In a previous article I looked at Chinese regulators’ crackdown on Didi Global, China’s ride-hailing service. Didi is one of several Chinese tech giants that have been tamed in the past nine months. Prior to Didi, Ant Group, Tencent, Meituan, and Pinduoduo were all quelled by regulators. After Didi, regulators targeted Full Truck Alliance and Kanzhun. They recently shut down online for-profit tutoring and have banned mining cryptocurrencies in China. 

Thus far, the Chinese government’s actions have resulted in almost $1 trillion net losses for the Chinese tech sector. 

The two big questions are, Why now? and, relatedly, Who’s next?

SupChina has a well-organized explainer on China’s Big Tech Crackdown here.

Another helpful resource is this video from DW, “How China is tightening control of its tech companies”:

According to SupChina, China’s Big Tech Crackdown is not a monolithic initiative, but really three different areas of concern that fall under the jurisdiction of three different, albeit overlapping, governmental departments. Additionally, some companies, like Didi, could fall within any of these areas of concern.

Authoritarian Style Antitrust Probes

The first category of crackdowns is antitrust probes in which companies have been dinged for “anticompetitive behavior.” The antitrust probes are in response to legitimate concerns of exploitation that come out of lax regulations on China’s tech sector when the government favored growth and global dominance over regulations. For example, e-commerce marketplaces like Alibaba, Pinduoduo, JD.com, or Taobao have engaged in an unspoken “picking one from two” policy in which vendors are only allowed to sell their wares with a particular marketplace and will be penalized for posting with a competitor.

SupChina compares China’s antitrust probes to the U.S.’s antimonopoly investigations into Silicon Valley’s tech giants, but the two have important differences. The Economist has several articles that do a good job of parsing out the nuances. In “China offers a masterclass in how to humble big tech, right?”, the article shows how the Chinese Communist Party’s (CCP) “regulatory authoritarianism” contrasts the U.S.’s methods for dealing with monopolies. For example, while antitrust laws have been around in China since 2008, they were rarely enforced on the tech sector because of the CCP’s priorities on rapid growth. Then, in 2018, the State Administration of Market Regulation (SAMR) was formed to serve as the CCP’s regulator and wielded its authority when it drafted new regulatory rules a week after Ant Group’s IPO was suspended. SupChina says that since December 2020 when the Politburo gave the SAMR its blessing “the market watchdog has come out swinging.” 

Furthermore, unlike the U.S., where companies can argue their case in court, the SAMR serves as police, judge, and jury, which means the SAMR can retroactively penalize companies for breaking regulatory laws:

Alibaba became the first and largest victim of China’s antitrust probe when it was fined a record $2.8 billion on April 10. Three days later, 34 tech firms were called in by regulators to rectify antitrust practices. Almost every big platform company was called to this meeting, including Tencent (music and gaming), Meituan (retail), Didi (ride hailing), Baidu (search), ByteDance (social media), JD (ecommerce), and New Oriental Education (education). In the following months, SAMR has fined almost all of these companies for failing to disclose mergers, signing exclusive contracts, misleading marketing tactics, and other “merger irregularities.” Many of these deals occurred prior to 2018, before the watchdog even existed. (emphasis added)

Jeremy Goldkorn, “China’s Big Tech Crackdown” at SupChina

Data Is Power

The second reason the CCP is reining in tech companies is due to data security. According to some analysts, this is the predominant reason for the CCP’s crackdown. Ant Group and Didi, for example, sit on vast swaths of data about individual transactions in the case of Ant Group’s Alipay, and transportation data in the case of Didi. General Secretary Xi Jinping has made it clear that Big Data and artificial intelligence are key areas for China’s global dominance as well as domestic surveillance.

“Personal data, corporate data, government data — they want access to everything,” says Jeremy Mark, a senior fellow at the Geoeconomics Center of the Atlantic Council. The government plans to apply that data to everything from blockchain-based financial services to medical research to the surveillance state.

Jennifer Conrad, “China Cracks Down on Its Tech Giants. Sound Familiar?” at Wired

Wired interviewed several China experts, including Scott Kennedy from CSIS who said the real issue is not what data is being held by these companies but who holds it. Not only does the CCP want access to tech companies’ data, but it wants to ensure other countries can’t have access to it. Part of the regulations released by SAMR will require tech companies to undergo a review before listing on a foreign stock exchange. Additionally, two data laws ­— the Data Security Law which goes into effect September 1 and the Personal Information Protection Law — put restrictions on the data private tech companies can obtain from users, but the government can still have unrestricted access to private data. 

By way of example, Didi’s trove of data includes the ride activities for government employees. In 2015, the company published a report showing which government agencies had the longest hours based on when employees hailed cars.

Technology in the State’s Interest

The last reason listed in SupChina’s primer on China’s Big Tech crackdown is the “disorderly expansion of capital,” or the CCP’s concern that tech companies are profiting from services that are not in the public interest. 

This was ostensibly why regulators canceled Ant Group’s Shenzhen and Hong Kong IPOs. Ant Group was engaging in high-risk loans without being held to the same standards as banks that need to ensure some security. Tencent (gaming) and ByteDance (social media) were dinged because youth were addicted to the platforms. The online for-profit tutoring sector could also fall under this category.

While these companies may have taken advantage of lax regulations and engaged in poor business practices, the regulations handed down for “disorderly expansion of capital” are regarded by most analysts as a poor solution to the problem. SupChina reports that everyone they interviewed criticized the regulations as being haphazard and will likely have unintended consequences in the technology and business sectors. The problem stems from top-down regulations enacted by bureaucrats who are neither specialists nor industry experts. 

Underneath the justification for serving public interest is Xi Jinping’s agenda to redirect the tech sector toward manufacturing, semiconductors, microchips, artificial intelligence, and quantum computing. Rush Doshi, U.S. presidential advisor and author of “The Long Game: China’s Grand Strategy to Displace American Order” told The Economist, 

The final facet of China’s campaign is a transfer of resources from internet companies to firms that can create tangible advances in technologies that the party deems less frivolous. This would represent a striking shift in Chinese economic governance, which since the 1990s has put rapid development and attracting foreign direct investment over all else… Now the government wants to use such carrots, as well as its anti-tech sticks, to create a less unruly and more hardware-focused technology sector that will help it surpass America and the rest of the West in economic might. 

The Economist, “What Tech Does China Want?“

The Party Always Wins

Susan Shirk, chair of the 21^st Century China Center at UCSD, told Wired that the more power that is concentrated in Xi Jinping, the more paranoid he is of political loyalty. “It just makes him very nervous because he doesn’t know what [tech companies] will do with all of these resources. And at some point they could perhaps use them to organize a challenge to Xi Jinping or even party rule.” 

Viewed from this perspective, Jack Ma’s October speech that criticized regulators and Didi’s listing on the New York Stock Exchange against regulators’ advice the day before the 100^th anniversary of the Communist Party, could be considered “unpatriotic” and affronts to the CCP’s authority.

There’s a saying in the gambling industry: the house always wins. Even if you feel like you won big, at the end of the day, the house always wins. In an authoritarian, or neo-totalitarian, regime, the Party always wins. As the Deutsche Welle video (above) aptly put it, the recurring theme is the “regulating state holds all of the cards and determines the game and makes sure everyone plays in the way it prefers.”

You may also wish to read:

China’s Crackdown on Big Tech: Didi Global Inc. In an authoritarian government, data is power. Didi Global had its problems, but where it ran afoul of the CCP was in collecting too much data and listing with the U.S. (Heather Zeiger)

Chinese Entrepreneur Jack Ma Missing After Criticizing the Party. If even Jack Ma can just disappear in China’s high tech world, is anyone safe? The poster boy for new prosperity went missing in October and is said to be undergoing reeducation after he criticized China’s financial system. (Heather Zeiger)

China Sharply Reins in Big Tech Amid All-Digital Currency Rollout. Ant Group must turn over its vast customer database to the government in exchange for the easing of strict regulations. China may be aiming to nationalize the country’s financial services, giving the government control over all transactions, credit scores, and savings. (Heather Zeiger)