China this year has been executing a vast, society-wide crackdown. We have been seeing it in popular culture, with the recent suspension of K-Pop accounts on Weibo, a Chinese social media platform, and the banning of the latest Marvel blockbuster due to comments made by the star that were perceived as being anti-communist. We have been seeing it in the tech sector, with the Chinese Communist Party (CCP) tightening the leash on Chinese tech companies such as Didi and Meituan due to their “disorderly expansion.” And, most recently, we have seen Beijing turn the private cram school industry inside-out.
The nominal reason for Chinese leaders doing this is to create a more equitable society, but their true motives are more nefarious and should give pause to any Western entity, organization or individuals seeking to invest or do business there.
A More Just Society or a Better Controlled One?
In a number of Asian societies such as China, South Korea and Taiwan, there is a single exam that effectively determines the course of individuals’ lives. In China, it is called the “gaokao,” a shorter Chinese term for the intense multi-day ordeal that makes Western standardized university entrance exams look like a pleasant walk in the park. The test is so notoriously difficult, the competition so fierce, and the outcome so important, that parents across the entire socioeconomic spectrum spend exorbitant sums of money to send their children to “cram schools,” or after-school tutoring academies where students continue studying late into the night. Tuition fees are so expensive that middle class and low-income parents spend most of their income on these cram schools, and for this reason most of them cannot afford to have more than one child due to all the costs involved.
The costs for schooling children is one reason that has led to a historically low birth rate for China and presents a big problem for a nation with ambitions to maintain its status as an economic powerhouse and, ideally, supplant the U.S. as the dominant global superpower.
Partly as a result of the pandemic, there’s been a proliferation of online cram schools and the educational technology, or EdTech, sector, with EdTech startups in China having collectively raised billions of U.S. dollars in investments. This did not change the brutal financial realities that Chinese parents face with regards to cram schools, but it provided a timely opportunity for Beijing to both address the declining birthrate and further tighten its iron-fisted grip on societal control.
Many of the teachers at private cram schools, both online and offline, are Western ones since there’s a common perception that Western teachers are better than Chinese ones. But if Western teachers are allowed to teach students with minimal government interference, it’s not hard to see how the CCP would see this as a problem.
Cram schools were the one place where the state was not controlling every aspect of the curriculum as they’ve been doing with regular schools both on the mainland and in Hong Kong, including American, Canadian, and British-run private schools. Beijing chose to remedy this by confiscating ownership of private cram schools, firing all the Western teachers employed at them, and turning them into public institutions.
Doing this allows officials to accomplish numerous things at once. First, it allows them to entreat citizens to have more children for the sake of ongoing economic growth, while using the claim that they have “solved” the problem of expensive cram schools and have made them equitable for everyone. Next, by seizing ownership of private cram schools authorities now control the curricula of all education that students will be exposed to from grade school through university, thereby ensuring that all content will be party-approved and supportive of the Communist Party’s agenda. They can also prevent students from potentially being exposed to the kind of independent, creative thinking displayed by the entrepreneurs behind the tech-centered tutoring platforms who have been pushing the limits of what they could do under Beijing’s watchful eye.
Showing the Tech Industry Who’s Boss
Behind every move the Chinese government makes is a long-term, big picture strategy that the rest of the world, and certainly the West, is often unable to see. This brings us to yet another item on the CCP’s agenda: keeping the big state-owned enterprises, and the locus of the nation’s economic power, centered in manufacturing instead of tech. As the Party sees it, one of the problems with the tech companies that go public on the global stock exchanges is that they get held to international accounting standards that require transparent auditing. China has always resisted being held to any international standards under the pretext that they have different standards and that they’re a sovereign nation. (Of course, such resistance to international standards inevitably leads to problems such as the Luckin Coffee debacle, in which the chief operating officer of that company notoriously fabricated its sales reports).
In addition to wanting to keep the base of economic power in manufacturing, forcefully taking away private cram schools from the entrepreneurs who founded them also helps Beijing fulfill yet another agenda item: curtailing the growing economic and social influence of tech companies. When seen in this light, China’s recent moves against online cram schools make sense as it is simply part of the larger plan of keeping tech companies in their rightful place in the social hierarchy. Companies such as Alibaba, Didi and WeChat have pushed the limits of what companies in China have traditionally been able to do, such as squeezing small businesses, and this has not sat well with President Xi Jinping and Party officials who, over the past year, have been systematically making examples out of tech companies and the entrepreneurs driving them. Typically, the argument used is about protecting users’ data, preventing monopoly, or making society more equitable. But the real message is always clear: the Party is the law, and no one is above the law.
Hurting the West, Maintaining Dominance
Part of the thinking behind CCP’s chess moves lie not just in a big-picture, long-term strategy but in the way that each move serves multiple purposes. Whether it’s reigning in the influence of tech companies in general, or taking over online cram schools, as it has recently done, one of the desirable consequences from the Party’s viewpoint is that Western investors get hurt or crippled in the process. Not only is this retaliation for the U.S.-China trade war, it is part of the Party’s multifaceted strategy for securing China’s future as the dominant manufacturing and economic superpower and ensuring that no one from the outside (e.g., the West) or the inside (e.g., Chinese tech entrepreneurs) can pose a credible threat to the Party’s dominance and centralized control.
Part of Beijing’s modus operandi for this is to first let companies doing business in China to grow and become successful. This goes for both Western companies and Chinese companies heavily backed by Western investors. In the process, party-approved entities learn everything they can from these companies and, once that’s been achieved, the next step is almost invariably one of two options:
- Destroy these businesses and their investors by inventing a reason to confiscate the companies or their intellectual property and then kicking out all the Western managers and employees.
- Or in the case of powerful and influential Western companies, to use them as leverage for advancing the Party’s nationalist agenda.
The first option is what it recently did with online cram schools, just as it has done in the past with Western companies such as Tang Energy Group, a Texas-based clean energy company. The second option is essentially what it will do, and is already doing, in its business dealings with powerful corporations such as Disney and the Wall Street banks. In fact, if both Disney and the Western banks do not tread carefully, they may find themselves getting subjected to both options: strong-armed into supporting the Party’s nationalist agenda while also getting kicked out and having the state confiscate their businesses in China.
In light of all this, the question remains: Will international and Western organizations wake up to the dangers inherent to doing business in China or investing in Chinese companies? There is some indication that they are beginning to. It remains to be seen, however, whether anything will change or be done about it.
Western businesses and investors, up to now, have largely been blinded by the short-term promise of tapping into China’s enormous market to see the dangers, which is why they keep making the same mistake no matter how many times we see the same story play out. This could become especially problematic if influential Western universities such as Yale, which is currently collaborating with China, and Harvard, which has received $97.3 million in gifts from mainland sources, get locked into compromising situations. These institutions groom the future leaders of the West, and it is chilling to imagine what could happen if they are pressured to support China’s policies or have their efforts in China undermined as punishment.
It’s a dangerous game, and China is very good at it. We need to get better at it, too.