What Xi Jinping can learn from Reagan

Xiang Nina is the founder of China Gold Investment Network, a media platform that tracks China’s venture capital and technology industries. She is the author of the book “Sino-American Science and Technology War: The History of Chinese Science and Technology Reveals the Truth about Future Technological Competition”.

Chinese President Xi Jinping and former US President Reagan have at least one thing in common. Both leaders quoted the famous saying of the ancient Chinese philosopher Lao Tzu: “Governing a big country is like cooking a small fish.”

Reagan said these words in his State of the Union address in 1988, but added his own explanation: “Don’t overdo it,” which is consistent with his belief that the government should not over-intervene in the free market.

Deciphering Xi Jinping’s understanding of this sentence is not so simple. Chinese state media usually interpret Xi’s words as: “Be careful to control the fire, do not change policies arbitrarily, do not rush for success, and do not rush for success.”

But Beijing’s recent policy changes, especially its eagerness to shake China’s innovation machine, show that Xi Jinping may have ignored his own suggestions. Not only does Xi Jinping seem to lose control of the heat, but the pot is getting hotter and hotter, so that the innovative ecosystem that has become the lifeblood of China’s economy, the delicate little fish, is in danger of falling apart.

Factors such as a well-functioning venture capital market, entrepreneurs who dare to take risks, and increasing integration into the world are the roots of China’s innovation achievements. However, the entire system is being undermined by Beijing’s fierce and unpredictable movement to strengthen technological supervision and strengthen state control.

A good example is entering the U.S. stock market. For a long time, as one of the most important financing channels for Chinese companies, listing in the United States has been an increasingly difficult path. Securities regulators in the United States and China have added more cumbersome procedural changes.

With a long list of Chinese technology companies scrambling to find alternative financing channels, many Chinese technology companies now need to go through the disruptive process of dismantling the ownership structure of variable interest entities before they can go public in the country.

This uncertainty has caused a slowdown in dollar-denominated venture capital funds investing in Chinese start-ups, and the exit prospects of these funds have been clouded by uncertainty. In July, the share of US dollar venture capital funds in China’s total venture capital financing fell to a new low of 8.4%. This ratio is 28% in 2020 and 30% in 2019.

Xi Jinping may have ignored his own suggestions. © Xinhua/AP

A Chinese venture capital market that relies almost entirely on domestic capital as the only source of dry powder and the domestic stock market as the only exit point will severely limit the growth opportunities of local technology companies.

China’s stock market structure and its investor base are simply not mature enough, deep, liquid, and inclusive enough to support local technology companies. If Chinese technology companies were unable to enter the international capital market in the past, then today’s technology giants will not be able to develop to their current scale.

In addition, as many of China’s most outstanding entrepreneurs, including Jack Ma of Alibaba Group, Yiming Zhang of ByteDance, and Huang Kelin of Pinduoduo, retreat to second place, a sense of panic and silence has enveloped China’s entrepreneurial and technological communities. .

Chinese entrepreneurs are still eager to start new startups, but their primary focus is beginning to shift more to safety.

Their first task now must be to figure out whether their startup is aligned with Beijing, and then to study how to keep it right under government guidelines. Innovation needs to be open. Once fenced, it will begin to die out. In such an environment, it will begin to be affected.

A more introverted Chinese venture capital market, coupled with the weakened adventurous spirit of its entrepreneurs, is just one way for the country to become more closed and disconnected from the rest of the world.

China’s data security and privacy laws, especially provisions related to cross-border data transmission and data security review, may endanger the overseas activities of Chinese companies and the operations of international companies currently in China.

Although the evidence is inconclusive, new research shows that the EU’s General Data Protection Regulation has harmed the innovation capabilities and competitiveness of the 27 EU countries. China’s tougher regulatory crackdown may have a more serious impact.

However, this pessimistic outlook can be avoided.

The first thing Beijing should do is to cooperate with US regulators to allow Chinese companies to resume listing on the US stock exchange. The current stalemate stems from years of controversy over how to allow the accounting supervision committee of US listed companies to inspect the audit documents of Chinese companies listed in the United States.

This was a fairly simple dispute at first, with a straightforward solution. But recent developments put national security, data security, and geopolitical power struggles above it.

After President Biden spoke on the phone with Xi Jinping last week, this issue may be one of the first long list of issues that the two countries can try to resolve.

This is good for China’s innovation ecosystem, and Lao Tzu would agree.