In recent months, Chinese companies are witnessing a surge in the amount of regulations they must be subject to. Fines are also growing, albeit to a lesser extent. The so-called crackdown, which is carried out by the Chinese government, is nothing new, but it is indeed more intense. This is especially the case for the country’s technology firms.
Internet sector (Tencent), food delivery apps (Meituan), recruitment systems (Kanzhun), taix apps (Didi), or online private tutoring platforms, amongst others, are seeing how state intervention and supervision are increasing at a time when their economic activity was beginning to grow significantly within the country, or rather they were well consolidated companies over the Chinese market, but were seeking new global markets both at the commercial level, with greater market share and agreements in other countries, and also at the financial level by going public on foreign stock exchanges.
The technology crackdown in China
This was the case of Ant Group, formerly known as Alipay, whose founder is Jack Ma (from the Alibaba group, known as the Chinese Amazon). Ant Group is the highest valued FinTech company globally. In November 2020, Ant Group intended to list on the Shanghai and Hong Kong stock exchanges with an expected $34.5 billion revenue that would have made it the largest IPO in history. However, before this could happen, four Chinese regulators, led by the People’s Bank of China, met with Ant Group’s executive team and restricted large-scale share sales on the grounds of avoiding monopolistic behaviour. The IPO had to be postponed.
Since then, there have been similar cases, such as IPO’s limitation of Didi Chuxing (the so-called Chinese Uber), in this case on the New York Stock Exchange, as it was considered to violate Chinese data security protocols. Shortly afterwards, Full Truck Alliance, a freight logistics application, and Kanzhun, a recruitment platform, were limited with the same rationale.
Why this is happening
To understand the Chinese crackdown, it is essential to look out for several reasons. National security maintenance and stability is one of them, but not the only one. In July, the Data Security Law (DSL) was passed, and the Personal Information Protection Law (PIPL) is due to come into force in November. The aim is to manage how ‘core state data’ is used, this is, data that is considered essential for China’s national security. This explains why the Didi Chuxing case was handled by the CAC, the Cyberspace Administration of China.
The second reason refers to power concentration by Chinese technology companies. Ant Group is the most valuable unicorn company globally. Unicorn companies, which are start-ups with a valuation of more than $1 billion, are few and far between. There are 225 worldwide, out of which 33 have a Chinese origin (and 13 are from the European Union). There are more than 140 from the United States, such as Uber and Airbnb. The Chinese government, through the State Administration of Market Regulation (SAMR), aims to prevent monopolistic behaviour in which a few companies accumulate all the financial power and economic arms in the country.
An anti-monopoly law has already existed in China since 2008, but it was only in November 2020 that the SAMR began to create new, stricter rules, having received the Politburo’s support in December. Antitrust regulation has already been applied to at least 35 Chinese tech companies for failing to properly register mergers, sign exclusive contracts, or for allegedly acquisitions irregularities. The United States has not yet begun to regulate to this extent and intensity, although the Federal Communications Commission is already looking to step up antitrust requirements. This is especially significant, considering that in 2019 the US experienced a record of 9,222 Big Tech transactions to buy rival startups. This is part of a decade where, from 2010 to 2019, 819 smaller companies have been acquired to reduce the number of actors in competitive markets.
Antitrust regulation is coupled with fears that companies are concentrating too much power on their own, concretely without the state apparatus. Tencent and Alibaba have divided the Chinese Internet market power for the last eight years, as their services and platforms were interoperable with each other. For instance, Tencent’s payment system cannot be used on Alibaba’s online commerce sites, and Alibaba cannot share its links on WeChat, Tencent’s messaging app. In October last year, Alibaba founder Jack Ma complained at a conference in Shanghai that Chinese authorities were stifling innovation. Since then, regulatory agencies have cancelled its IPO and he does not appear much in public. The growth of these companies is steady, what explains why a large group of technology companies, including ByteDance, Huawei or Xiaomi among others, have agreed to allow their platforms to be interoperable with the rest of competitors, after a meeting with the Ministry of Industry and Information Technology. In addition, there will be state owned participation in the Ant Group’s customer rating system, which operates in credit, savings and insurance markets.
As may be seen, Chinese government’s restrictions are not only aimed at companies seeking foreign markets. Nor is it only for reasons related to personal data protection. In fact, there are two other factors.
First, the suspension of Ant Group’s IPO has led several Chinese government agencies that had powers to regulate markets to enter into turf wars in order to survive the next round of Chinese Communist Party Reforms, which consist of downsizing agencies and centralising certain issues into a few institutions.
The second reason has to do with social welfare, internal cohesion, and mental health. Regulation of the EdTech and gaming sectors stems from this idea. Reducing the number of hours per week to play videogames aims to reduce social isolation, and limiting private online tutoring aims to alleviate the hyper-competitive Chinese education system as well as to reduce the economic burden on families, with the idea that, by reducing their expenses, the birth rate will increase. The one-child policy elimination has not had the expected effect.
In conclusion, there is no single reason to explain what is happening in China. The crackdown is due in some cases to national security and economic competitiveness, and in others to causes such as mental health and cultural change. However, there is a common thread running through all of them. There is a tendency to prioritise strategic industries, something that might be more akin to the German industrial policy model than the US approach. For the EU and the US, it will be key to closely monitor this reality. As it is said, “you can go overseas, but you have to put your own house in order first”.