Dexter Roberts is a senior fellow with the Asia Security Initiative of the Atlantic Council and the author of "The Myth of Chinese Capitalism: The Worker, The Factory and The Future of the World."
Alibaba Group Holding, Meituan, Didi Global and Tencent Holdings have seen billions of dollars in share value erased in recent months as Beijing has reined in the internet sector as part of a wider crackdown on private business. Under the pressure of President Xi Jinping's slogan of common prosperity, the tech companies have also publicly committed billions in cash toward Communist Party-approved causes.
The squeeze on the tech sector comes as China's economy shows real weakness. Even as output grew 7.9% in the second quarter thanks to a surge in infrastructure and property investment, income and consumption growth lagged.
This is bad news for Beijing's plan to rely on domestic spending as the new driver of economic growth under what the leadership calls its "dual circulation strategy."
The private sector, meanwhile, has seen its share of fixed asset investment continue to fall since reaching a peak in 2015 as state-owned enterprises take an ever larger role. Different regions of the country are also diverging in recovering from the global COVID-induced slowdown, with some areas lagging well behind in reviving employment and consumer spending.
The gap between China's wealthy and those less well-off is also widening, according to a recent survey by Ant Group and the Southwestern University of Finance and Economics.
Over half of those making less than 30,000 yuan ($4,644) a year reported having only enough financial assets to survive for three months. One-third said they earned less in the second quarter this year than in the same period of 2019, before COVID. Most of the low-income respondents expressed worries about their future employment.
"Higher income people are doing better in all aspects -- household income, assets and job security. Lower income people are doing worse," said Southwest University economist Gan Li. "That's the story for China's economy today."
Private-sector companies have been huge job creators, already employ 80% of China's urban workers and could help boost lagging incomes. So why is Beijing punishing China's most successful companies when the economy is showing weakness?
The clampdown is supposed to send a message to regular folks that the government cares about them and will rein in exploitative private business.
Hence the education ministry's rhetoric about how private tutoring services "peddled anxiety" to turn a profit while sucking up parents' money and children's time as it moved to declare that the sector would henceforth be open only to nonprofit operators. That move sent the shares New York-listed tutoring services New Education & Technology Group and TAL Education plunging.
That was not such a bad thing in Beijing's eyes. The leadership hardly minds landing stray blows on foreign investors who are vilified for profiting in China while showing what is seen as hostility to the country's interests by, for example, expressing concern about human rights abuses in Xinjiang and Hong Kong.
The squeeze on tech entrepreneurs to donate their wealth also serves multiple goals.
For one, the funds should boost favored policy areas such as clean energy, public education, agriculture modernization and rural revitalization. The donations also demonstrate to Chinese frustrated by the country's growing wealth gap that the government is ready to stick it to the very richest. All told, the billionaire leaders of Tencent, Alibaba, Pinduoduo, Meituan, ByteDance and Xiaomi have pledged close to $30 billion to social causes in recent months.
China's strict pandemic border controls have been a boon for the leadership, too. Limiting contact with the world makes it easier for Beijing to shape an official narrative that presents U.S. democracy as chaotic. China's comparative success at combating the COVID pandemic has helped boost overall optimism about the direction the country is heading, according to the Southwestern University survey.
"When (people) look at what has happened in the U.S. and compare it to China, it makes regular folks quite proud," Gan said.
The costs of Beijing's COVID strategy, however, are starting to become apparent. Repeated rolling lockdowns to tightly restrict the spread of infection are damaging consumer confidence and handicapping the economy's sustainable recovery.
"People are still not spending, even more than a year after they suppressed the significant spread of COVID-19," said Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong. "So the question is, what is China's end game and how can they transition from the current path to a new one?"
The answer remains unclear. Without a strategy to move to a more sustainable economic model and with the wealth gap becoming ever more apparent, the Communist Party is left vulnerable.
This will reinforce the authorities' inclination to identify ever more companies as suspect and then crack down on perceived misbehavior in the name of advancing the interests of the Chinese people.
Expect officials to name and shame more industries and slap new restrictions on their activities. Pricey private health care, and the economically all-important housing sector, which along with education costs are seen as "three big mountains" at the heart of the wealth gap, may be in the crosshairs next. Investors should prepare to take cover.