| When China went into Covid-19 lockdown last year, online tutoring took off. Billions of dollars flooded into hot startups, among them Yuanfudao, which offers an ingenious math problem-solving app that Chinese parents use to check their kids' homework. Yuanfudao claims it looks over almost 100 million answers to math questions every day, saving countless hours of parental time, while its algorithms identify common student errors that help refine the company's online classes. This week, Yuanfudao became one of the most prominent targets of a regulatory crackdown that has all but wiped out China's $100 billion-a-year private tutoring industry. First, Chinese fintech firms found themselves in the crosshairs of Beijing regulators. Then ride-hailing and food-delivery apps. Now edtech. It looks to much of the world like Beijing is engaged in a strategy of economic self-harm.
Why, you may ask, is China crushing some of its most innovative unicorns?  Photographer: Qilai Shen/Bloomberg Photographer: Qilai Shen/Bloomberg The Chinese Communist Party-state sometimes likes to teach entrepreneurs a lesson, just to remind them who's boss. In this latest case, regulators also had a legitimate complaint: Edtech's high-priced products strain middle class household budgets while placing intolerable stress on children. On top of that, high education costs undermine the government's policy of encouraging families to have more children. (Three kids now being the target.) But it's arguable there wasn't a need to shut down the whole industry to make this point. Something fundamental has shifted in the way China manages its economy. We're in a new era led by President Xi Jinping, and politics are in command.  Xi Jinping in Lhasa, capital of China's Tibet Autonomous Region, earlier this month. Photographer: Xie Huanchi/Xinhua "China's leadership has embarked on a new and risky path in economic policy making," writes Dexter Tiff Roberts, the author of "The Myth of Chinese Capitalism: The Worker, the Factory, and the Future of the World." Beijing, Roberts writes, "is intent on strengthening control over private companies and foreign investment, reserving set shares of its market for indigenously produced technologies like semiconductor chips and electric vehicle batteries, and boosting the role of state-owned firms."
Ultimately, Xi's goal is to catch up with—and exceed—the U.S. in all dimensions, from economy to industry and military.
Coming out of the initial year of the coronavirus pandemic, Xi sees an opportunity to use China's economic momentum to accelerate this competition. In part, say China experts, the assault on his own technology sector is a grab for control over big data, a strategic asset in China's showdown with America.
Chinese entrepreneurs are expected to get with the program or get out of the way. That means focusing on the next wave of growth—to be led by industrial automation, smart cities and the "Internet of Things—rather than extracting oversized profits from consumers.
The online education sector, complained Communist Party publication People's Daily, has been "hijacked by capital." Xi called the industry a "chronic disease."
To cure this supposed sickness, regulators have banned out-of-school learning outfits from making money. If they have a future at all, it will be as nonprofits. What's more, all foreign investment in the sector is banned, a move that's panicked international fund managers who once assumed that backing "national champion" tech giants was a risk-free ride on China's surging consumer growth.  The Semiconductor Manufacturing International Corp. headquarters in Shanghai. SMIC is to build a $2.35 billion plant with funding from the government of Shenzhen, the first major project to emerge from China's plan to match the U.S. in advanced chipmaking. Photographer: Qilai Shen/Bloomberg But nothing is safe anymore. China is in the throes of a "rectification" campaign, a throwback to the kind of political struggle that periodically convulsed the country in Mao Zedong's day.
Like Mao, Xi is appealing directly to the public. The humbling of China's Internet moguls plays well with those on the lower rungs of society who welcome Xi's call for "common prosperity." Meituan, the food delivery app, stands accused of underpaying its gig-worker drivers. Didi Chuxing, the ride-hailing giant, is charged with abusing customer data.
Who's next in line for "rectification"? Real estate tycoons must be feeling nervous. Runaway property prices are by far a bigger contributor to social inequality and falling births than education. Indeed, regulators are already starting to nose around the property management industry.
Watch this one carefully. If Beijing pushes too hard, it could destabilize the entire Chinese economy. The National Bureau of Economic Research, a U.S. nonprofit research organization, reckons the whole Chinese property sector including construction accounts for as much as 29% of China's GDP, a colossal proportion. Don't count Xi out, though. When politics are in command, the markets-based models Western financiers use to calculate China risk aren't much use. This both explains why the U.S. Securities and Exchange Commission just stopped accepting initial public offerings from China, and why some of China's savviest investors spend their time studying Xi's speeches on the economy.
Eric X. Li, a Shanghai-based venture capitalist, says he adopted his entire investment thesis from recent copies of Qiu Shi—literally "Seeking Truth"—the Chinese Communist Party's leading theoretical journal.
Li's advice: "We should read Seeking Truth seriously, roll up our sleeves and work hard."
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