September 23, 2021
The China-U.S. Financial Round Table met last Thursday, according to Bloomberg News, attended by senior Chinese banking officials and representatives from some of the biggest players on Wall Street, such as Goldman Sachs and Citadel. The topic of discussion was China’s ongoing regulatory crackdown on public-facing technology sectors such as education, gaming, and e-commerce, which has spooked international investors and triggered rapid reductions in market capitalisation for some of China’s best-known companies.
Last November, Chinese authorities cancelled a planned $37 billion IPO for Jack Ma’s Ant Group, in response to comments Ma had made at a public forum criticising the Chinese banking sector. Since then, Chinese regulators have issued substantial fines to a series of high-profile companies, including Alibaba, Baidu, Bytedance, and Tencent, citing antitrust laws, and targetted taxi app DiDi, which was removed from app stores across the country. This was followed by the announcement of strict new rules for China’s rapidly-expanding online tutoring sector, which analysts say will severely hamstring its growth. So called “EdTech” firms are now banned from foreign ownership, and must be run not-for-profit, among other restrictions.
Inevitably, international investors have taken note, as commentators warn of “China risk” and express confusion at China strangling the “golden goose” of tech companies that have taken decades to build into giants. According to the Wall Street Journal, four leading companies – Alibaba, Kuaishou Technology, Meituan, and Tencent Holdings – lost about 20% of their market capitalization in July alone, and the Nasdaq Golden Dragon China index has dropped by about 50% so far this year. Investors are concerned that the crackdown may continue into other profitable areas of the Chinese economy such as healthcare and property.
It is in this context that Chinese officials are attempting to calm nerves, such as at the meeting last Thursday. According to Fang Xinghai, Vice Chair of the China Securities Regulatory Commission (CSRC), the recent actions were taken to “strengthen regulations for companies with consumer-facing platforms, and improve data privacy and national security.”
The Chinese government is widely known to emphasise the importance of data, recently naming it as the “fifth factor of production”, after land, labour, capital and technology. The state-owned Global Times wrote that “the government will not allow internet giants to become rules-makers of data collection and usage. The standards must be in the hands of the government to ensure that giant companies are restrained,” adding that “no internet giant is allowed to become a super database that has more personal data about the Chinese people than the country does, not to mention using the data at its own will.”
Explaining the restrictions placed on DiDi, Chinese state media highlighted the vast amounts of data collected by the app, arguing that it was dangerous for such information to be held by a private company, as DiDi would “be able to analyze a person’s behavior and habits with big data [which] poses potential data risks to individuals.” Many may find this line of argument ironic, as the Chinese government is ever increasing its own use of data for further measures of social control. However, the key point is clearly one of monopoly, and by extension power. Regulators are clearly also concerned about the related problem of such data falling into foreign hands, as evidenced by the skittishness about IPOs and foreign – especially American – shareholders.
However, not all Chinese tech is feeling the pinch. Telecom giant Huawei has remained unaffected, and vast investment continues into electronic hardware, semiconductors, artificial intelligence, and other industries. The targetted companies are predominantly those that are public-facing. According to Bloomberg columnist Noah Smith, the bafflement of Western investors at China’s moves to throttle its own businesses may reflect deeper differences in attitudes towards economic regulation. According to Smith, whereas U.S. investors are delighted by companies such as Facebook, Google, and other Silicon Valley giants which generate huge profits – and huge power in the process, especially in the form of data – Chinese authorities are wary of alternate power bases growing in this way, and seek to regulate and control the technology sector in a way that serves society, and the interests of the state. They are therefore prioritising “hard tech” with real economic value – computer hardware, robotics, military industrial products – rather than consumer tech that exists only to amuse and entertain the public, such as social media and e-commerce. In other words, the Chinese government appear to be playing a strategic long game, and putting power over profit.
