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Why China's government won't stop Uber-Didi deal

The biggest winner in Uber's decision to sell its Chinese business to Didi Chuxing, its fierce local rival, appears to be Didi Chuxing. Didi not only eliminated its top competitor but gained a veritable monopoly over the world's biggest market for ride-sharing services. The only remaining question is whether the Chinese government is willing to grant it such dominance.

And Didi has little to fear on that count. The ride-sharing industry has presented China's government with a host of challenges - including serious political and social strife - and the plight of consumers hurt by reduced competition simply isn't high on its list of concerns.

In China's biggest cities, choked by traffic and taxi monopolies, the arrival of ride-sharing has been transformative. Take Beijing: Between 1994 and 2011, the city's population increased from 11 million to 20 million, yet licensed taxis increased by only 10 per cent, to 66,000. Perhaps unsurprisingly, Beijing's cabbies have acquired a reputation as some of the worst in the world. Taxi-hailing and ride- sharing apps offered a cheap and clever solution to this problem, and quality of life improved as a result.

But that improvement came at a cost. Recorded taxi strikes in China surged from 62 in 2011 to 263 last year. In Shenzhen, where licensed cabbies claim that ride-sharing has cut their monthly pay by half, a strike in January effectively immobilised the city. Thousands of drivers in at least a dozen other cities walked out the same month.

Making matters worse, the labour strife is compounded by class divisions: Most ride-sharing drivers own their cars, while taxi drivers must rent theirs.

All this has placed the authorities in a delicate position. As in other countries, taxi companies in China are usually protected monopolies, and often owned by a local government or local officials. In most cases, they make money by charging rental fees to drivers. Didi and Uber were undercutting this comfortable arrangement by subsidising fares - thus luring both drivers and customers - in a fierce war for market share.

Some local governments cracked down on the newcomers, occasionally sparking riots. Others threw their support behind apps that hired drivers licensed by the old monopolies. But for the central government, the preferred approach was simpler: Eliminate competition. Doing so would limit the subsidy wars, mollify angry taxi drivers and - critically - increase the government's leverage over the remaining player(s).

Last year, regulators allowed Didi to merge with its largest domestic rival, Kuaidi, despite concerns about how the deal would affect consumers. Last week, they issued rules that effectively outlawed competition by prohibiting ride-sharing companies from setting prices "below cost to push out competitors or dominate the market". That means local governments can now negotiate pricing and other concerns with Didi without having to worry about anyone undercutting the deal.

That's clearly a win for Didi. It's probably a win for Uber, whose investors will retain a 20 per cent stake in its former rival. And (for now) it seems like a win for Beijing, which badly wants the benefits of ride-sharing without the disruptions that go along with it.

The only losers will be consumers, who will likely be facing higher fares, less choice and worse service. China's passengers, in other words, are once again being taken for a ride.

BLOOMBERG VIEW

A version of this article appeared in the print edition of The Straits Times on August 04, 2016, with the headline 'Why China's government won't stop Uber-Didi deal'. Print Edition | Subscribe