-run businesses. During the first phase of Deng Xiaoping’s “Reform and Opening-up” policies, people began opening shops in the ground floors of their apartment complexes. Finally free from the punishment of running small enterprises, these small stores and restaurants bloomed, providing products and services that drove growth in both the local community and national economy. For almost forty years, these businesses were the cornerstone of China’s new venture into individual-centered neoliberalism, an underemphasized leap from the previous decades’ collectivity.
Although the government may be concerned about sanitation, food safety, and, presumably, increasing tax revenue from small businesses, the social cost is damaging. Even if the government crackdown is a natural step towards regulatory and consumer protection practices, the timing of these initiatives is suspect given that very little attention was given to these issues in the past. This seemingly innocent drive towards formalizing economic activity has coincided with a dangerous trend towards both traditional and digital monopolies in the private sector.
As online marketplaces expanded to meet China’s new middle class’ demands, hundreds of apps and services emerged to connect people to what they wanted. But in the last five years, fierce competition let only the strongest one or two services in any given sector to remain. In the food sector, Ele.me ($25 Billion valuation) and Meituan ($60 Billion valuation) offer cheap delivery fees 5-7¥ (~$1 USD), allowing people to purchase their meals online instead of cooking and buying vegetables from their longtime local markets and preparing traditional home-cooked meals. Dozens of delivery services existed a few years ago, but these two companies have come to dominate the market, raising questions of how the natural monopolies in internet companies should be regulated. Although most existing restaurants have made it to the online marketplace, their smaller counterparts are excluded if they don’t meet certain certifications.
Moreover, millennials and technologically-keen older generations, even those in their 70s, shop almost exclusively through Alibaba online, which is likely to reach a trillion dollar valuation by 2020. Alibaba holds 58 percent of the retail e-commerce market share alone, while the top ten companies in the sector hold nearly 85 percent of the the market share combined, collectively displaying seemingly unstoppable growth. Small shops find it nearly impossible to beat the efficiency of their competitors, not to mention the diversity of choices such a well developed online marketplace offers.
With such market-altering force, many online giants knowingly operate through fiscal loopholes; the government’s immediate plans to regulation these giants are not clear. Every internet giant is listed overseas, often in tax havens such as Cayman Islands, as variable-interest entities which receive the profits of the company without the liability of having ownership of the assets. They navigate this legal charade to avoid regulations that prohibit foreign investments in China’s internet. Local businesses clearly have none of the legal might to replicate this form of extreme profiteering. Even though the government could decide to change rules about variable-interest entities, it seems they have been concentrating their time in targeting small businesses.
China’s newfound scrutiny for small business now raises even more questions. Are local businesses being pushed out by their competitors through market forces, or is the government helping with their exit? Perhaps both. Should the government instead be helping to keep small businesses afloat by further regulating online mega-companies? How will the relationship between business elites and government change as online sectors tend toward monopoly?
As these digital monopolies grow, entire families’ incomes evaporate and the day-to-day sense of community fostered in each small neighborhood slowly disappears. Isolating people from their storekeepers and neighbors will destroy opportunities to support each other, making people forget their interdependence. Without even realizing it, the convenience that drives people towards online services drives their peers out of work.
Ultimately, this sort of regulation may just be the next logical step as these large cities, and indeed the rest of the country, progresses at their rapid pace. We have seen this pattern in the United States and Europe, where giants such as Coca-Cola, Nestle, Kraft, Johnson & Johnson, and P&G have taken over whole industries. As other countries forge ahead in their development, their governments and economies may also follow suit.
Despite all the speculation surrounding the government and China’s internet giants, it’s certainly possible that the government has a hidden agenda unknown to all but a few. Though it may not be clear now, the true intentions behind this agenda will likely become apparent in China’s next Five-Year Plan.
Photo: Night Market