In this editorial, Vimeo’s Director of Product examines China’s recent crackdown on tech giants like Alibaba and Didi. Is China right or wrong? A little bit of both, argues Emma Cai.
It seems it all started in Nov 2020 when Ant Group suspended its record $34.5B IPO in Shanghai and Hong Kong. Since then, the Chinese government has sped up its regulatory crackdown against Chinese technology companies and introduced regulations from antitrust to data protection overnight. The market saw a $2.1T market cap wiped out from China tech stocks since its peak a year ago. Many investors were forced to pivot their positions in China.
We’ve seen this form of control before in Chinese history. What is surprising this time is the way the government is specifically cracking down on tech companies even though they have been the prime driver of the Chinese economy for the past decade. Like many observers, I couldn’t help but wonder: what is the Chinese government’s intention? Is this going to be a long-term industry reform? What’s next?
While there is widespread concern about China’s crackdown on tech companies, I want to look a little bit closer. Is China increasing opportunity and competition by breaking up the biggest players in tech? Or is it introducing a level of instability in the tech market that will hinder long term innovation?
Breaking Up Big Tech
A particular focus of Chinese regulators has been non-bank financial players such as Alibaba’s Ant Group and Tencent’s Wechat Pay. These companies offer financial services but traditionally without the strict regulation that banks face, and there are two reasons for China’s concern.
First, data. These two companies control a majority of Chinese consumer payment transaction data. The Chinese government realizes that if these companies are going to list overseas, China could lose control over their data. Such concern led to the passage in August 2021 of the Personal Information Protection Law, which includes “strict requirements for transferring Chinese citizens’ data outside the country.”
The second reason China is concerned with these companies is risk. In the eyes of the Chinese government, there is already too much money in Alibaba. That money benefits the Chinese economy by allowing Alibaba to expand overseas, which is a strategic goal of the Chinese government, but at the same time, they want to keep Alibaba from becoming a threat to their financial system by drawing savings away from the state banks. At some point we might see a form of top-down “de-risking” in the form of pressure to divide these companies up to limit their size and reach.
These pressures explain why Chinese tech companies do not and will not perform like typical growth stocks. While their downside risk is limited, their upside is also going to be capped because the government won’t let them get too big.
President Xi Jinping’s “Common Prosperity”
What is common prosperity? It is a term long ago used by Mao Zedong, but recycled in 2021 by President Xi Jinping to refer to policies aiming for equal income distribution. China is still a developing nation, and hasn’t yet become a middle-income society. The government’s goal is to double GDP per capita by 2035 and become a middle developed country.
How can China achieve common prosperity, according to President Xi? It is about growth and distribution. Growth is self-explanatory. However, if distribution and opportunities are unequal, that presents obstacles to wealth. China wants to give more resources to low-income earners, preventing them from sinking back into poverty.
The common prosperity policy puts pressure on regulators to take actions against big tech companies who have benefited from their monopoly position for decades in China. Platform companies like the ride-sharing app Didi increase employment, but also have been a factor in increasing income inequality: many argue Didi drivers are underpaid in wages and benefits, and in May of 2021 the State News Agency Xinhua accused Didi of an unfair payment structure for its drivers.
The stated ultimate goal of President Xi’s campaign is to create more equitable opportunities for competition, decrease inequality in distributions, and allow middle-income small business owners to thrive. In practice, this has meant putting strict limitations on the growth of China’s most successful companies. As of yet it is unclear whether cracking down on companies like Didi will result in more opportunities for competitors, or in greater distribution of wealth.
The Chinese government may seem to be negatively targeting big tech companies with antitrust and data protection rules. But the tech sector is clearly a strategic priority for China, and it will continue to grow. China’s policies have so far been moderately successful in influencing market competitiveness (e.g. Tencent has now started unblocking rivals’ content on WeChat, and Alibaba is now integrating Tencent’s WeChat Pay on some of its apps).
Such top-down control over tech seems unreasonable to many, especially in the Western world. Indeed, wiping out a $2.1T market cap overnight seems reckless. On the other hand, the fundamentals of antitrust action makes sense in a developing nation, and some of the steps toward greater competitiveness have been effective. Moving forward, a more welcome approach may be for China to recognize better boundaries between the government and the market. Specifically, the government should do less to undermine stability and predictability in the market. One thing is clear: considering President Xi Jinping’s policies pertaining to common prosperity, the tech companies need to adjust their business outlook and follow the new rules and direction set by the government.