The Trojan horse threat behind China’s tutoring and tech crackdown amid US rivalry

Both industries have become increasingly powerful and could be capable of destabilising society and Communist Party rule as China engages in an existential contest with the US

Andy Xie

Published: 3:30am, 2 Aug 2021

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Beijing is cracking down on tutoring businesses in its latest move to reshape China’s economy. Internet companies have also been under scrutiny for some time. Many actions fall under the murky policy goal of reducing neijuan, which translates as involution or “wasteful churning”.

China’s intensifying rivalry with the United States appears to be the catalyst for reducing neijuan and increasing efficiency. But the story is much more complicated. Keeping the ruling party at the centre of everything is behind almost every decision in China.

Tutoring companies create business by triggering competition between middle-class parents. They create demand by forcing ever-younger children into academic study. With sought-after kindergartens and primary schools designing their entrance tests for the well-tutored, everyone must do it – or risk leaving their child behind from the start.

This is a quintessential case of neijuan. Resources are wasted and children’s lives ruined in cram schools. It is also a clear case of profit-driven education causing harm.

Tutoring costs are also probably the most important factor, after astronomical property prices, in putting couples off having children. China could experience a declining population in three years. That would be a huge psychological blow, weakening the world’s perception of China’s chances in its rivalry with the US.

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Further, private tutoring companies may not advance Communist Party priorities in learning. As reliance on these companies grows and the tutoring industry expands, it poses a long-term threat to party rule.

The widespread participation of Western capital in this market is probably viewed by the party as a Trojan horse to subvert its rule. Beijing is aware that the US undermined Soviet rule during the Cold War by distributing the classic novel Doctor Zhivago. With so many politically sensitive negatives associated with the tutoring industry, it is unlikely to survive.

Beijing has also been targeting internet companies over monopolistic practices. But it is far more complicated than that. These companies are monopolies because the government chose to support them. This was why, despite transgressions, they had been treated with kid gloves. But the recent rumblings are far more serious. The government may have come to view them as threats to its rule.

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Internet companies collect massive amounts of data, with real-time knowledge of what’s going on. They want to use this knowledge for profit – but they could use it for other purposes. With their foreign capital and connections, the party fears they could become Trojan horses in the China-US rivalry.

We have to assume the Communist Party is thinking of the worst-case scenario. So, internet companies’ capabilities could be a threat.

Internet companies are certainly a big part of China’s neijuan story. They use big data to exploit human weaknesses for profit, particularly in online gaming. I wrote many years ago that it was the opium of the 21st century. It has already decimated a generation of young men.

As the main profit tool is to encourage gamers to buy weapons to gain an advantage, online gaming has instilled in a whole generation the ethos of winning by any means possible. There is no sense of fair play. It is all about how much money you have. Left unchecked, this trend could destabilise society and be the biggest threat to the party.

The online universe promotes a culture where anything goes and winning is everything. This is a major reason that winners are often worshipped no matter how they got there. If someone becomes rich by fleecing retail investors through pump-and-dump schemes, what a clever guy.

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Over time, this sort of social Darwinism destabilises society. If the winner is always right, anyone could cook up anything to overthrow the Communist Party for the ultimate prize – control of the country.

If the party wants to maintain its grip on power for the long haul, it should promote middle-class culture – where being in the middle is considered good enough. The winning-is-everything online world is not consistent with that. This is probably the main driver for the Communist Party to rein in the wild online world.

Rules in the virtual world must be similar to those in the real world. Selling fakes isn’t OK. Listing paid propaganda as search results should be a criminal offence. Luring young boys into the gaming world should be punishable. It is not hard to turn the virtual world around. It just takes determination from the government.

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The Communist Party feels that China’s rivalry with the US is an existential threat. If it fails, it won’t have a second chance. The US, however, can collapse and rise again. It has the institutional resilience that China doesn’t. This is why China is detoxing when the US is still focused on giving people a good time with borrowed money.

Over the past two decades, China and the US have embarked on an era of asset inflation, underpinned by what was effectively a dollar-yuan peg, and supported by the productivity of hundreds of millions of underpaid Chinese workers. It has been about who could leverage up.

In China, the state-owned financial system favours those with connections. The US is not so dissimilar. It gives the masses capitalism, that is, Americans compete against the Chinese to keep inflation low, while the Federal Reserve offers quantitative easing “socialism” in the asset markets.

As US speculators become super-rich and powerful, they increasingly influence the government to keep the game going. The political backlash led to Donald Trump’s election as US president. Now, Joe Biden is borrowing trillions of dollars to give the masses “socialism”. But, when its available to everyone, rampant inflation isn’t far away.

Andy Xie is an independent economist