China vs Big Tech
By: Tan Yu Xuan
Big Tech firms like Alibaba and Tencent are some of China’s largest companies. They supported the growth of the Chinese economy through innovation, driving up productivity and consumer spending. However, within less than a year, the Chinese government rolled out countless new regulations to clamp down on these tech firms. EdTech firms are forced to turn into non-profits.
Is this simply a political move by the Chinese Communist Party to seize power? Here we try to offer a more logical explanation for the recent events. Read more to find out!
For many years, technology companies in China have experienced unprecedented growth due to the lack of supervision by Chinese regulators in the name of innovation. By hiring former regulatory officials, these tech companies were able to exploit and manoeuvre their way around grey areas in the legal system (Au, 2021). In his own words, Jack Ma, the founder of Alibaba said, “We always stay a step ahead of the regulators. We have to.” (Zhai et al., 2021).
Where it all began
In October 2020, in the presence of regulatory personnel, Ma took a swipe at the Chinese regulators, accusing them of stifling financial innovation. A few days later, Ant Group’s record-breaking $34 billion initial public offering was blocked personally by Chinese President Xi Jinping (Zhai et al., 2021).
In the months following the event, Chinese regulators imposed a string of crackdowns on many different tech companies in China, accusing them of monopolistic practices (Au, 2021). Ant Group, the spark that lit the fuse, ended up having to change its entire business model (Zha et al., 2021). Investors lost confidence in the growth of Chinese tech companies. During an interview with Delivering Alpha, Chamath Palihapitiya, CEO and founder of Social Capital said that China is a place he will read about, but not invest in. “What we have seen in the last six months has really shaken my confidence in the ability to predict what happens next”, said Palihapitiya (Rosenbaum, 2021).
Impact on Chinese tech stocks
As a result of the chain of regulatory crackdowns from 2020 through 2021, Chinese tech took a major blow in its stock price. Ticker symbol KWEB, an ETF that tracks the CSI Overseas China Internet Index, had its valuation slashed by almost 60% from its all-time high of $103 to a $44 low from February to August 2021 (Yahoo Finance, 2021).
Growth fuelled by big tech
In 1979, China reformed its economy by introducing the free market and opening up to foreign trade and investments. Since then, China has been able to double its economy, on average, once every 8 years (Charlton, 2019). Figure 1 charts the annual GDP growth rate of China, the U.S. and the world from the year 1979 to 2020. The Chinese economy grew roughly twice as fast compared to the U.S and the world during this period (The World Bank, 2021).
Figure 1: GDP Growth Rate of China, the U.S. and the World
Source: The World Bank
Fast forward to the year 2015, when things started to look not so great for China. There was a slowdown in economic growth, where China’s GDP growth rate slumped to sub-10 levels for several consecutive years. Many worried that this marked the end of China’s massive growth and that a recession was looming around the corner. Private debts rose from 150% to 230% of GDP due to runaway lending with the Global Financial Crisis in 2008. This was the turning point for China (Sharma, 2020).
Despite this, a recession never came. Referencing from figure 1, China was able to maintain a GDP growth rate of about 6% till 2020 when the Covid-19 pandemic hit. This can be attributed to the rise of tech giants such as Alibaba and Tencent. These companies created a new digital economy. Its growth rate was so high that it managed to offset the decline in older industries, anchoring the growth of the Chinese economy (Sharma, 2020). In 2020, despite the pandemic, China’s digital economy maintained a growth rate of 9.7%, 3 times higher than that of GDP growth. The scale of the digital economy reached 6 trillion dollars, accounting for almost 40% of China’s GDP (Xinhua, 2021). This highlights the pivotal role tech companies play in China's economy. The effects of the rise of big tech are far-reaching, increasing productivity and consumer spending across multiple industries.
While Chinese leaders pointed out that the recent crackdowns were aimed at curbing monopolistic practices, protecting consumers, and maintaining financial stability, they have by large remained silent on their underlying intentions. Some speculate that the regulators just want to reassert their oversight power, while others say that the growth of tech companies has threatened the existence of more traditional state-owned firms. This is particularly true for the case of fintech companies like Tencent and Ant Group (Bloomberg News, 2021).
Figures 2 below clearly show the threat fintech firms pose to traditional Chinese state-owned banks. Digital wallet payments make up 54% of the total market value of e-commerce payments in China in 2018 (J.P. Morgan, 2019). Tencent’s WeChat Pay and Ant Group’s Alipay make up 94.4% of the total market share of mobile payments made in China. As of 2020, the combined market-capitalization of Alibaba, Ant Group and Tencent was nearly $2 trillion, which vastly surpasses that of state-owned banks (Bloomberg News, 2020).
Figure 2: Market value of e-commerce payment methods in China
Source: J.P. Morgan
Analysts also suggested that the Chinese Communist Party may have growing concerns over the massive amounts of data controlled by private internet companies that the party has little direct control over. The party considers the data collected from hundreds of millions of users the key to driving the country’s geopolitical and economic goals (Bloomberg News, 2020).
China is trying to regain control over data, which regulators fear can be used against China when it falls into the hands of foreign adversaries. Companies like Didi, Alibaba, and Tencent collect vast amounts of information, ranging from consumer behavior to real-time location and mobility data. Many of them have exploited regulatory loopholes, allowing them to list their shares overseas (Bloomberg, 2021). Regulators cited China’s national and cyber security laws, saying that the investigation into Didi was to prevent data security-related risks. Apart from Didi, the regulators also tightened rules for other tech companies in areas such as the collection, storage, and handling of key data (Reuters, 2021). The regulatory crackdowns seek to close up these loopholes, which China views as national security threats. Recently, regulators proposed to introduce new regulations that will effectively ban Chinese tech firms which handle sensitive data from listing overseas (Ray, 2021).
Crackdowns… unique to China?
It is worth pointing out that such crackdowns are not unique to China. The U.S has the largest digital economy in the world, standing at $13.6 trillion in 2020 (Global Times, 2021). The digital economy accounted for 5.7% of total employment in the U.S. and supported 8.8 million jobs. Figure 3 below shows that the digital economy’s share of total GDP in the U.S. has been on a constant uptrend from 2005 to 2018 (Nicholson, 2019).
Figure 3: Digital economy’s share of GDP in the U.S.
Source: U.S. Bureau of Economic Analysis
The digital economy is arguably equally important to the U.S. as it is to China.
Recently, the U.S. Congress unveiled an antitrust overhaul package targeting Big Techs such as Google, Facebook, and Amazon. The proposed measures include banning firms from prioritizing their products and services, requiring portability and interoperability of data between apps, and banning large tech firms from acquiring competitors (The Business Times, 2021). All of these were proposed in the name of maintaining competitiveness and fairness in the markets. In recent news, the Biden administration pledged to crack down on corporate crime and anti-competitive practices, with the Department of Justice saying that it will involve some of the largest corporations operating in the U.S. (Palma, 2021).
Same story, different reactions
The topic of data collection has been a sensitive topic across the globe. However, we are seeing a completely different reaction to the recent crackdowns in China as compared to similar antitrust cases in other countries. Amid anti-trust lawsuits against Google and Facebook, their stock price seems to be relatively unaffected. In comparison, the stock price of Chinese tech companies took a major hit. Media coverage on the cases against U.S. tech companies was also nowhere near today’s coverage on China’s regulatory crackdown.
One reason for this is the sheer speed and efficiency of regulatory actions by the Chinese Communist Party. Within less than a year, the regulators rolled out a series of new regulations targeting a broad range of industries. Apart from the tech industry, the entertainment, gaming and education industries have undergone a series of regulatory changes (Reuters, 2021). The private education industry took the biggest hit when China forced companies providing after-school tutoring services to register as non-profits, essentially wiping out the entire sector. (Channel News Asia, 2021) The speed and scope of regulatory changes in China are considered novel in developed economies like the U.S. where a typical anti-trust ruling can take up to years before concluding. China has implemented far-reaching rules, demonstrating the kind of authority over tech companies that the U.S. regulators struggled to (The Business Times, 2021).
The future of China’s big tech
With all that being said, it is unlikely that China will kill off its tech industry as it did with the education industry. China’s goal of being the world’s largest economy still largely depends on the success of the tech industry. This means that foreign investments will still need to be flowing into Chinese tech firms. Why kill the goose that lays the golden eggs? What China is doing now is similar to what governments around the globe are struggling with, which is finding the delicate balance between economic growth and the growing influence of large tech companies. The difference lies in China’s political structure, where the Chinese Communist Party has complete control and can effectively regulate a wide range of industries without going through lengthy parliamentary or congressional debates. However, as of now, it seems like the end of the regulatory clampdown on China tech is still out of sight.
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