THE VISION is becoming clear. In a decade or so China will, if the Communist Party has its way, become a techno-utopia with Chinese characteristics, replete with “deep tech” such as cloud-computing, artificial-intelligence (AI), self-driving cars and home-made cutting-edge chips. Incumbent technology giants such as Alibaba in e-commerce or Tencent in payments and entertainment will be around but less overweening—and less lucrative. Policies to curb their market power will redistribute some of their profits to smaller merchants and app developers, and to their workers. Second-tier cities will boast their own tech industries with localised services that, when linked up with national data resources, compete with the less-mighty titans. Data will pulse through the system, available to firms of all sizes, under the watchful eye of the government in Beijing. China’s internet will strengthen its authoritarian design.
Clearer, too, is the way in which President Xi Jinping wants to make this vision a reality. Besides talking up deep tech, this involves taking the shallower sort down a peg. In the past nine months China’s regulators have cracked down on the county’s effervescent tech scene, which, though it has generated world-beating innovations and astounding shareholder value, is no longer seen as fit for purpose. As a result, the country’s hottest tech groups have lost at least $1trn in combined market capitalisation since February (see chart 1).
Foreign investors who have backed Chinese online firms are retreating. Domestic Chinese investors are anxious. Indices tracking Chinese tech stocks in Hong Kong and Chinese groups more broadly in New York are down by 40-45% since mid-February. No matter. Indeed, it may be part of the plan. Consumer-internet companies make up at least 40% of big Chinese stocks in the MSCI China Index. Like their American peers—Apple, Alphabet, Amazon, Facebook, Netflix—these firms have made tonnes of money for their shareholders. But, the party seems to think, at the expense of abusing their market power, exploiting workers and polluting minds.
The list of casualties is a Who’s Who of Chinese tech: Ant Group, an Alibaba affiliate whose $37bn initial public offering (IPO) was suspended days before the listing; Didi Global, whose ride-hailing app was expelled from Chinese app stores days after its own $4.4bn IPO in New York; Tencent, fined by regulators for sexually explicit content and unfair practices, and told to end exclusive music-licensing deals; the online-tutoring industry, swathes of which were barred last month from making a profit. And the list is getting longer. Trustbusters are reportedly getting ready to slap a $1bn fine on Meituan, a super-app that delivers meals. On August 9th the Financial Times reported that NetEase, an online-entertainment group, decided to shelve the planned IPO in Hong Kong of its music-streaming business owing to investors’ worries about the regulatory crackdown.
The ranks of potential winners are less well-defined. As a guiding principle, the vice-premier, Liu He, recently stated that China is moving into a new phase of development that prioritises social fairness and national security, not the growth-at-all-costs mentality of the past 30 years. He noted how the government will guide the “orderly development of capital”, the better to suit the “construction of a new development pattern”. Barry Naughton of the University of California, San Diego, calls this the “grand steerage”. Dexter Roberts of the Atlantic Council, a think-tank in Washington, DC, discerns an echo of Mao Zedong’s “politics-in-command” economy. Either way, it is a break with the old pro-growth model and the beginning of “real state capitalism”, as one investment banker puts it.
Start with data. Europe and some American states, such as California, have devised laws that seek to protect consumers from the misuse of their personal information by large companies. China has put similar rules in place; in some cases they are more severe than in the West. But Chinese regulators are going further. In a largely ignored, jargon-filled policy paper from the State Council, China’s cabinet, in April last year, data were named as a “factor of production” alongside capital, labour, land and technology. This hinted at the importance assigned to information by the Chinese state, notes Kendra Schaefer of Trivium, a consultancy.
China’s new data policy remains a work in progress. The Data Security Law will come into force on September 1st and the Personal Information Protection Law is due to be adopted by China’s rubber-stamp parliament soon. It is unclear how they will be enforced, though data specialists intuit that many types of data currently held by internet giants could eventually be traded on government-backed and private exchanges. Ant, for example, is already being prodded by authorities to open up its vast stores of personal financial data to state-owned companies and smaller tech rivals. No specific rules for financial-technology firms have been issued but everyone is waiting for them, says Deng Zhisong of Dentons, a law firm.
Another prong of the state’s strategy is to redistribute the wealth and power large tech platforms have accrued over the past decade. E-commerce groups such as Alibaba, JD.com and Pinduoduo have been targeted by the State Administration for Market Regulation (SAMR), China’s newish antitrust regulator, which accuses them of monopolistic behaviour. Merchants on these platforms often indeed pay high fees and must choose between selling on one or the other. Payment systems run by Tencent and Alibaba have prevented exchange of information between them, which led to a bifurcation of the market.
The giants are now being forced to shift to more open models where payments and shopping activity are no longer exclusive to one platform, allowing merchants to regain some control over the prices of their wares. Analysts believe that the changes will lead to higher margins for sellers and lower prices for consumers but slower growth for the tech titans. Alibaba warned investors in early August that long-running tax benefits could soon come to an end, adding billions of dollars in costs.
Workers will benefit from the wealth transfer, too. Companies like Didi and Meituan, which use armies of low-paid drivers or warehouse staff, are on the hook. The authorities are already going after Meituan for not providing adequate care to such employees. It will be forced to raise wages and give drivers better insurance. Meituan’s market value has fallen by a fifth, or $42bn, since the measures were announced in late July.
The final facet of China’s campaign is a transfer of resources from internet companies to firms that can create tangible advances in technologies that the party deems less frivolous. This would represent a striking shift in Chinese economic governance, which since the 1990s has put rapid development and attracting foreign direct investment over all else. Under-regulated internet firms have been the prime example. Local officials lowered taxes and gave away land in order to attract the online giants to their cities and provinces.
Now the government wants to use such carrots, as well as its anti-tech sticks, to create a less unruly and more hardware-focused technology sector that will help it surpass America and the rest of the West in economic might, writes Rush Doshi, an adviser to President Joe Biden, in his new book, “The Long Game: China’s Grand Strategy to Displace American Order”. Mr Xi has referred to “great changes unseen in a century” in areas such as AI and quantum computing (which would harness the weirdness of subatomic physics to drastically speed up certain types of calculations). These, he has suggested, will usher in a new global economic order that revolves around China. Senior officials believe that if China can get a first-mover advantage on the cutting edge of technology, it will become not just an economic superpower but a geopolitical and military one, too, writes Mr Roberts of the Atlantic Council.
Move fast and regulate things
Many politicians in America and Europe would love to fashion their technology sectors into something like Mr Xi’s vision: less social media and other “spiritual opium”, as Chinese state press recently dubbed video-gaming, and more strategic development of the technological infrastructure of the 21st century. This includes computer chips, clean energy and much besides, partly to counteract an effort by America and its allies to restrict exports to China of some critical technologies such as semiconductors. When launching a new business, entrepreneurs and investors must therefore ask, “How does this solve China’s problems?” sums up Liu Jing of Cheung Kong Graduate School of Business in Beijing.
Yet the way China’s regime is going about its desired transition is far from guaranteed to work. One problem stems from who is doing the regulating. The Communist Party presents an image of a unified force with a single set of objectives. In fact, like any large bureaucracy, Chinese authorities are fragmented, and can act at cross-purposes.
The policies behind the techlash are born of sweeping goals for society from the highest reaches of central government, an echelon of engineers and economists who lack speciality in most of the sectors in the firing line. But it is up to specialists in bodies such as SAMR and the Cyberspace Administration of China (CAC) to enact these objectives. And as regulators’ remits expand, the odds of a clash shorten.
Some run-ins have already happened. A recent policy from the central bank aimed at breaking up powerful fintech groups spilled into antitrust territory covered by SAMR, notes Angela Zhang of the University of Hong Kong. Following Didi’s post-IPO app ban and online tutors’ profit-prohibition, in both of which the CAC played a part, the China Securities Regulatory Commission (CSRC), which has spent years trying to convince global investors that Chinese markets are stable, had to contact bankers and investment funds to assure them that other industries would not be treated so harshly. The CSRC’s move was interpreted by some as a sign that regulators were rethinking their scorched-earth tactic. Instead, the situation highlights how poorly co-ordinated the campaign has been at times.
Another worry is that the crackdown has spooked entrepreneurs and venture capitalists. It is true that some smaller firms view the tech giants as bullies that have strong-armed rivals and snuffed out competition. China’s most innovative startups have had the choice of selling out to big tech or facing a quick and brutal demise, says Mr Liu. The recent dismantling of online monopolies has been a godsend for many promising, young executives who have long struggled under the thumb of big tech, he observes. And entrepreneurs have flocked to the approved deep-tech fields: last year alone Chinese founded 22,000 chip firms, 35,000 cloud-computing companies and 172,000 ai startups.
But the tech giants’ founders, such as Jack Ma of Alibaba, are still held in high regard by other technology bosses. Many industry executives now feel that years of hard work and sacrifice have gone unnoticed by their new regulatory overlords. The Communist Party has communicated its intentions and goals poorly to a generation of talented businesspeople, says an executive at a small startup. If the current turmoil persists, China may end up with an open field for free and fair competition “but no one to run the companies”, says another executive.
Investors face similar considerations. A prominent private-equity financier says that he fully agrees with the goals of the regulation campaign. If carried out correctly China could reduce inequality while becoming a model for regulating big tech. But, he adds, the tactics have not been thought out. Pointing to China’s world-beating fintech sector, he warns that “harming China tech is harming China as a nation.” A more level playing field could let smaller tech companies flourish. But “who would invest in these right now?” asks Chen Long of Plenum, a Beijing-based research group.
A big test of investor sentiment will come with the rumoured IPO of ByteDance, a $180bn unlisted giant which owns TikTok and its Chinese sister short-video app. But venture capitalists are already getting cold feet. Fundraising for privately held tech firms peaked at $28bn in the last quarter of 2020, when the techlash began, according to CB Insights, a data provider. In the second quarter of this year Chinese startups raised just $23bn, even as those in America raked in ever more capital (see chart 2). The bulk of last year’s litter of new deep-tech companies probably predates the clampdown. Their prospects and easy access to capital are far from assured.
Apparently without irony, Chinese media have likened the government’s push to spur the domestic semiconductor industry to China’s Great Leap Forward. In 1958 Mao decreed that farmers set up furnaces in their backyards in order to help China surpass Britain in steelmaking. What the media have omitted to mention is that the resulting steel was mostly unusable pig-iron. Meanwhile, millions of Chinese starved as fields went unploughed. Mr Xi’s technological leap towards cutting-edge chips and other deep tech will not be as calamitous—China is too prosperous for that. But it is not immune to the law of unintended consequences. ■