China’s crackdown on tech companies hasn’t really surprised anyone who knows China. However, how far the Chinese authorities have gone has raised new questions without really answering the older ones.
In this post, we look at the backdrop to get a feel for where China’s crackdown on the near-untouchable giants began. We looked at some data and made hypotheses about what led China to take what seemed like a drastic step.
The Beijing Stock Exchange and Jack Ma
An American president once said that when China is thirsty, it will play the guitar.
In China, nothing happens by chance. And most people, including most experts, can never put two and two together in China because things are never what they appear to be. Due to its famous opacity, China makes it almost impossible for others to connect the dots, except perhaps in hindsight.
China’s regulatory crackdown on tech companies is no different. It has multiple angles. Take a look at these two events:
- Last year, Alibaba’s gigantic IPO was canceled at the last minute. And the founder Jack Ma suddenly disappeared, if not completely disappeared, then for a long time.
- Almost immediately after this, a new stock exchange was inaugurated in Beijingwhose negotiation began on November 15, 2021.
Are these two events related?
Yes, if you’re based on some observers who understand the Chinese game a bit more than others.
Here are three reasons why:
Show them who’s boss
Xi Jinping of China wanted to show that he is really the boss After all, it didn’t matter how much influence Jack Ma from Alibaba was gathering.
For example, Ma, in 2015, had had the strength of the network with which he was able to get a regulator to withdraw a report that did not speak highly of Alibaba. Today, Ma is almost out of the limelight.
Tell them we’re business friendly
China’s is a unique model of socialism-cum-capitalism. After reducing the size of Alibaba, Jinping’s China began to resemble a business-gobbling dragon.
The stock market was China’s way of saying, “Hello companies, we love you! Don’t be afraid of us! We are business friendly!”
We are realigning objectives
China’s current tech superheroes are all B2C companies. As Jude Blanchette of the Center for Strategic and International Studies think tank observed, “Xi doesn’t care if people can get their meals 14% faster or it’s 7% easier to order a car…he’s more than happy to see capital move away from those sectors and into areas he sees as providing the foundation for China’s future.”
The current repression is a serious realignment of China’s goals, back to chips and semiconductors and all those things
China is changing course
The chart below shows how China compares to some of the countries when it comes to R&D spending.
As a percentage of their individual GDPs, here is where some of the countries ranked in 2020:
| Country | % of GDP spent on R&D |
| Israel | 4.93% |
| South Korea | 4.64% |
| USA | 3.06% |
| OECD countries | 2.47% |
| Porcelain | 2.23% |
If you’ve noticed that Israel’s spending shares are more than double those of China, you’re right.
But you will also have noticed that China’s spending growth has been one of the fastest among the countries highlighted above. In just two decades (2000 to 2020), China’s spending on R&D has jumped from 0.89% to 2.23%, an increase of two and a half times.
Ask: What does all this have to do with China’s recent crackdown?
Answer: China is realigning its resources and redefining priorities.
The Chinese government may believe, and rightly so, that the global dominance it dreams of cannot come from Baidu, Tencent, Alibaba, or ByteDance alone. You will need something stronger.
And, as usual in China, there is more.
China in the Global Innovation Index
The World Intellectual Property Organization (WIPO) assembles a complex set of data to rank the position of countries in terms of innovation globally. Here’s China’s position in 2011: 29th, behind countries like Qatar and the Czech Republic, which aren’t exactly tech giants.
And now look at China, which is ranked 12th in 2021, exactly 10 years later.
While not the same as being number 1, the rise is so impressive that it would seem as if China jumped the queues.
Once you combine this ranking and the OECD chart on R&D spending above, a clearer picture begins to emerge: China is not happy with the growth of online retailers, taxi services or microblogging giants.
Behind that is also how some Chinese tech giants may have exploited data privacy loopholes while the Chinese government looked the other way.
Data privacy breaches in China
Here are four of the examples. The Wall Street Journal cites to showcase data privacy violations in China that are routine business for tech giants.
- Residential developments equipped with cameras with facial recognition capability: Tenants and visitors have complained about this
- Video streaming services tracking and openly exposing see stories of users
- extreme surveillance in areas like Xinjiang that have prisons and internment camps. You’ll need facial scans even for basic activities like refueling your car.
- He policeman looking over his shoulder to check if you have installed certain applications. Schools and authorities are promoting such measures to ensure full coverage of vaccination campaigns.
China’s strategy paper for 2021
China’s regulatory crackdown has such wide-ranging repercussions that it cannot be reduced to one or two simple causes. And the actions are not sudden knee-jerk reactions either; they are part of a very strategy of which only parts are visible to people outside of China.
One of the pillars of China’s regulatory crackdown may have its roots in the strategy unveiled in 2021.
Xinhua News Agency (AKA New China News Agency), which is China’s official state press agency, reports a 10-point plan of the strategy document.
- Construction rules: Study and implement the rule of law of government.
- Promote the role of government: Improve the functional system of government agencies
- Accelerate standardization: Improve the administrative system
- Increase credibility: Improve the decision-making system for greater credibility
- Improve the application: Improve law enforcement and promote strict and standardized law enforcement
- Dealing with exceptions: Improve the emergency response system in accordance with the law
- Prevent conflict: Offer a mediation resolution system and promote equity and social justice
- Emphasis on transparency: Improve supervision and promote transparency of machinery and administrative processes
- Improve technological security: More system under the rule of law and integral construction of a digital government
- Strengthen leadership: Strengthen the party leadership and improve the promotion mechanism
Roundup of China’s regulatory crackdown on tech companies
Why was Ant’s IPO cancelled?
Most people forget the fact that Ant, had it been listed as planned, would have been considered a banking and finance company, and not a tech czar. And banking companies, traditionally, have never performed as glitzy and glamorous on the stock market as technology companies have.
The listing could have weakened the perception that people and investors would have had about Ant.
Why is there a sudden crackdown on tech companies?
Local tech companies in China have had tacit and unspoken support from the Chinese government. As they grew to become near monopolies, the communist government looked the other way.
Today, now that these companies are sitting on tons of personal data, the Chinese government is ready to crack the whip and gain access to personal data. You don’t need to be told what a gold mine this data is for China’s authoritarian and almost dictatorial form of government.
Simply put, companies only owe this data to the government, as a thank you for allowing them to grow unbridled. It’s like the teachers think it’s time to “get even” as Sandipan Deb wrote in LiveMint.
Featured image courtesy: Photo by Wei Zong Lao on Unsplash
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