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Bans, stock collapses and policy overhaul: China’s tech crackdown, explained

China's swift backlash against technology firms has surprised even its closest watchers. Ant, Didi, online education, bitcoin, the list goes on. Is it just a power grab? Or is there more to it? Moneycontrol explains.

Mumbai / July 29, 2021 / 07:57 AM IST

Investors are shocked worldwide. Company executives are still grasping the full extent of what has happened. The Chinese government’s crackdown was best described by author Ernest Hemingway when he described going bankrupt- “gradually, then suddenly”. The government’s increasing skepticism about technology and large tech companies has been apparent for months now. But, its recent actions - wiping out the online education sector overnight, clamping on food delivery, real estate and more could have massive repercussions globally. Moneycontrol explains what happened and why it matters.

What happened now?

Earlier this week, the Chinese government banned online education firms from teaching courses that are taught in school, from raising foreign capital, and said that they should be registered as non-profit firms. The move led to listed Chinese edtechs losing billions in market cap- as much as 90 percent, while privately held hot startups became a sour proposition overnight. For example, tutoring firm Gaotu Techedu saw its market cap fall from $25 billion to $880 million. Their investors’ fortunes have dipped in the blink of an eye.

What else?

The next day, the government said food delivery apps would have to pay their workers above minimum wage, provide insurance and relax delivery times in rush hours. This led to food delivery apps’ shares falling, and increased pressure on them to treat workers better. The so-called gig workers do not get the benefits that a full employee does, and these lack of benefits are the cost advantage for these companies- virtually their DNA. Their entire business model can come under pressure if worker costs rise.

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Why are they doing this?

It is the multi-billion dollar question, one that most experts are struggling to answer. But pieced together from news reports, analysis and the government’s statements, China’s policy and social goals are more important to it than business growth, or the fate of foreign investors in China.

Rising social and education costs are driving down birth rates in China and leading to an aging population. China wants to reverse this, and is trying to make living less expensive- by banning the education apps that advertise heavily, rely on capitalistic models and take up a large portion of parents’ and kids’ time and money. For the same reason, the government has also clamped down on a booming real estate sector whose growth was led by borrowing. It feared that a loan-driven real estate bubble was in the making.

Any other reason?

The trend of China cracking down on tech is unmissable by now. Ride hailing app Didi was taken off the app store days after its $4.4 billion public listing for a cybersecurity review. Ant Financial’s IPO was called off and Chinese billionaire and titan Jack Ma was personally summoned by the regulator. One possible explanation though is that China is focusing on a different kind of technology.

What’s that?

China has steadfastly been protecting its mobile-network and handset-maker Huawei, amid US tensions. Its semiconductor industry and Artificial Intelligence efforts are still going strong. It seems to be clamping down on the consumer technology side of things, because its policy may dictate a refocus towards industry focused technology, and not mere consumer apps.

While tech is important, “we must recognize the fundamental importance of the real economy… and never deindustrialize,” Premier Xi Jinping said in 2020.

“When China’s leaders look at what kind of technologies they want the country’s engineers and entrepreneurs to be spending their effort on, they probably don’t want them spending that effort on stuff that’s just for fun and convenience. They probably took a look at their consumer internet sector and decided that the link between that sector and geopolitical power had simply become too tenuous to keep throwing capital and high-skilled labor at it,” one economics blogger says.

How does this impact India?

It is too soon to definitively tell, but there are indicators already. Global investors- stock market investors, venture capitalists and private equity funds could come to India instead of China because India is currently a more open and predictable market (also slated for more growth, compared to China which is already a mature economy). Byju Raveendran, CEO of the eponymous learning app and India’s most valuable internet company told Moneycontrol, “Many people are telling me this is a bigger opportunity for Indian ed-tech. We stand to benefit the maximum. A lot more money is going to chase the Indian companies. India and Indian ed-tech will define how everyone will learn globally.”

Why is this such a big deal?

Indian startup investors and entrepreneurs have looked to China to emulate their models, growth, sales tactics and funding mechanisms. Many investors built their thesis on the Indian market led by China’s growth in the 2000s. The government’s swift clampdown is a reality check for many who want to invest in China.

But it also represents a huge opportunity for India, to set the stage and define the narrative for many tech-led sectors.
M. Sriram
first published: Jul 29, 2021 07:57 am
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