Ex-Central Bank Governor Zhou Xiaochuan Warns of Capital “Burning Money” to Chase Monopolies in the Digital Economy

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The former governor of the People’s Bank of China (PBOC) has warned of Chinese online platforms seeking to achieve complete monopolies in the era of the digital economy by means of “burning money” provided by investment banks and venture capitalists.

Zhou Xiaochuan (周小川), said that “from capital to platforms, there has emerged a commercial strategy of ‘burning money’ to achieve a ‘winner-takes-all’ [outcome.]”

“It doesn’t matter if you are second or third in the sector, you will bear considerable pressure in the sector, because if your competitive opponents aren’t eaten up, then you will be eaten up,” said Zhou. “This is different from traditional industries.

“In traditional industries, major enterprises can hold a very large market share, but there still exist space for small enterprises to survive, and each has its corresponding customer demographic.”

Zhou made the remarks on 10 September at a research symposium on the digital economy held by the Bo’ao Asia Forum (博鳌亚洲论坛研究院数字经济课题研讨会).

During the symposium Zhou made repeated reference to the pursuit of “winner-takes-all” (赢者通吃) strategies by Chinese enterprise, and the problems that this could create in certain sectors of the digital economy.

“In the digital economy, it’s only certain sectors which are characterised as ‘winner-take-all’…looking at community purchases, ride-hailing software, as well as this year’s takeaway war, in the background without exception there has been the burning of money to obtain market share and volume, with capital serving as the background contributor of money.”

One example of this is Xingsheng Youxuan (兴盛优选), a community purchasing platform established in the Hunan province capital of Changsha in January 2018. The company has since gone through eight rounds of financing to raise over USD$5 billion in funds.

This included a D-series fundraising round in February of this year, with participating investors including Sequoia China, Tencent Investment, Temasek, FountainVest Partners, KKR, DCP Investments, Primavera and Evergrande Group.

“Once this competitive strategy emerges, investment banks, venture capitalists and private equity will correspondingly believe that if one enterprise can achieve a winner-takes-all outcome, then it will be an excellent investment target,” said Zhou.

“Summarising all this, there emerges a new mentality for competitive strategy, which is to burn money to obtain volume.

“The money being burnt is on the one-hand the retained profits of enterprises, but even more of it is funds from investment banks and venture capitalists.

“If this continues, it will no doubt drive a warped competitive ecosystem in which enterprises madly pursue volume.”

According to Zhou strategy has already “created a series of consequences,” and as a consequence Chinese regulators have repeatedly sought to prevent the “disorderly expansion of capital” since the start of the year.

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