Meituan's worries are about regulations, not poems

A recent quotation of a classical poem by Meituan's CEO Wang Xing has seen Meituan's stock price plummet, as people fear Wang will fall foul of Xi Jinping. (The poem appeared to criticise Xi).

Yet at the same time there are far more serious regulatory threats to Meituan emerging; these threats also affect most other platform economy companies and yet there has been no similar correction in their market price. Why not? And what will happen next?

Poetry as the signal?

On Thursday last week, May 6, Meituan CEO Wang Xing used a Tang poem to discuss what was on his mind. The text refers to Qin Shi Huangdi, who both established the first Chinese empire but also burnt and persecuted his critics. (An aside: this Qin emperor was cited with approval by Mao Zedong as his model for rule in Mao's own poetry; Mao thought that all other emperors "lacked ambition").

Wang deleted the poem on the weekend, and claimed that it referred not to Xi Jinping but rather possible Meituan rivals, ones not yet seen or imagined.

But by then it was too late; perhaps tipped off by the weekend deletion of the poem, investors sold off Meituan shares steadily throughout Monday and Tuesday. As of Wednesday night, Meituan shares are down nearly 12% from the start of the week. The fall is based solely on an interpretation of the poem as criticising Xi Jinping.

Compare this with when Meituan was actually directly named, shamed, and punished by China's anti-monopoly regulators. The regulators launched a probe into Meituan's business model specifically. As per usual for anti-monopoly regulators, the announcment happened on a weekend (that of April 25); yet on the Monday, Meituan's share price barely moved. Similarly on April 12 Meituan, along with other Chinese tech giants had to publicly promise to comply with China's anti-trust laws. In neither of these cases did Meituan's share price move much. That is in spite of the regulatory impact being very large.

There is precedent for Chinese poetry moving markets. Jack Ma visiting Chinese schools and reading a poem on January 20 after the Ant IPO also caused a 9% jump in the value of Alibaba's share price.

Founder activity has a more immediate impact on share price. Government announcements and action tells you what they are going to do to the sector, and how much money they intend to put into it. But a careful analysis of government regulation shows that in the limited number of cases we have thus far state action precedes founder activity, not the other way around. One first issues regulations in prose that the founders respond to with poetry, rather than the poems leading to the crackdowns.

Why Meituan is really in trouble: delivery riders

The strongest signal of Meituan's trouble has thus far not been reported in Western media: Xi Jinping's visit to Guangxi (Bilby April 28) included a long speech about improving the lives of delivery workers.  

"We must improve the social security system for those in flexible employment and safeguard the legitimate rights and interests of truck drivers, courier brothers, and takeaway food couriers" Xi said, stressing the need to protect the legitimate rights and interests of "courier brothers".

This was a coordinated national order. Instantly, the central post office told all  bureaux to "mobilise" around Xi's speech; different provincial post regulators had already prepared their responses and were quoted prominently. This was not an off-the-cuff remark, but rather a carefully coordinated campaign.

Most businesses were spared. JD.com and SF Express both had special "model workers" promoted as representatives of what Xi wanted. The heads of ZTO and YTO Express delivery companies were both alloowed to speak. Shentong Express, Yunda, Best Group, and other large companies were all quoted. Meituan was extremely conspicuous in its absence.

More painfully for Meituan, the next day the Beijing Ministry of Human Resources and Social Security issued social media footage showing the bureau's deputy director working as a Meituan delivery driver for the day. The footage went viral far faster than the more formal regulatory signals from above. His pay for the day was cut by 60% for taking too long to deliver food. "Money is very difficult to make" he said afterwards in the clip, which even made it into international media.  

Meituan's response was to cite "22 surveys done with riders" and note that they were working on improvements. Such a response did not seem to placate the central authorities. They responded this week with a "central logistics guide", issued by the Central Committee that runs China, outlining how procurement was to work and further cementing the comments of the Xi visit.

For Meituan, this is a serious issue. Xi Jinping-fronted coordinated national campaigns that have synchronised criticism of a company are not easy to stare down. Moreover, delivery is at the heart of not only Meituan's business model but also that of major rivals. JD.com for example could arguably be called a logistics company that delivers goods. Yet Meituan is the company being singled out.

Platform economies under pressure

A big fight over delivery drivers is not the only problem Meituan faces; in addition, like other Chinese tech giants, it must face a crackdown on the "platform economy" led by China's newly-empowered antitrust regulator.

The formal start of the platform economy crackdown came in mid-March, at a meeting of the Central Economic and Finance Committee (this only meets roughly twice a year, so its minutes we scrutinise especially carefully). This meeting declared that "the overall situation of China's platform economy development is good, and its role is positive". However, "it is necessary to improve the state's supervision ability and level of supervision, to optimize the supervision framework, to ensure all that parts are supervised before and after the fact, to enrich the anti-monopoly supervision force and enhance the supervision authority, and to include all financial activities in financial supervision." (Note that the last one was covered already prior to this meeting in the withdrawn Ant IPO; more on that in the final section of this report).

Xi went a little further to say that the platform economy was also to take on a broader role in society, serving "high-quality development and high-quality life". This extended the remit of what the tech giants are to do to cover also "the rights and interests of businesses using the platform (and) ... the responsibilities of commodity quality and food safety" as well as to safeguard the rights and privacy of users' data, and clarify the labor protection responsibilities of platform enterprises." It is this last point that Meituan appears to be caught out on.

Following this March 15 meeting, the anti-monopoly regulator has extended its remit. It is now forcing private companies to regulate food safety for example (see https://bilby.ghost.io/hebei-cracks-down/ for a previous report). And all of China's thirty-odd platform economy companies are now to "thoroughly investigate the problems, resolutely implement the rectification requirements, strictly abide by the legal and compliant business commitments, and jointly build an honest business environment."

What does this mean? A lower-level regulator outlined the exact issues that are of concern: Forced implementation of "from two pick one" business techniques, which force companies to pick a side from one of them and ban them from using the other side's platforms; "top-notch mergers and acquisitions", or basically buying any potential competitors; splurging capital trying to win the community group buying market for groceries; "big data killing" or not allowing firms access to your data environment; "fake and shoddy" goods sales; "information leakage" or violating consumer privacy; "consumer fraud"; and finally "false propaganda" and "network marketing". Given such a long and detailed list of issues, it is not surprising that all platform economy firms have come under scrutiny recently.

This crackdown is taking different forms for different firms. The largest tech giants, Alibaba and Tencent, for example are being fined by the anti-monopoly regulator for their use of "from two pick one". The Alibaba investigation was launched in December, and resulted in a US$2.6bn fine. Beijing is preparing to slap a fine of at least $1.6 billion on Tencent Holdings Ltd., Reuters has reported, focusing on Tencent Music (TME), despite it now being a separately listed company. Both companies are also seeing their M&A deals squeezed. The anti-monopoly body has said that the complex fundraising structure used to raise funds on US exchanges is now to be covered by Chinese law, and therefore all mergers and acquisitions need to be approved by China's anti-monopoly regulator.

This is the other battleground that Meituan is fighting on: as well as needing to sort out its delivery driver payment scheme it needs also to not be picked up under the platform economy problems.

Further information unlikely until May 20 or thereabouts

If anything is going to happen, we don't think it will happen until late next week.

Central regulators have already made clear that firms must stop "abusing their market dominance and cease all illegal activities within one month" or face “severe punishment.” That central signal was sent April 12. This will be assessed mainly by SAMR, but the internet and tax regulators are also part of the critique. 30 of China's largest internet firms must "comprehensively self-assess, rectify any issues and pledge to comply with China’s laws and regulations". These pledges are due this week. We are tracking them, and the social media accounts of the CEOs. We do not expect any steps out of line.

Why? Because as part of the central activity discussed above, provincial regulators were also told by Beijing that they must also crackdown on platform economy companies. Two weeks after the central regulators told the tech giants to submit to "administrative guidance", the provincial regulators where many of the firms are headquartered issued the same demand, but at the provincial level. They told everyone that they must report by 15 May. The same threat of "severe punishment" for non-compliance was also made.

It will take a couple of days for the reports to reach China's anti-monopoly regulator in Beijing. And thus far anti-monopoly investigations are released on Friday night or Saturday. Hence, we think 20 May onwards.

What isn't clear is what Beijing has asked platform economy firms for in relation to governance. The standard boilerplate is "we should take this warning talk as an important opportunity to strengthen internal governance and promote the development of compliance with laws and regulations, establish and improve a long-term mechanism for internal management of enterprises, and jointly safeguard the order of fair competition in the online economy." We are unclear as to what this "strengthening" of internal governance is, nor what a "long-term mechanism for internal management of enterprises" is to be.

Poetry as protest not indicator

Either way, all of the messages were already delivered to Meituan well before any poems were posted. So if Wang Zheng did mean to send a signal to Xi Jinping et al, it was after the fact and not before it.

This is similar to the recent cancellation of the Ant IPO. At the time the cancellation was blamed on Jack Ma’s speech arguing that regulation was standing in the way of solving problems with technology.

Ma misjudged. He staked his cards on a game of regulatory poker. He pitched Ant as a technology company that worked on finance, rather than as a financial services provider. But Ant holds more financial licenses than any other financial institution. Hence, they attracted the attention of financial stability regulators, who are more powerful and well connected than anti-monopoly counterparts. Ant was provided notice of new regulations that would require any company owning more than two financial businesses to register as a financial holding company. Under these rules, Ant could not fully claim to be a technology company. These rules were foreseen. Proposed in 2019, they were acknowledged in the Ant prospectus. Ant said that they planned to register such a financial holding company.

When financial regulators dealt with Alibaba six years ago, trying to get rid of the now-ubiquitous QR code, Ma reportedly used his connections with the central government to get what he wanted. The second time was not the charm.

The last time he had this fight and won, in 2014, he relied on the fact that China’s banking regulators do not have direct channels to the top like he does. Financial regulation in China remains a long way from decision making. China’s central banker does not sit on the committee of the 25 most powerful people in the land. Its financial and insurance regulator do not have a clear person in charge, instead splitting responsibilities across two people, one of whose meetings are not made public.

But in 2017 China made clear that it wanted to strengthen banking regulations. Xi Jinping made financial risk one of his “three critical battles”. It set up a special Financial Stability and Development Committee, put Xi Jinping’s trusted lieutenant in charge, and gave it a direct reporting line to the government. Coordination improved. Ma’s run around the outside of the regulators proved less successful. The diagram below describes. The khaki lines, new committee and new regulators were all new additions; this direct access to Xi was the kicker, not what Jack Ma may or may not have said.

This is the dilemma that now faces Wang Zheng: he is fighting a regulatory war on a couple of fronts. It is understandable that he uses poetry to release his frustration. But the issue of how to pay delivery drivers more and to try and still keep Meituan profitable is, we would argue, the most pressing one.