Are the Chinese tech giants controlled by the China Government?

Introduction

The Chinese government continues its broad “crackdown” on the country’s technology sector. It is reinforcing its control over the tech sector by establishing strict regulations which prioritize data privacy, cyber security, and firm market share.?

Beijing has been strengthening its hold on internet platforms in recent months, after years of a more free hand approach particularly around data, which could impact the way China’s technology giants operate.

Furthermore, stocks in Hong Kong fell sharply on that news. Gaming giant, Tencent fell by 3.5%, while e-commerce giant Alibaba fell 2.5%.?

Backdrop

China’s crackdown on domestic tech companies dates back to last October, days before Alibaba’s subsidiary Ant Group was set to rise to $34 billion in an IPO and would have been the world’s largest public offering. The Chinese government responded to Alibaba's co-founder and one of the country’s most high-profile billionaires, Jack Ma’s accusations of stifling innovation by?halting Ant’s IPO?and filing an antitrust case against Alibaba. In July, the government ordered a security review of the ride-hailing firm, Didi before its $4.4-billion IPO in the US and banned the company from taking on new customers. The new rules also restricted ed-tech firms from going public or raising capital, registering as non-profits, and stopping offering courses over weekends and during school vacations.

What’s happening?

• The State Administration for Market Regulation, China’s market watchdog issued a set of draft regulations aimed at stopping unfair competition on the internet.?
• The Antitrust Law of 2008?targeted against practices like false advertising, fraudulent online reviews, unfair competition, interoperability issues, data protection, and consumer privacy issues was enforced with these new rules. Thirty-five companies fell victim to antitrust scrutiny and a few were heavily fined. The list includes China’s leading internet companies, such as?Tencent,?Meituan, Alibaba,?Pinduoduo, and Didi.
• Data Protection and Competition:??China’s tech sector has been featured by the China-U.S. rivalry, which has targeted the technology and intellectual property security of the country.?

Cyberspace Administration of China ensures national?cyber security?and makes sure that???the data collected by private companies do not make it out of the country.?The?data protection law?was passed on August 21, 2021,?setting out tougher rules on how companies collect and handle their users’ information.?The regulations also provide anti-competitive rules for the prevention of “disorderly expansion of capital” so that companies cannot abuse their market dominant position.

Analysts speculate that these could be the reasons for the “Big Tech Crackdown”:

1. The Chinese government has decided that it wants its economy to be heavy on manufacturing and hard tech and light on the consumer internet.
2. Besides strategic competition with the U.S, Chinese regulators engage in turf wars,?too, as they jostle to expand their influence, and
3. Public discontent towards the tech sector.

If China is abandoning the Silicon Valley model, what is it going to replace it with? Insiders suggest it will be less founder-driven and more China-centric i.e., ultimately focusing on protecting government policy instead of strengthening consumer protection.

What’s next?

Following a 2015 mandate, cities in China had set up data exchanges that facilitate the transfer of anonymized information between corporations which could lead to a nationalized data-sharing system that serves as a kind of digital public infrastructure, placing a massive trove of data into the central government’s hands. However, the danger with this approach is that it could have a chilling effect on innovative ideas. The government has outlined sectors it wants to prioritize, including semiconductors, artificial intelligence, 5G, advanced manufacturing, and green energy which means highly concentrated sectors like gaming, advertising, healthcare and real estate which have little relation to state policies and have previously faced public scrutiny may have to bear the brunt of the ongoing crackdown.

Conclusion

If the crackdown makes it more difficult for China’s largest companies to expand, the beneficiaries could be American tech giants who could keep buying up future rivals, winning at a global scale as the prospects for regulation in the U.S. remain uncertain.?

The cost of China’s tech crackdown is additionally being borne by its future business leaders, who, instead of looking up to DiDi and Alibaba’s models, now have to be more cautious in rolling out riskier products, act with more reverence for the Chinese Communist Party policy, and may try to avoid growing too huge, lest they draw unwanted government attention.