(Yicai Global) Sept. 9 --  Over the weekend Chinese leader Xi Jinping announced that the country would be establishing a “Beijing stock exchange” the third of its kind in China, to go alongside those running in Shenzhen and Shanghai. Specifically, he earmarked the new market to focus on “small and medium sized enterprises” (SMEs) of which will “serve the leading orientated firms”.  It comes amongst a series of reforms and announcements which have strived to transform the country’s regulatory environment in the past few months.

This new stock exchange is designed to better serve China’s goals and national interests. There has been a great deal of misconceptions from the western media over the past few weeks regarding the state’s decisions, largely reducing it to a simplistic matter of political power, but its claim that China is somehow more risk worthy or unsuited for foreign investment is not substantiated with evidence. Rather, it is a simple question of the government meting out what China needs in a changing geopolitical context, as set out by Deng Xiaoping’s famous dictum of “finding stones in order to cross the river”.

China is at a fundamental crossroads regarding its own national development. After decades of rapid GDP growth, it has established itself amongst the middle-income tier of nations in the world, surpassing most nations in Latin America and Eastern Europe. However, the next step in order to become a “high income” or “developed” country will be the most challenging one China needs yet, as to do so requires the creation of a stable consumer economy, as well as comprehensive success in scientific and technological development, similar to what has been achieved in neighbouring South Korea and Japan.

However, China’s environment faces unique challenges compared to these two countries legacies as the United States is opposed to such a trajectory. Whilst America supplied Tokyo and Seoul with access to its high-end technology, it has on the contrary sought to block China’s advances by cutting strategic industries and countries off from American markets and supply chains, the most vivid example being the trajectory of Huawei. This means in order to advance; China has to succeed independently in its own innovation in order to bridge the gap.

In conjunction with this and the changing geopolitical context, China’s economic priorities have shifted towards the consolidation of “hard tech”- that is creating semiconductors and other key parts. Whilst China has already created a comprehensive and advanced “soft tech” digital and online economy, regulators believe that the consolidation of these monopolies, whilst rich in capital, are fundamental distractions and even obstructions to what China needs, not least because the status quo promulgates growing wealth inequalities and does not serve the national interest.

As a result, the announcement of a new Beijing stock exchange is to shape the country’s changing economy in line with its priorities, in order to obtain fresh capital for the acceleration of “hard tech” enterprises, most specifically of the small and medium variety because these are deemed more important to establishing a more equal growth and jobs opportunities, whilst also laying out the path to securing the fundamental advances China is looking for. This will also help offset policies in the US which have sought to target strategic Chinese enterprises with investment bans or exclusion from the New York Stock exchange.

In this case it is important to understand these events in China not as a dismantling of the market economy, or to create an environment hostile to investors, but reshaping the fulcrum of the system in line with the new challenges China faces. The west have a tendency to believe that unbridled, uncontrolled capitalism is always the answer to everything and in the interests of all, this is a false mantra. China’s development and political theory in the post 1978 era has always been about making necessary decisions in order to facilitate what the country needs, and right now that falls on development of innovation and technology, not bigger and wealthier internet monopolies.