Last week, a meeting of the Financial Stability and Development Commission (FSDC) chaired by Vice Premier Liu He made a series of key announcements, which apparently resolved a number of issues that have clouded the Chinese stock markets and overseas listed Chinese stocks. The market reacted immediately, with the Shanghai A-share index gaining 6% and the offshore Hang Seng China Enterprise Index gaining 20% ​​by the end of the week. Clearly, the market found the FSDC announcements reassuring.

Yet while the announcements showed a policy shift that will help a number of listed companies, they indicate the shift of only one of the many bureaucracies that influence listed companies in China. In addition, the top-down dictatorial leadership in China, as well as changing leadership policy preferences, will continue to result in greater volatility for Chinese companies, particularly in the technology sector.

March 16^and The meeting of the FSDC represents a clear reorientation of the policy of the financial bureaucracy in China. For overseas-listed stocks, in particular, financial technocrats in China had threatened to force Chinese companies that had listed in the United States to delist due to differences in auditing standards between United States and China. The FSDC eased investor concerns by saying that the US and China are “working hard to come up with a specific proposal for cooperation. The Chinese government continues to help all kinds of companies (in China) to register overseas. For internet businesses, the FSDC called for “stable and healthy development of (internet) platforms… through standardized, transparent and well-awaited regulations…”. After a year of relentless regulatory action against the internet industry, this has provided a bright ray of sunshine.

Perhaps most importantly after a year of regulatory action against some of China’s largest listed companies, the FSDC insisted that “for policies that have a major impact on the capital market, (the issuing agency) should coordinate with financial regulators in advance to maintain unity and stability of policy expectations. This statement was clearly intended to reassure investors surprised by a relentless stream of policies that have affected earnings, and even core business models of a wide range of Chinese enterprises over the past year and a half.

Despite these assurances, the statements of the FSDC should be taken with a large pinch of salt. On the one hand, the agencies under the control of the FSDC, in particular the ruling trio of the People’s Bank of China, the China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission, traditionally wielded influence significant on listed companies. However, the Cyberspace Administration of China (CAC), which is outside the control of the FSDC, has become an influential agency for listed tech companies in China and abroad. The CAC is the administrative arm of the Central Commission on Internet Security and Information (CCISI), which is chaired by Xi Jinping himself. Since the commission reports directly to the Central Committee, CCISI and CAC by extension are entirely outside the jurisdiction of the FSDC. As an organ of the State Council, the FSDC only has jurisdiction over the financial regulatory bodies of the State Council.

Although relatively small in its early years, the ACC has engaged in a series of regulatory measures over the past year and a half, including imposing a daily youth gambling limit, banning thousands from live streamers and online fan clubs for music and movie stars, and limiting or even prohibiting recommendation algorithms, in-app pop-ups and push notifications. While some regulatory measures such as data protection requirements and push notification limits have likely been welcomed by consumers, other measures have eradicated or severely undermined the core business models of thousands of tech companies. Chinese companies generating hundreds of billions in revenue per year. Additionally, the CAC has enacted a new cybersecurity vetting procedure for any tech company seeking to register in China or overseas, becoming a de facto securities regulator for the nascent tech industry in China.

Games, live streaming, online fan clubs and online tutoring were all multi-billion dollar industries where consumers in China and beyond sought entertainment and ways to improve their lives. Measures adopted by the CAC and other regulators in China have resulted in catastrophic losses for some of these companies, while others have rushed to overhaul their business models at great expense. This led to huge losses of Chinese wealth. Only Tencent, Alibaba, Pinduoduo and Didi alone had lost nearly $1 trillion in market value since the start of 2021, recovering only around 20% of the value lost in the recent rally. While a policy shift in the FSDC is welcome, it does little to reassure tech investors if a similar shift does not occur within the CAC and other regulatory bodies, such as the State Administration of market regulation (SAMR).

More importantly for the future development of the technology sector in China, the Chinese regulatory system continues to be top-down. A shift in senior management’s preferences or focus would lead to dramatic policy shifts affecting listed companies and their investors. As generations of Chinese scholars have noted, the power of China’s authoritarian government is “fragmented” into several major bureaucratic groupings. With dictatorial power at the top determining almost all top-level promotions, the leaders of these various bureaucracies compete with each other for the attention and favor of senior management. This power dynamic will continue to prompt mid-level ministers to respond immediately to the wishes of senior leaders without giving too much thought to the impact of the resulting policies on businesses and individuals in China. Civil servants may even be incentivized to adopt policies that result in underperformance by bureaucratic or political rivals. But in doing so, companies face potentially catastrophic new regulatory requirements.

Despite recent setbacks, China’s vast wealth of human capital, strong entrepreneurial spirit and world-class infrastructure continue to make it a promising hub for the tech industry. However, in a system governed by the dictates of powerful party organs and individual officials, companies and investors will continue to engage in China’s tech sector under the shadow of unexpected and potentially devastating state interventions.

Victor Shih is an associate of the GeoEconomics Center of the Atlantic Council. He is Associate Professor and Ho Miu Lam Chair in China and Pacific Relations at UC San Diego.

Image: Supported by China’s growing economic and trade development, the Shanghai Stock Exchange has become one of the largest stock exchanges in the world.