Hundreds of billions of dollars have been lost to China’s tech crackdown this month. Tencent’s market cap alone has declined by $170 billion. Ride-hailing service Didi Chuxing, whose initial public offering on the New York Stock Exchange seemed to have signalled Beijing’s regulatory action, is trading nearly 40 percent below its opening price. Many other planned foreign listings appear stalled, and investors have begun a broad re-rating of all Chinese Internet stocks.
Clearly, investors have been caught by surprise. It need not have been so. Some might have hedged their bets, had they read more into Alibaba founder Jack Ma’s chastisement in October. But Beijing’s ways are often inscrutable. When regulators summoned Ma and grounded a planned listing for his Ant Financial arm — at a likely valuation exceeding $300 billion — many considered it as retaliation for Ma’s public rebuke of China’s financial system as a “legacy of the industrial age.”
Hindsight suggests there was more to it than just bruised egos. Beijing worried about a lot more, including the Alipay operator’s size and dominance, its treasure trove of user and transaction data, and apparently its complex owernship structure that would feather the nests of a few investors. According to an article in The Wall Street Journal, Chinese President Xi Jinping’s action was, among other things, targeted at “a coterie of well-connected Chinese power players, including some with links to political families that represent a potential challenge to President Xi and his inner circle.”
Still, most investors didn’t think Beijing would hold other Internet companies to similar, or — as is evident now — even greater, scrutiny. The current crackdown not only targets tech excesses seen elsewhere in the world, but also strives to restore some egalitarian ideals forgotten in China’s headlong rush into capitalism for the past four decades.
With the unexpected unfolding, an early assessment is that China will reshape the tech industry, and might even offer a model for the rest of the world. Some think the strong antitrust element might be good for innovation, giving newer entrepreneurs more room to grow without fear of being squashed by bigger rivals. Some rival startup ecosystems, like India’s, might fancy their chances of attracting venture capital dollars as some investors exit China, but few can match the Chinese market for its size and maturity.
Regardless, China is in a strange situation of creating a level playing field in technology. It is, after all, a country that blocked access to most global Internet companies, and imposed sharp censorship within its boundaries, fully subverting the concept of a free and open Internet. So what exactly is China doing?
For clarity, it might help categorise its recent actions into three broad categories — geopolitical, antitrust, and the communist.
In the first are actions that seek to assert control over data, ensuring it does not become available to other governments. Given the troubled relationship with the United States, Beijing is likely also strategising US listings and limiting exposure of its companies to foreign regulators and investors.
Most of the Chinese action is centred on antitrust, an area in which the West has been extraordinarily slow to act. Beijing clearly is seized by the same concerns over tech excesses as regulators in other parts of the world. In some ways, China’s Internet problem may be bigger than it is in rest of the world. This is because of two Internet giants — Tencent and Alibaba — and their dominance via ‘super apps’ that can do anything from messaging to payments and e-commerce. In comparison, the heft of Google or Facebook, for example, in either payments or e-commerce is limited. It is why Beijing has ordered, for example, Tencent to surrender its monopoly over music streaming, and asked the two giants to make several of their platforms interoperable.
The third category of actions is the more curious, not only for what Beijing has already ordered, but for how much more it might. Overnight, lucrative online tutoring firms have been barred from profiting from lessons on ‘core’ subjects. The China Securities Regulatory Commission is believed to have assured investors that it won’t similarly disrupt the business plans of firms in other sectors but it is not clear if they count for much. Similarly, Beijing has set new salary rules for delivery firms’ drivers, and additionally ordered companies to “appropriately relax delivery time limits.”
With the combination of antitrust action, and revived communist ideals, it would be hard to see China minting a billionaire every 36 hours, as it did in 2020 amid the pandemic. Now, that might not be a bad thing.
Bala Murali Krishna works for a New York-based startup.
Views are personal and do not represent the stand of this publication.
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