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Victor Shih is a professor of political science at the University of California San Diego, where he is also director of the 21st Century China Center. A well known and prolific commentator on China’s political and financial scene, his most recent book, Coalitions of the Weak, describes how elite Chinese politics has worked since the late-Mao era until the present day. We recently met in London to discuss the ramifications of the Party’s moves against big tech companies in recent years combined with its ongoing efforts to root out corruption. The following is an edited transcript of the conversation.

Q: Let’s start with the period from late 2020 when Beijing effectively blocked the IPO of Alibaba’s Ant Financial. People now refer to this as China’s ‘tech crackdown’ — do you refer to it that way and what do you think the government’s motives were?

A: I think it was a crack down. In retrospect, and even somewhat at that time, it was clear that it was really about establishing the relative level of power between the private technology sector and the Chinese government. For a while before, the tech sector had had no real regulator, and a lot of space to expand and build on its own. 

Initially, that worked to China’s great advantage. The only thing the nascent tech sector demanded was protectionism, which the Chinese government happily offered them. Potential competitors like Google and Facebook were banned in China. And of course, this served the party’s own interests: it didn’t want all this western content and speech to get into China. But it really did provide a space for the Chinese tech sector, in social media and in online sales, to prosper. And they did. There was light regulation, and while that sort of changed with the establishment of the Cyberspace Administration of China [in 2014], initially the regulatory approach remained relatively light. 

But at some point that changed. It might have been Jack Ma’s speech [Ma gave a speech in November 2020 that was critical of government regulation, a moment many see as the beginning of the tech crackdown], although I suspect that it had been building up — various stories of what Jack Ma was doing had filtered into Zhongnanhai [where China’s top leaders live and work], and perhaps purposely been brought to the attention of Xi Jinping himself. 

As far as we know, this is how policymaking works in China: certain issues get highlighted to Xi, and then he reacts to it — sometimes positively, sometimes negatively — and then the outcome ensues. This might have been an episode where the Jack Ma speech — which, of course, was not directed at the Chinese government as a whole but was actually directed at the financial regulators — was somehow highlighted to the leadership.

And it seemed to end a period in China where the government’s approach to certain sectors that are more consumer-focused had been relatively hands-off.

Yes. Traditional heavy industry was always dominated by the state: while light manufacturing was growing on its own with some subsidies from the Chinese government. And then you have the primarily consumer-facing technology industry that was growing with a relatively light regulatory touch, and protection from foreign competition, which was really important. 

Over time, different departments within the party realized the enormous potential of the tech industry to shape the thinking of young people. In recent years there has been another big crackdown, which people don’t talk as much about, towards the gaming industry, which really hurt companies like Tencent, which is still a major game developer. 

The party also needs to have firm control over anything that infringes on its core functions, which includes the financial system, where the tech sector was gradually taking over. The Ant Financial crackdown was part of a larger movement for the party to really assert control over the entire Internet space for the first time.

Ant was offering high-yielding wealth management products that were very easy for users to purchase. The way that threatens the traditional banking system is that you could potentially see large withdrawals of deposits held by ordinary retail consumers in big state banks, which are then plowed into the trust products that Ant was marketing. The regulators were ringing the alarm bells, and actually did kind of put a stop to this. That’s what Jack Ma was complaining about in his speech, the way in which the financial regulators were taking the most profitable segments of Ant Financial out of their hands. Then that is what got the reaction from the higher levels.

To what extent do you see the crackdown as an effort to reorient the tech sector so that more talent would go into areas like developing chips and hardware, rather than what the Party might see as more frivolous things like video games, crypto and social media? 

That came a couple of years later. You heard more about this in 2022, even in the middle of the pandemic. But the reality is, smart, science-oriented students in China are still driven by job opportunities. Even if you curtail the development of some of these online platforms — and some of these big traditional platforms are hiring fewer people — they will still be attracted to the most profitable segments. 

It’s extremely difficult amid this very complex web of red tape, any one of these regulators can choose to make your life very difficult — to impose fines or fees, or stop approvals and so on.

One area that the Chinese government supposedly has cracked down on already is cryptocurrencies. But it remains a very popular sector for young people around the world. Tech savvy people want to devote their energy and attention to cryptocurrency trading because they think they can create wealth out of thin air. Even if you destroy the sector in China, the sectors are so globalized — it’s the same thing with gaming. Within China, people can go online and programme for a foreign company now. That’s very easy to do, so that’s what they do.

Jack Ma was pretty much the most famous Chinese businessman in the world. So the narrative that the media ran with, particularly outside of China, was that the tech crackdown was a personal effort to cut him down to size. To what extent do you see it as having been motivated by that sort of dynamic?

The leadership in China doesn’t like having a very high profile and vociferous leader from the private sector. The Party sees normal interaction between it and the private sector as a discussion meeting, where technology leaders can politely raise two or three concerns, and then the Party will benevolently respond with their help. Everything’s very polite, there’s no direct criticism of the party. This has been how Xi Jinping has tried to placate the private sector. 

What the party does not usually tolerate is sharp criticism of government policies in public, or even in private. In the past, they tolerated it for a while, partly because many of the technology companies had backers very high up in the Chinese government, associated with different senior leaders. 

But of course, with the consolidation of power in the hands of one person these connections mean much less today. So when people dare to criticize, and the leadership finds that to be displeasing, they have the ability to really crack down. Some of the tech sector entrepreneurs did not realize that behind the scenes the power structure within the Party had changed fundamentally — and that behavior that they used to get away with because of their very high level backers, they could not get away with anymore. 

By now, people have learned that lesson. And this is why within China, there’s hardly any murmur of criticism against the government, especially against the top leader Xi Jinping.

The way that wealth and power interact in any society is fascinating. Do you see that wealthy people in China are seeking political influence? 

Yes, and they have sought political influence, of course. And the reason is very simple. In theory, their day-to-day interactions should only be with the regulators of their particular sector. The problem is, every company in China faces numerous regulators, from local authorities to different central ministries. It’s extremely difficult amid this very complex web of red tape, any one of these regulators can choose to make your life very difficult — to impose fines or fees, or stop approvals and so on. 

It’s also impossible to run a business if you have to deal with the regulators directly and have no political power on a day to day basis. So business leaders have to go over their heads, they have to find some kind of political pressure points to exert on their everyday regulators, so that they will make decisions favorable to them. From day one, from the 1980s onwards, Chinese business people have tried to gain the favor of local leaders. 

In the 1980s and 90s the princelings who had very high levels of access in Beijing were able to exert pressure on lower level officials. When power at the top was evenly distributed among different factions, it actually provided, I would argue, a weird kind of property rights protection. In China, there’s the law, but it’s all run by the Party. So how do you protect your property rights? It’s through knowing someone, having guangxi with someone higher up, either at the local or central level. 

Because there were originally so many different power points, and power was evenly distributed, you had a large number of firms who had pretty good guangxi, and the different power centers could not destroy each other. There was an equilibrium: You run those businesses, I run these businesses and let’s hope there’s no big clashes between them, then we can all make money through our fiefdoms. 

That worked for a long time, also because China underwent a long period of extraordinary economic growth, partly made possible by this system of de facto property rights. I think that changed when power became concentrated in the hands of one person.

A lot of people back in the 1980s and 90s, certainly from outside of China, predicted that pursuing pro-growth reforms, allowing people to get rich and some level of market forces to take over in the economy, would eventually see the rise of a middle class that in turn would push for systemic change in China. Are you surprised that hasn’t happened? 

I’m sure, in reality, there’s demand for that kind of change. In practice, it’s extremely difficult to realize or even begin to organize or conceive of something like that, just because the Party watches over everything. I’ve just been to Beijing, there are cameras everywhere. 

There are a lot of people now who are quite unhappy. There’s a very high unemployment rate among young people, and salaries are being cut in the financial sector by 30, 40 or even 50 percent. Bonuses from previous years have been clawed back — millions of renminbi, it’s unimaginable. 

So there’s a great deal of unhappiness, but the party’s ability to manage that has gone up tremendously in the past 10 years. It would take a very extreme scenario of hundreds of millions of people not being able to work, or being able to leave their house to buy food, which is what you saw in late 2022 [during the so-called white paper demonstrations across several Chinese cities], to get a relatively large scale national protests. That kind of extreme scenario is not likely to repeat itself in the near future. And even if it did, the Party — because of what happened in 2022 — has built up its capacity to stop protests and any kind of mass manifestation of dissatisfaction. 

The one outcome of all of these very successful social management policies, if you will, is that a lot of people are leaving China. So with private entrepreneurs, many of them have left en masse to Singapore, or the U.S.. 

Do you see the crackdown as having a long running impact on the economy and growth in China then?

Yes. A lot of talent is leaving. 

But on the other side, the Chinese government has provided a lot of incentives for scientists to stay or come back to China, and has even been recruiting some foreign scientists from Russia, for example. 

Xi Jinping is very focused on the technology race between the U.S. and China. So there’s a great willingness to create a lot of incentives for scientists. But of course, the ideological crackdown has been a deterring factor for scientists to go back to China. I’ve talked to a few people who say, ‘Well, if I go to Tsinghua University, I will have a lab, I will have all this stuff. But then my kids will have to go to school and learn all about Xi Jinping. They won’t want to do that.’ If things like that were relaxed, I think China would be able to attract such people. 

So I think there’s some pull factors, but the lack of economic opportunities for retail businesses is a push factor. A lot of people are leaving. The poor state of the real estate industry, and the government’s willingness to just let the sector go down continually also has driven some investors out of China. 

Turning to the anti-corruption drive: you will have followed this from the start. What do you think drove that initially? 

Well, there was a lot of corruption. And some of the princelings, some of the people in the PLA saw that as a cancer within the party that they wanted to eradicate. 

One thing that they kind of missed, is that the corruption provided incentives for local and even some central officials, to promote economic activity within their jurisdiction, and to allow businesses to flourish. This is an argument that Yuen Yuen Ang has made. If businesses are dying, they’re not able to provide their taxes and corrupt payments to officials. But if they flourish, and they generate income, this in many cases can be fed to their political patrons.

This is the argument that in some developing economies, some level of corruption greases the economic wheels.

There’s some truth to that. It provided incentives: meanwhile mid-ranking civil servants who engaged in petty and even large scale corruption powered consumption in China. Part of the reason why the consumer market is not doing especially well now in China, is because of the years of anti-corruption. The middle class in China is the Chinese government. 

This is another explanation as to why there hasn’t been a middle class uprising. If you go to most medium-sized cities in China, the vast majority of middle class people work for the government, or units attached to the government, like hospitals and schools. They’re not going to rise up against their employers. 

If corruption was a positive in terms of economic growth, because it allowed people to get round the system of bureaucracy and regulation, if you then crack down on it, I guess what you need is a commensurate loosening up of the system to allow businesses to flourish in a more legal way. Have we seen that happen at all? 

There have been attempts. This was the work of Li Keqiang when he was premier. He tried to cut a lot of red tape. 

Then Premier Li Keqiang chairs a symposium on China’s economic situation, attended by experts and entrepreneurs, Beijing, China, July 11, 2016. Credit: Chinese State Council

Officially, that happened: a lot of red tape got cut, taxes were reduced. Except that the Chinese Communist Party still has a monopoly of power, meaning the general secretary of every city can still arbitrarily impose fines and fees, and prosecute companies as they wish, and there’s really no legal recourse. In China you cannot sue the government: I mean, you can, strictly speaking, but in practice it is always very, very difficult to make that work.

On my recent trip to China, I heard a lot of stories from economists who told me of local businesses being hounded by primarily local governments to extort them, basically, because the local fiscal situation is in very poor shape, as my research has shown.

One aspect of the anti-corruption drive from the start has been that Xi has been very prepared to target high profile figures. History would suggest that in regimes where that sort of thing takes place, it works for a while, but eventually you get to a tipping point where you create too much resentment. Do we see that kind of dynamic in China?

There’s been no uniting of people affected. The rational response has been just to do nothing. Just say, ‘Well, I’m not going to make any extra money whatever I do, I will just do the bare minimum to satisfy whatever the latest dictate is coming from Beijing.’ 

This is like the Brezhnev-era problem in the Soviet Union [in the 1970s and 1980s]. People saw things slowly deteriorating and getting worse all around them, yet no one did anything. This is what we’re seeing in China today. There are a lot of problems that are festering, no one has an incentive to fix it, because they also know they have no power to do so. If only one person has the power to make a decision to dramatically reform something, no one else has it. So why should they propose or try to do anything to make things better? 

…we are beginning to see that within Xi’s faction there seem to be some rivalries emerging — not challenging his power, as such, but fighting for relative positions within the regime.

We know this is happening, because Xi Jinping himself has said time and again that lower level cadres are not ‘doing things’. Xi knows that this is a huge problem, but it’s one that he caused with all these crackdowns, with all these demands for ideological uniformity. He has succeeded tremendously in a sense: there is ideological uniformity, corruption is largely gone. When you don’t have any real estate investment there’s no room for corruption: Nobody has any money. Congratulations, you’ve succeeded! 

So what’s happening is a gradual degeneration instead of some kind of opposition emerging. People are just going to let things fester until state capacity is so weakened, that any kind of shock can destabilize the whole system. We don’t know what that will be: It could be some kind of international event, it could be a rebel movement that emerges like what we saw in the late Qing period. I don’t think we’re there yet: there’s still a lot of state capacity, as we discussed.

So when we sum all of this up, how do you assess Xi’s current position and power?

Within the party he’s very powerful. All the rival factions, they’re all gone, even the ones which were never particularly rivalrous with him, but were more independent of his power base — Wang Qishan, the [former premier] Zhu Rongji tendency have all been more or less removed 100 percent. 

But we are beginning to see that within Xi’s faction there seem to be some rivalries emerging — not challenging his power, as such, but fighting for relative positions within the regime.

Can you put some names to this? 

So there’s Tang Yijun, who Xi trusted with the Ministry of Justice job after Fu Zhenghua was removed. Fu Zhenghua was someone who had helped Xi Jinping rise to power by looking after the Ling Jihua case, and he benefited from that for a while. But then he was removed three or four years ago. And Tang Yijun took over his position: but he was arrested himself a couple of months ago. 

So then you’re wondering, well, how did this happen? Either Xi Jinping himself discovered something that angered him, or someone else within his faction highlighted this person’s problem, which led to his arrest. Either way, within Xi’s formerly very unified group of people, you’re beginning to see some splintering.

What should we be watching for there? 

This is kind of what you saw in the late Mao period. No one dared to challenge Mao’s power, but among themselves, they began to try to undermine each other. It’s kind of a low level conflict. 

The net result of that is that nothing got done, nothing substantial. No one dared to make a bold proposal, because that might leave them very vulnerable to attacks later on by some other faction. People made very mundane proposals to protect themselves. This is what we’re seeing today, actually.

I think Xi will carry on for a fourth, fifth or sixth term, who knows? But it doesn’t mean that the jockeying has not begun yet. People are trying to position themselves in different ways.

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