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Algorithms, Data, E-Commerce, IPOs: Why is China Targeting Its Powerful Tech Sector?

Aug 30, 2021 5:53 AM 5 min read

Since August 17th, China has been launching a series of regulatory diktats with the aim of reigning in its powerful tech industry.

While Beijing's increasingly hostile attitude towards the country's private power bases is not exactly new news, the frequency of these attacks has become an almost daily occurrence over the past two weeks.

Chinese Tech’s Week to Forget

It on the Tuesday before the last, when the country's antitrust watchdog, the State Administration for Market Regulation, released draft rules banning unfair competition among internet companies and calling for “self-rectification”. This was not a mere statement - it was a detailed undertaking that covered wide-ranging issues from false ratings and fake reviews to the practice of limiting traffic to other platforms and companies’ ability to use user data to influence their behaviour.

Then that Friday, the Personal Information Protection Law (PIPL) was passed, laying out for the first time set guidelines about how companies can collect, process and store data. The PIPL was modelled after the EU’s landmark General Data Protection Regulation (GDPR) with the convenient exception that the new rules were meant only for companies; the Chinese government still retained its broad access to consumer data and ability to surveil.

Last week, the Chinese Communist Party (CCP) continued its clampdown with plans to bar Chinese companies with access to “large amounts of sensitive consumer data” from going public in the US. The sectors most affected by such a development would be the ones Beijing considers vital to national security, such as tech, telecommunications and education.

And on Friday, regulators said tech firms should not set up algorithm models that tempt users to spend large amounts of money or spend money in a way that may "disrupt public order". They also proposed a new policy that would force these firms to give consumers the option of turning off algorithmic recommendation services or tracking.


Tracing Troubles

The CCP’s cynicism about the country’s powerful tech sector is well-documented. But it actively began cracking down only late last year.

In November, less than two days before Ant Group’s stocks were supposed to begin trading in Shanghai and Hong Kong via a hotly anticipated $35bn IPO, the Shanghai Stock Exchange sent the company notices saying its listing may no longer meet “qualifications or disclosure requirements”. The IPO was abruptly suspended, and was followed by the launch of a high-profile regulatory probe and Jack Ma’s highly-publicised months-long disappearance.

In March, Tencent’s Pony Ma confirmed a “voluntary” meeting with regulators where “some conditions in our past investments” were reviewed. Alibaba was fined a record $2.8bn next month. And 22 companies, including Tencent, Alibaba and Baidu, were fined $75,000 each for engineering dubious stake acquisitions to increase their market power.

Algorithms, Data, E-Commerce, IPOs: Why is China Targeting Its Powerful Tech Sector?On May 18th, China's central bank barred financial institutions and payment companies from providing any services related to crypto transactions, sending Bitcoin’s price crashing. This was partly due to the CCP’s distrust of digital currencies, but also probably influenced by efforts to popularise the state-backed digital Yuan.

More recently, only days after ride-hailing giant Didi Chuxing’s $4.4bn IPO in New York, China’s cybersecurity regulator announced an investigation into the company over data concerns. Less than a week after this, app stores in China were asked to remove Didi’s app. Last week, officials unveiled intentions to regulate car-pooling platforms’ pricing policies. Furthermore, food-delivery major Meituan is also under investigation for forcing vendors to exclusively sell on its platform.

There’s no reason to expect an end to the regulatory backlash anytime soon. Many of the policies listed above are still proposals; their implementation is likely to spark even more pandemonium. Moreover, the anti-monopoly legislation is expected to strengthen further later this year. Expect that to be the icing on the cake.


Action and Reaction

Naturally, the regulatory actions are having real-world consequences. Since February, Chinese companies have seen almost $1trn in value wiped off. Tech stocks in particular have been drowning in a bloodbath, plummeting helplessly every time a new regulation is released.

All in all, a perspective is emerging that the Chinese economy has reached an "inflection point" where Beijing’s all-out offensive against the private sector will lead to either better regulatory compliance or a return to the days of excessive state control. The latter, needless to say, might be a point of no return.


The Interpretation of Schemes

On some level, China’s tech tirade follows a familiar pattern. The CCP has a history of allowing a sector to blossom and grow robustly - before barging in with a harsh regulatory clampdown. This happened with shadow banking and it happened with fintech. Tech’s turn was probably a long time coming. But the difference is the intensity of the retaliation and the far-reaching implications, considering the fact that the Chinese tech sector has influence well beyond Chinese waters.

Algorithms, Data, E-Commerce, IPOs: Why is China Targeting Its Powerful Tech Sector?On another level, these developments run parallel to the ongoing tech backlash across the world. The US wants to bring Big Tech to its knees. Europe has been levying record fines on the likes of Google, Facebook and Apple. India has been bringing in sweeping new rules for e-commerce and social media, to say nothing about the extant decrees on data localisation and the upcoming Personal Data Protection Bill. It can be argued that Beijing’s new directives seek to update its regulatory framework for the tech sector. It can also be argued that in many places - like algorithmic recommendations - China is actually going one step further than other governments.

But to understand anything about the Chinese economy, you need to look at it through the eyes of its government. After all, in the Middle Kingdom, it is the invisible hand of the state that guides the “free” market (more on that here). In that light, pay attention to President Xi Jinping, who has been busy adopting a more Mao-esque personality of late (sometimes quite literally!).

Even before he assumed office in 2012, Xi frowned upon his predecessors’ tolerance of the super-rich. Wealth accumulation was a result of capitalistic excess, according to Xi, and he has been on a mission to emphasise “common prosperity”, which roughly translates to the need for the state to reduce wealth inequality. The reprisals against the country’s tech elite could be viewed as a part of this campaign.

But Xi’s eagerness to reduce inequality doesn’t necessarily stem from a well-intentioned desire for an egalitarian society. On the contrary, it stems from the CCP’s desire to exert and solidify control. Common prosperity, Xi has said, is “not just an economic issue, but a significant political one that matters to the Party’s basis to rule”.

Call it antitrust regulation with Chinese characteristics.

