Business and finance

Power Play: China's Command & Control

In November 2020, I authored an article on China’s move of scuttling Ant Group Co.’s blockbuster $37 billion listing. Little did we know that it was just the beginning of an excessive clampdown on the country's technological sector.  To continue with the story of e-commerce giant Alibaba, the country’s authorities imposed a record fine - $2.8 billion in 2021, after an investigation that found it had abused its dominant market position for years. China’s unprecedented crackdown on its tech industry has cost several companies and their investors hundreds of billions of dollars. Tencent alone has had $170 billion shaved off its value. For context, that’s more than ten Byju’s, India’s biggest startup, which is valued at $16.5 billion.  The July Roundup by Goldman Sachs Group Inc shows that since November, the country’s regulators have taken more than 50 actual or reported actions on areas spanning antitrust, finance, data security and social equality, i.e. more than one move a week. For decades, China has assiduously built up its tech sector, and has borrowed an industrial and internet model from the West. Arguably it was a resounding success, then why is it now trying to strangle the golden goose it had once cradled?  China adopted a new cybersecurity law in June, which builds on the foundation of the 2017 Cyber Security Law, that started tightening the control of data flow. However, since the measure was vaguely worded, it remained unclear how it would be implemented. Around the same time, the Chinese economy was rebounding from its bout with COVID-19, lifting the nation's ride, hailing giant Didi Global’s revenue with it as the US stock market continued to be in a bull run. Didi's long venture investors, including Softbank’s Vision Fund, urged seizing the moment to take the company public. The company made its debut at $14 on the New York Stock Exchange on the last day of June 2021, raising $4.4 billion - the biggest stock sale by a Chinese company since the 2014 listing of Alibaba Group Holding Ltd.   Its shares briefly topped $18 in the first days of trading, before China’s cyber security watchdog - Cyberspace Administration of China (CAC) stunned investors on July 2 by launching a data-security probe into Didi and blocking its China business from adding new users.  The crackdown worsened on July 9, when 25 more Didi apps - including ones used by drivers - were ordered to be removed from app stores, potentially crippling the company’s operations. If this was not enough, the administration further extended its clampdown on other sectors in  July. On July 22, the government announced new worker protection rules, under which online food platforms must cover minimum wage and insurance benefits. This gutted the share price of delivery giants such as Meituan and its rival, Alibaba's Ele.me; which had drawn severe criticism on social media for their treatment of riders and guaranteed time-bound delivery which has compelled riders to undertake dangerous routes, risking their lives.  On the following day, Beijing effectively torpedoed a multibillion-dollar industry - after-school tutoring - with a single administrative order. The new rules banned companies that teach the K-12 school curriculum from going public and registering themselves as non-profits. The shares of the three largest US-listed Chinese edtech firms - TAL Education, New Oriental and Gaotu Techedu, fell by 65-70% on the announcement, and the founders of the latter two companies went from billionaires to millionaires almost instantly. The corporate intervention that has hammered internet stocks is now driving investors to sectors still in Beijing’s good graces, such as high-tech manufacturing and renewable energy. Indexes for new energy stocks, semiconductor makers and electric vehicle companies, outperformed the market from 4% to 18% since the beginning of July.  Broadly, Beijing is concerned about four pillars of stability: banking, antitrust regulation, data security and social equality. For example, social equality being at the heart of the ban of for-profit after-school tutors or rights concerning gig economy workers.  Some market participants believe China is trying to direct capital and human resources from internet companies into sectors that will help the country become more self-reliant. A portfolio manager at M&G Investments, Singapore, tracking the Chinese economy said, “They are trying to reach a new equilibrium because it seems capital flows were not in line with long-term, top- down priorities.” Analysts believe the government’s latest initiatives are motivated by a bigger ambition to realign the relationship between private business and the state, with a goal of ensuring companies do more to serve the Communist Party’s economic, social and national security concerns. However, it is worth noticing that Huawei, which should fall under the purview of the state on every possible reason in law, is entirely untouched.  As per some observers, the reason for the telecom giant being solidly backed by Beijing is due to the mutual benefit of both parties. China’s vision for a domestic adversary as opposed to a Silicon Valley has benefited the private companies for years from lax regulatory oversight. However, leaders now worry that the tech giants have become too big and could be using personal and corporate digital records as leverage to build alternative power centers in the one-party state.  In the past, the government has often demanded data from private firms, and could sometimes enforce its wishes, especially for hunting down criminal suspects and silencing dissent but the tech companies have pushed back on requests to share and centralise their statistics.  Nonetheless, Beijing now wishes to undo these through their complex cyber security laws and regulations which would make it harder for companies to resist data sharing requests.  Chinese regulators have formally made the data localisation requirement a prerequisite for foreign institutions trying to get a foothold in China, enabling the government to have more authority over the records. Western companies have long complained such “data localisation” requirements could stifle innovation in their global operations or enable Chinese authorities to steal their proprietary information.  US electric car maker Tesla Inc has pledged to build more data centers in China and to keep information generated by the vehicles it sells there, within Chinese borders. “Less invasive private-sector data collection anywhere is a good thing,” says analyst Ryan Fedasiuk at Georgetown University’s Center for Security and Emerging Technology. “But China’s push for data privacy strikes me as yet another move to strengthen the role of the government and the party vis-à-vis tech companies.” Unlike the EU rules, the Chinese version lacks restrictions on government entities when it comes to gathering information on people’s call logs, contact lists, location and other data. Meanwhile, these laws should also be seen against the backdrop of high tensions between US-China relations, which has sharpened President Xi’s focus on security and self-sufficiency. Beijing prohibits foreign ownership of larger sections of the Chinese economy, especially the profitable parts involving digital technology and data, and hence the companies follow a concept of  Variable-Interest-Entity or VIE, where the companies selling shares in foreign markets (including Hong Kong) can do so only quasi-legally at best. The workaround for VIE was the transparency that would come with foreign ownership and control which could reveal more about the state of the economy.  Under a 2020 law signed by then-President, Donald Trump, Chinese companies would have to share their audit working papers with the US regulators. Failure to do so would lead to delisting of companies from US exchanges.  For China, that could risk allowing key data, such as detailed information about Chinese consumers and government agencies that may be included in the papers, to end up in the hands of a foreign government. Both the second largest economy in the world and West see tech as a possible disrupter, however, it’s the Chinese who seem to be turbocharging a move towards the real tech, where they are ready to destroy the ‘pre-tender’ that exists today.

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