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technology | IST

Explained: Why is China clamping down on its tech industry

China’s onslaught of regulatory crackdowns on tech companies rattled global markets Monday when it announced some curtailing measures on after-school tutoring institutions and asked them to convert into not-for-profit companies. For more reasons on why China is attacking its consumer-focused internet companies, watch the accompanying video of CNBC-TV18’s Prashant Nair.

China’s onslaught of regulatory crackdowns on tech companies rattled global markets Monday when it announced curtailing measures on after-school tutoring institutions and asked them to convert into not-for-profit companies.
The announcement hammered the tech stocks and instigated a sell-off so wide that Asian stocks touched seven-month lows. Companies like Tencent Holdings—an entertainment-to-tech conglomerate—plunged nearly 8 percent. And indices like Hong Kong’s Hang Seng tumbled nearly 7 percent—the indices’ worst performance since inception a year ago.
Ed-tech stocks, on the other hand, crashed nearly 50 percent in Hong Kong.
Then on Monday, regulators issued guidelines on the treatment of food delivery drivers. This resulted in stocks like Meituan—a leader in offline-to-online services—losing over 14 percent in a session.
In another announcement, regulators asked the country’s internet giants to get their act in order and fix anticompetitive practices and data security issues. This was an extension to its month-long campaign aimed to tackle issues like data security, financial stability, and monopolistic behaviour.
While it may seem too much at the moment, the latest rounds of crackdowns actually began last year. It started with Jack Ma’s (the founder of Alibaba Group) comment on how Chinese regulators stifle innovation. (Soon after making the comment, he disappeared.)
But Jack Ma, Alibaba, and China’s tech industry have an even longer backstory dating back to 2014.
The backstory
It was 2014 and China’s top business regulator was in a meeting with executives at Alibaba—an e-commerce giant, the Chinese version of Amazon Inc.
The State Administration for Industry and Commerce (SAIC) had alleged that the e-commerce giant engaged in “selling illegal, dangerous, and counterfeit goods”, “dealing with unlicensed vendors, and offering misleading sales promotions,” among other misdeeds.
No one knew about the meeting at the time. In fact, these allegations were made public in January 2015. But by that time Alibaba had already done what no one had done before—raised a record $25 billion with a debut on US-based tech index Nasdaq.
When allegations were disclosed, investors dropped the stocks like a hot coal and Alibaba lost billions. While the investors and money eventually returned, it started a chain of events.
Regulators launched an investigation in the company to figure out if Alibaba had misled the investors by not disclosing SAIC concerns.
Soon after, SAIC and Jack Ma engaged in a verbal war. It escalated so much that China’s Communist Party had to meddle to stop the spat before it could scare away investors from China’s nascent tech industry.
SAIC buried the probe. It admitted not revealing the complaints to avoid inflicting damage on the IPO. Jack Ma emerged victoriously.
Fast forward to 2020-21
Fast forward to 2020-21. China is in the middle of cracking down on the industry it saved all those years ago. Jack Ma is out of favour. And investors are considering leaving China.
So how and when did the Communist Party do a 360?
The story begins with Jack Ma.
Remember how I mentioned he disappeared from the public’s view? Remember reading reports speculating where he could be?
Well soon after, regulators had cancelled Ant Financials’ IPO, preventing Ma from launching yet another “world’s biggest IPO.” They then levied multi-billion-dollar antitrust fines against Alibaba, triggering a collapse of Ma’s empire.
Now China has pointed its arrows towards the rest of the internet industry. This time, it began with Didi, a ride-hailing app.
Chinese regulators spoiled an IPO party, this time after the listing.
Two days after Didi’s $4.4 billion IPO was listed on the New York Stock Exchange, Chinese regulators initiated an investigation into the company.
Two days later, its app was pulled off the stores on the back of allegations that Didi was illegally collecting and using the personal data of its users.
Yes, investors dumped the stock.
But why is China attacking its own companies?
Good question. For starters, if you do not belong to China’s Communist Party, you wouldn’t know why. I am not sure you would know even if you were a part of the party.
But people are speculating.
One obvious answer is ‘antitrust campaign’. Or more like ‘an antitrust campaign gone badly wrong’. Hard to say. Because the US, EU, Australia, India, nearly every big economy is launching an antitrust campaign on its Big Techs.
But you don’t see me writing about them. Or you don’t see those campaigns sparking talks of mass-scale investor exodus. Or you don’t see global markets plunging after reading headlines like ‘India likely to expedite Amazon, Flipkart antitrust probe’.
In other words, no country is crushing its entire internet industry.
Plus, if it is about the monopolizing habits of Big Techs, then why would it reduce venture funding? China is appearing to reduce venture funding. Venture funding helps build competition.
Maybe because China’s attack is focused.
Another specific trend to note in the crackdown is—it is not attacking all its tech companies, as Noah Smith, a Bloomberg Opinion columnist, writes. No, the attack is focused on “consumer-facing internet companies”.
For example, Huawei, a ‘tech’ company still enjoys government backing. So, we might not want to use tech and consumer-facing internet companies interchangeably, at least not in China’s context.
Another argument is China is catching up on laws and regulations to reach parity with the West.
China’s anti-monopoly laws were passed in 2007, over a century after the US passed its first law on monopoly, ‘Sherman Act of 1890’. Also, China’s Big Techs were born before the country had any law to regulate them. Alibaba was founded in 1999, Tencent in 1998, and Baidu (one of the largest internet companies in the world) in 2000.
And then a watchdog (State Administration of Market Regulation, SAMR) to regulate these companies was established even years later in 2018.
Lillian Li, a development economist focused on China, in her blog talks about another reason that she calls ‘Let the bullets fly for a while’. It is borne out by a macro-economic theory.
According to the theory, when markets experience high future uncertainty where regulators have inadequate regulatory tools, bias towards inaction is a dominant strategy.
So as these tech companies with hybrid governance structures experience hypergrowth, it becomes less obvious what to regulate and how. So, just let the bullets fly for a while.
For more reasons on why China is attacking its consumer-focused internet companies, watch the accompanying video of CNBC-TV18’s Prashant Nair.