China’s crackdown on tech firms will damage financial progress, analyst mentioned

The Chinese government has gone “too far” to crack down on large tech companies – it will hurt innovation and slow economic growth, an analyst said Tuesday.

Regulators in China have been taking a closer look at the country’s tech giants like Alibaba and Tencent over the past few months. Companies are now threatened with fines and new rules designed to curb monopoly business practices.

“It is certainly logical to pinpoint the monopolies and abuse of power that we observe in some companies in Chinese economics at the Center for Strategic and International Studies.

Kennedy told CNBC’s Street Signs Asia that the private sector is a major source of productivity gains that is driving much of China’s economic growth.

There is certainly a logic in limiting yourself … but they have gone too far and basically shy away from innovators from being innovative.

Scott Kennedy

Center for Strategic and International Studies

However, regulatory crackdown could hinder new businesses from starting, while existing businesses – especially small ones – may be afraid to invest in the future, he added.

“Here lies all of China’s major, good, and high productivity growth that we may never see because of the crackdown now taking place,” said Kennedy.

This potential impact on China’s growth prospects adds to the economic challenges facing the ruling Chinese Communist Party, which this week celebrates its 100th year since it was founded. China – the world’s second largest economy – is also struggling with a growing mountain of debt, an aging population and growing inequality.

China’s economic growth outlook

The World Bank raised its economic forecast for China in 2021 on Tuesday, citing an “effective suppression” of Covid-19 as a contribution to the country’s recovery. The bank expects the Chinese economy to grow 8.5% this year, higher than its previous forecast of 8.1%.

Last year, China’s economy grew 2.3% year over year – making it the only major economy to see growth as the coronavirus spread around the world.

Read more about China from CNBC Pro

Kennedy said China will likely depend “primarily” on government-led investments to fuel growth over the next decade. That is because, although consumption has grown, it has not recovered from the pandemic to the level of investment, he added.

To boost consumption, China needs to liberalize parts of its service sector so that consumers have additional options to spend their money, Kennedy said.

“We all saw it coming, but … at least in the short term, there is still a bridge too far,” said the analyst.

The Chinese authorities want to reduce the economy’s reliance on debt-driven investments for growth. But their multi-year debt-deleveraging efforts paused last year due to the pandemic, pushing China’s debt ratio to an all-time high of nearly 290% in the third quarter, data from the Bank for International Settlements showed.

– CNBC’s Evelyn Cheng contributed to this report.

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