Saturday, July 10, 2021

[ChinaFile] Why China Is Going After Its Tech Giants

Just days after its lucrative listing on the New York Stock Exchange, China ride-hailing giant Didi Global was hit with another round of sanctions by the Cyberspace Administration of China (CAC). On July 4, the country’s Internet regulator ordered the removal of its mobile app from Chinese app stores. This came two days after the same regulator opened an investigation into the company, suspending it from adding new users. The app, alleged CAC, “has serious violations of laws and regulations pertaining to the collection of personal information.”

Didi is not the only company to face heightened scrutiny in recent months. Other Chinese Internet giants, including Meituan, Tencent, JD.com, Bytedance, and Alibaba have faced government regulatory investigations and even been slapped with hefty fines. Most notably, of course, Ant Financial saw its mega IPO in Hong Kong and Shanghai halted by the Chinese government. These actions were often carried out by China’s State Administration of Market Regulation, the anti-trust regulator. Its policy decisions on such major companies undoubtedly are driven by the Chinese Communist Party (CCP) leadership at the highest level.

Even smaller Internet companies are not immune. Most recently, CAC opened probes into Zhipin.com, an online recruiter, and truck-hailing apps Huochebang and Yunmanman, which merged to become Full Truck Alliance. Both Zhipin.com’s owner, Kanzhun, and Full Truck Alliance went public last month in the U.S. Now, they are also under review to “prevent national data security risks and safeguard national security.”

Why is the Chinese government targeting its own tech companies in such a heavy-handed fashion, and why now? Over the last decades, as a technologist, entrepreneur, and legislator in Hong Kong, I have witnessed the evolution of China’s regulatory regime, as it moved from the invisible to the visible, and from one that encouraged disruptive innovation to one that now favors complete state control. However, as a recent Global Times editorial put it, “China’s Internet enterprises must say goodbye to the phase of barbaric expansion, and building up the concept of compliance will become the essential strategy of their development.”

To understand why, it is best to try to think from the perspectives of China’s leaders. Their intended messages are aimed at different audiences: domestic Internet firms and the domestic public at large, as well as those outside of the country.

The latest series of actions taken against Didi and Full Truck Alliance are similar in that both companies had recently listed in the U.S. It’s unlikely authorities were unaware of their listing exercises in the U.S., so perhaps the timing of CAC’s regulatory actions was intended to send a message. It must have been motivated by fears that the companies’ compliance with regulations in the U.S. would compromise their total control by the Chinese state, perhaps even requiring them to cede their data to a foreign government.

These fears might seem paranoid, especially to those who don’t assume financial regulators will engage in political and economic hostage-taking tactics. But for a government that views China’s private companies’ data almost as a state asset, the risks must seem stark.

There is some irony if one considers that only a year or so ago, at the height of American rhetoric about disengaging with China, there were talks of barring Chinese companies from listing in the U.S. in order to “protect” U.S. investors. But, despite such periodic hostility in the U.S., many Chinese companies are eager to list there. For the firms themselves, there are many reasons: more liquidity, greater access to capital, and greater visibility for the global market. For others, like Didi Global, listing in the U.S. just comes with the global nature of their business.

China’s leaders, however, care only about maintaining control over these firms and all their data. This is reflected in the recent passage in June of a national data security law in China that dictates how data is collected and utilized. Laws like this one, along with probes and fines, should be understood first and foremost as a preemptive defense against not only the tech companies themselves but also the data they hold.

From the perspective of its leaders, China is not a victim of decoupling. It is the decoupler. Hence the increased emphasis on “self-reliance” in the Chinese Communist Party’s messages throughout its 100th anniversary celebration.

So, the first message sent by the recent investigations should be understood as targeted toward an audience of Chinese global Internet firms—essentially making sure they know who’s boss. (Something similar was afoot in the misfortunes of Alibaba founder Jack Ma when authorities nixed his Ant Group’s IPO in Hong Kong.)

Despite the clear signs of Beijing’s desire to maintain control over Chinese companies, some foreign investors may still be in denial. International financial market players must be reminded again of Beijing’s goals, lest they want so much to profit from listing these Chinese firms that they end up putting investors at risk.

Other collateral messages that the current wave of regulatory actions are intended to send are targeted at a second audience: Chinese citizens. For them, the message echoes the one often referenced after the Ant Group IPO fiasco, namely that Deng Xiaoping’s era of “let some people get rich first” has come to an end.

To some extent, China’s mega-rich, especially those from the tech sector, may have brought themselves unwanted official attention by flaunting a “work-to-death” ethos for their employees while the gap between the rich and the poor widened out of control. The choice for the Party at a time when it needs to consolidate the highest level of support for its rule is clear: feed the frenzy of populism against the rich. This is consistent with Xi Jinping’s repeated emphasis on the need to “struggle.”

Finally, there is also a more indirect message intended for Western policymakers, especially American. Strict regulatory control over China’s tech companies not only serves its own domestic agenda, but China also would not mind to be seen as an example for a playbook for the West, as the U.S. contemplates what to do about its own big tech.

Hoping that some in the U.S. may consider the Chinese model as quick and decisive, China would not mind to be viewed as the leader in anti-competitive regulation. If there is any chance for American tech giants to become hobbled by anti-trust regulations, China may see that as a chance to turn it into near-term benefits to its own tech dreams and pull ahead in its “tech war” with the U.S.

To China, there is little cost to its own tech industry and its innovation strategy, which was always controlled and manipulated by government policies. A heavier-handed approach to the U.S. tech industry could bring much bigger consequences and disruptions to innovation than those tactics do for Chinese firms.

While it may seem highly unlikely for such a regulatory model to be adopted in the U.S., given the very different systems in the two countries, it is still a possibility. While, for China, any such hope for collateral damage to the U.S. tech industry must still be secondary to its own agenda at this stage, the country’s leaders must be watching closely how the U.S. will conduct its own expected “war on big tech,” as any impact on U.S. innovation and competitiveness can tip the balance of the China-U.S. tech competition.


Published on Asia Society's ChinaFile on Jul 10 2021

https://www.chinafile.com/reporting-opinion/viewpoint/why-china-going-after-its-tech-giants

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