Martin Chorzempa is a senior fellow with the Peterson Institute for International Economics in Washington.
Today’s headlines give the impression that the Chinese government is intent on crushing its innovative internet companies.
Both tech companies and Chinese policy are topics often subject to misleading hyperbole, and this is no exception. It is true that the economic policy environment these days in China is dark and statist, given the authoritarian politics.
The total surrender narrative on tech companies, however, misses the point. In fact, there are legitimate public policy reasons behind China reining in its tech giants, many of the same ones motivating the U.S. and other democratic countries to take similar actions. Even aggressive states sometimes are right to assert their prerogatives.
Since Alibaba Group Holding founder Jack Ma criticized his country’s government last October at the Bund Summit for what he called excessive regulations, China’s tech sector has been hit with a regulatory storm. After authorities canceled the initial public offering of Ma’s Ant Group and put the company through a “rectification” process, China’s Politburo announced that it would “prevent the disorderly expansion of capital” in a statement clearly directed at Big Tech. It seems that all of China’s major internet companies are in hot water.
Didi Global has been pulled from app stores and raided amid an investigation into its data security and privacy. Alibaba, Tencent Holdings and Baidu have been fined for anti-competitive practices. More lasting, new draft rules for overseeing Big Tech have been published, including for antitrust and personal data protection.
This timeline has fed the widespread misjudgment that this is all about China’s leadership retaliating against a loudmouthed entrepreneur to ensure complete control of the tech sector and silence any critics. This simplistic narrative skips over the underlying issues at work.
The rapidity with which China’s central bank and market regulator issued new draft rules affecting trillions of yuan in economic activity, only days or weeks after Ma’s speech, means there is no way they were drawn up from scratch as retribution. Even if, as is likely, they were toughened after Ma’s Speech, they must have been drafted and discussed for months, if not years, but were held up due to a lack of political consensus. Ma’s ill-calculated speech broke the logjam and released the pent-up pressure for regulations.
In fact, pressure has been building around the world to handle the risks which Big Tech’s dominance and data collection pose to competition, privacy and more. The Biden administration in the U.S. has made it a priority to act on some of the same issues as Chinese regulators, with many similar policy proposals. Much of the concern globally has rightly been about tech companies amassing excessive power.
China’s private tech sector is arguably even more powerful than its Western counterparts due to its dominance of finance through a duopoly of super apps.
For example, Tencent, the dominant social media company, blocked WeChat users from sending links to its rival Alibaba’s e-commerce websites — the U.S. equivalent would be iMessage and WhatsApp refusing to forward Amazon links. Exclusivity agreements force many merchants or startups into choosing Alibaba or Tencent, as they need distribution through the billion users the giants’ super apps boast.
Icons of messaging app WeChat and Alibaba-linked mobile payment service Alipay: exclusivity agreements force many merchants or startups into choosing Alibaba or Tencent.
© Imaginechina/AP
Yet, until this shift, Chinese Big Tech companies had faced nearly zero antitrust scrutiny and a loose and unenforced regulatory regime except, of course, for the aggressive Communist Party censoring of content. In part, this is because tech companies and their leaders had immense influence within society and the Party. One senior Chinese regulator even described them to me as “our oligarchs.”
Their power has held back sensible regulation, such as allowing Jack Ma to go over the central bank’s head in 2014 to neuter rules on what were then quite insecure QR code payments. Didi, meanwhile, refused to hand over data to authorities after people were murdered using their service, dropping off boxes of printed paper instead.
China’s tech companies have long ignored the law requiring them to report acquisitions, and the so-called Variable Interest Entity loophole has long allowed overseas IPOs with limited oversight.
China’s campaign to regulate Big Tech, of course, entails political threats, from silencing business opposition to party overreach, which is lamentable. On the economics, however, what has been implemented thus far is more a useful corrective than a shutdown — unlike the draconian crackdown in the tutoring sector. None of the new tech antitrust, privacy, or fintech policies in China are as drastic as the ideas currently floating through the U.S. Congress to break up companies such as Google, Facebook and Amazon.
Ant Group and others were operating immensely complex fintech empires, without proper regulatory oversight — a danger that needed to be addressed. Meanwhile, though Ant Group has not been able to IPO, its investors are still valuing it at around $150 billion. The moderate but not catastrophic decline in valuations suggests reduced monopoly rents, which could be good for innovation and competition in China.
Sometimes even authoritarian governments are right to increase economic regulation. In the area of Big Tech, China’s recent measures are more of a correction than an overreach though there is no denying that these regulations are designed in part to expand party control as well.
Many of China’s goals in this sector are the same as those attracting attention from policymakers in democratic countries, like less concentration of power and greater privacy.
Surely many of Beijing’s tools would be unacceptable in democratic societies. Still, China’s progress addressing genuine issues of common concern is worth clearly assessing, rather than dismissing them as simply a power grab.