China’s tech crackdown: Tightening the leash on the tech industry

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  Quantumrun Foresight
• January 10, 2023

China’s 2022 crackdown on its tech industry has produced two camps of opinion. The first camp views Beijing as destroying its economy. The second argues that reining in big tech firms might be a painful but necessary government economic policy for the public good. Nonetheless, the end result remains that China sent a powerful message to its tech firms: comply or lose.

China’s tech crackdown context

Since 2020 until 2022, Beijing worked to rein in its technology sector through stricter regulation. E-commerce giant Alibaba was among the first high-profile firms to face heavy fines and restrictions on their operations—its CEO Jack Ma was even forced to cede control of the fintech powerhouse Ant Group which was closely affiliated with Alibaba. Stricter laws were also brought to the fore targeting social media companies Tencent and ByteDance. In addition, the government introduced new rules concerning antitrust and data protection. Consequently, this crackdown caused many major Chinese companies to have a high sell-off in their stocks as investors withdrew about USD $1.5 trillion from the industry (2022).

One of the most high-profile crackdowns was on the ride-hailing service Didi. The Cyberspace Administration of China (CAC) prohibited Didi from signing up new users and announced a cybersecurity investigation against it days after the company debuted on the New York Stock Exchange (NYSE). The CAC also ordered app stores to remove 25 of the company’s mobile apps. Sources reported that the firm’s decision to go ahead with its USD $4.4 billion US initial public offering (IPO), despite orders from Chinese authorities to put the listing on hold while they conducted a cybersecurity review of data practices, caused it to fall out of regulators’ good graces. As a result of Beijing’s actions, Didi’s shares fell almost 90 percent since it went public. The company’s board voted to delist from the NYSE and transfer to the Hong Kong Stock Exchange to appease Chinese regulators.

Disruptive impact

China didn’t spare any major players from its relentless crackdown. Big Tech giants Alibaba, Meituan, and Tencent were accused of manipulating users through algorithms and promoting false advertising. The government fined Alibaba and Meituan USD $2.75 billion and USD $527 million, respectively, for abusing their market dominance. Tencent was fined and prohibited from entering exclusive music copyright deals. Meanwhile, technology provider Ant Group was stopped from pushing through with an IPO by regulations issued for tighter control of online lending. The IPO would have been a record-breaking share sale. However, some experts think that although this strategy seems like a disaster, Beijing’s crackdown will most likely help the country in the long term. In particular, the new anti-monopoly rules will create a more competitive and innovative tech industry that no single player can dominate.

However, by the beginning of 2022, the restrictions seemed to be slowly easing down. Some analysts think the “grace period” is only up to six months, and investors should not consider this a positive turn. Beijing’s long-term policy will likely remain the same: to tightly control big tech to ensure wealth is not concentrated among the elite few. Giving a group of people too much power can change the country’s politics and policies. Meanwhile, Chinese government officials met with tech firms to support some of their plans to go public. However, experts think that the tech sector has been permanently scarred by the brutal crackdown and would likely proceed with caution or not at all. In addition, foreign investors could also be permanently spooked and stay away from investing in China for the short term.

Implications of China’s tech crackdown

Wider implications of China’s tech crackdown may include: 

• Tech firms becoming increasingly wary of regulators, choosing to coordinate closely with governments before implementing any major projects or IPOs.
• China performing similar crackdowns on other industries it deems are becoming excessively powerful or monopolistic, plunging their share values.
• The Personal Information Protection Law forcing foreign companies to rehaul their business practices and share additional data if they want to work with Chinese entities.
• Stricter anti-monopoly rules forcing tech companies to improve their products and services internally instead of buying innovative startups.
• Some Chinese tech giants possibly never regaining the market value they once had, leading to economic contractions and unemployment.

Questions to comment on

• How else do you think China’s tech crackdown has affected the global tech industry?
• Do you think this crackdown will help the country in the long term?