What is the Chinese tech crackdown really about?

From the West, it seems as though Chinese authorities are curtailing their own success, but this is unlikely the goal. So what exactly is the reason behind the tech crackdown and what is the desired outcome?

Long story short

  • The Chinese government wants to build a rule of law, see family values sustained, see common prosperity and see a safer consumer environment.

  • The outcomes listed above are underlying reasons behind the $1 trillion tech crackdown and signify two things:

    • One, the Chinese are putting values before business, which contrasts heavily from their US counterparts.
    • Two, the Chinese government can act extremely quickly, unlike their US counterparts, something indicative of state power.

  • The crackdown has a good intent—protect consumers, even out the laying field, and push for more prestigious technological goals.

  • The crackdown’s intent also implies that the American style of entrepreneurial hustle is not a socially endorsed mindset for Chinese citizens.

 


Chinese tech crackdown recap

It seems quite odd to capitalists in the West. Why would the Chinese government shoot itself in the foot? The $4 trillion tech industry in China hosts companies like Alibaba, Didi and Tencent, firms that supply services to billions of people—Didi for example, has more users than the USA has people! So far, there have been 50 regulatory actions ranging from antitrust to data breaches that have taken place costing investors $1 trillion.

China’s biggest tech firms now trade at an average discount of 26% versus their American counterparts, and foreign investors including SoftBank executives and Soros are questioning the long term thesis. The committee for ‘’crackdown’’ action (the CAC or Cyberspace Administration of China) is new as of 2014 and started its campaign to clean up the internet in May 2020.

By December 2020, the CAC had duly removed 105 apps considered ‘’illegal’’ such as Tripadvisor. The broader tech crackdown though started with targeting Ant Financial back in October with a focus on data, data the states wants to be in charge of. Then the summer happened and valuations came crashing down.

Quick government response impresses

The narrative has changed since the Ant financial IPO was halted. Between October and June, the first big shocks were the Ant and Didi IPOs. Those two events in isolation begged the question ‘’what is going on?’’. But as more companies started seeing the axe, there might be a regulatory theme around governing big tech firms.

Maybe those two events are in their own bucket. Other buckets started to appear recently. We see, bucket 1 for reactive stuff (plain old, the government does not endorse your tech), bucket 2 for antitrust issues and bucket 3 for longer term issues with social consequences around video games and education affecting family values.

Fines versus substantial action, those are the ways in which the West and China differ. The Chinese actually put a stop to their industries, versus the West who has political hurdles to jump through. We are, without a doubt, witnessing a powerful and swift hand from China.


Why do this now in the middle of a pandemic?

The premise from the party has been clear; to protect Chinese citizens and improve their standard of living. The party wants education to be free and not something people have to pay for. The party sees education tech companies as a threat to public morale, cohesion and well-being. The same thing is true of video games companies. But… why right now?

First, online services usage blew up and became very apparent. How much people were turning their attention over to private tech companies meant that private groups and individuals had too much power—something the government and Chinese society does not exactly promote as a social value (community over the individual).

Another way to see this is that during covid people moved their lives online. The government therefore has to move its way into that sphere of existence at some point to stay relevant. The party cannot let cyberspace be ruled by some invisible hand. It wants the culture of the real economy to be that of the digital economy. In other words, it seeks to have the same control it has in the real world, as it does in the digital world. While the west calls this control seeking behavior, the East calls this consistency in governance.

Secondly, China will probably not open its borders for the next year because Covid is still ravaging parts of the world, and so the government sees this as an opportunity to act in a sort of cocooned fashion, an incubation effect to hit some political objectives. The Chinese have been interested in two things; one is going from service-led to consumption-led economics which means the country has to change its consumer behavior. Two, much like Germany, China wants to become a more industrialized economy with smaller medium sized specialized firms building precision manufacturing parts all over the country. China may see the pandemic and trade tension as an answer in that there is no other option but to act in its own way.

Desired outcomes from Chinese tech crackdown

The types of outcomes the Chinese have could be listed in the following way:

   1) Building the rule of law (requires a comprehensive regulatory overhaul)

   2) Dual circulation (make markets fairer both for consumers and producers)

   3) Family values (make it easier to have kids, and to raise them)

   4) Common prosperity (reduce wealth inequality, denigrate billionaire success stories)

Beijing wants to prioritize certain tech initiatives over others. In California, firms like Snap and Facebook and consumer-oriented technologies don’t exactly represent the highest points of technological potential in their eyes—think harder like aeronautical sciences.

The Chinese have a point in wanting to focus on those harder techs. Lots of smart people are attracted to softer tech projects because there’s a huge money incentive. Working for a hedge fund as an analyst after doing a PhD in physics pays 5X more than being at Nasa. To the Chinese, digitization is important, but the real economy is paramount, and it starts with what people do for a living. Brain drain no more? Semiconductors, life sciences, aircrafts, chemicals, those are more important than gaming and finance to China.

For people living in the country, that’s not exactly a problem. Citizens mainly respond to regulation of large tech company excesses positively. Parents are happy about online education cracked down because they feel as though gaming companies and online education have competed with their parenting.

More sectoral decapitation?

Probably not. The framework for regulation seems to be more clear now (the three aforementioned buckets). What is going to go next with the CAC however? The CAC is a new regulatory body, a party organization with a demonstrated great deal of power. It’s covered by state council but it’s more of dual party and state organization. Investors are dealing with a brand new regulatory body, a body that regulates a lot of society, things like regulating algorithms in tech and so on, which means investing in China has become a high risk endeavor it’s not even clear if the by the dip argument works at all when we consider a scenario where a Didi just collapses entirely.

The government has targeted some of the most well known figures in Chinese society to make a point. The government doesn’t see all entrepreneurial hustle as ‘’good’’ and to some extant it is objectively correct just think back to lessons learned from remember 2016 online lending Ponzi schemes? This regulatory behavior is not new in China and the ‘’you cannot create value by monetizing risk’’ is almost a civilizational shift, a shift to make a point against Western capitalism.

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