Xi Jinping’s assault on tech industry will change China’s course

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OF ALL OF CHINA one of the most impressive achievements over the past two decades has been the rise of its technology industry. Alibaba hosts twice as many e-commerce activities as Amazon. Tencent runs the world’s most popular super-app, with 1.2 billion users. China’s technological revolution has also helped transform its long-term economic outlook in the country, allowing it to move beyond manufacturing into new areas such as digital healthcare and artificial intelligence (AI). In addition to propelling China’s prosperity, a dazzling tech industry could also be the basis of a challenge to American supremacy.

This is why President Xi Jinping’s assault on his country’s $ 4 billion tech industry is so startling. There have been more than 50 regulatory actions against dozens of companies for a staggering number of alleged breaches, ranging from antitrust abuses to data breaches. The threat of government bans and fines weighed on stock prices, costing investors around $ 1 billion.

Xi’s immediate goal may be to humiliate tycoons and give regulators more leverage in unruly digital markets. But as we explain, the Communist Party’s deepest ambition is to rethink the industry according to its model. Chinese autocrats hope this will strengthen their country’s technological lead while boosting competition and benefiting consumers.

Geopolitics can also stimulate them. Restrictions on access to components made with American technology have convinced China that it needs to be more self-sufficient in critical areas like semiconductors. Such “hard technology” can benefit if crackdowns on social media, game companies and others direct talented engineers and programmers in its direction. However, assault is also a giant gamble that can end up causing long-term damage to business and economic growth.

Twenty years ago, China barely seemed on the brink of a technological miracle. Silicon Valley dismissed pioneers like Alibaba as imitators, until they overtook it in e-commerce and digital payments. Today, 73 Chinese digital companies are worth more than $ 10 billion. Most have Western investors and internationally trained executives. A vibrant venture capital ecosystem continues to produce new stars. Of the 160 Chinese “unicorns” (start-ups worth over $ 1 billion), half are in fields such as AI, big data and robotics.

Unlike Vladimir Putin’s war against Russian oligarchs in the 2000s, China’s crackdown is not about insiders fighting over the spoils. Indeed, it echoes concerns that motivate Western regulators and politicians: that digital markets are tending towards monopolies and that tech companies are hoarding data, abusing suppliers, exploiting workers, and undermining public morals.

Stronger police were expected. When China opened up, the party maintained a suffocating grip on finance, telecommunications, and energy, but let technology tear itself apart. Its digital pioneers have used this virtual absence of regulation to grow at an astonishing speed. Didi, which provides transport, has more users than America has inhabitants.

However, large digital platforms have also exploited their freedom to trample on small businesses. They prevent traders from selling on multiple platforms. They deny food delivery drivers and other workers together basic benefits. The party wants to put an end to such misconduct. It is an ambition that many investors support.

The question is how? China is poised to become a political laboratory in which an irresponsible state struggles with the world’s largest corporations for control of critical infrastructure for the 21st century. Certain data, which the government considers a “factor of production”, such as land or labor, can become public property. The state can enforce interoperability between platforms (so that, for example, WeChat cannot continue to block rivals). Addictive algorithms can be controlled more rigorously. All of this would hurt profits, but could improve the functioning of markets.

But make no mistake, the crackdown on China’s unruly technology is also a demonstration of the party’s unhindered power. In the past, her priorities were often victims of vested interests, including corrupt insiders, and she was constrained by her need to court foreign capital and create jobs. Now the party feels emboldened, issuing new rules at a breakneck pace and enforcing them with fresh zeal. China’s regulatory immaturity is fully demonstrated. Only about 50 people work in its main anti-monopoly agency, but they can destroy business models with the stroke of a pen. Denying due process, companies have to smile and put up with it.

Chinese leaders have spent decades successfully challenging Western conferences on liberal economics. They may see their crackdown on the tech industry as a refinement of their state capitalism policy – a model for combining prosperity and control in order to keep China stable and the party in power. Indeed, as the Chinese population begins to decline, the party wants to increase productivity under state leadership, including automating factories and forming urban mega-clusters.

Still, the attempt to reshape Chinese technology could easily go wrong. This is likely to arouse suspicion abroad, hampering the country’s ambitions to sell services and set global technology standards in the world in the 21st century, as America did in the 20th. Any brake on growth would be felt well beyond China’s borders.

A greater risk is that the crackdown will weaken entrepreneurship in China. As the economy shifts from manufacturing to services, spontaneous risk-taking, supported by sophisticated capital markets, will become more important. Several of China’s top tech moguls have withdrawn from their businesses and public life. Aspirants will think twice before trying to emulate them, not least because the crackdown has driven up the cost of capital.

Slowdown at start-up

China’s biggest tech companies are now trading at an average discount of 26% per dollar in sales compared to US companies. Startups, such as minnows who take Didi’s rideshare business with mapping apps, have nibbled away at key government targets. Far from being emboldened by repression, they are likely to feel exposed. Much of the economic development is about creative destruction. China’s autocratic rulers have shown they can handle the destruction. Whether this technological uproar will also promote creativity remains very uncertain.

This article appeared in the Leaders section of the print edition under the headline “China’s Attack on Technology”

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