Since the late autumn of 2020, the international business press has been buzzing with alarm and the warnings of stock market analysts and financial advisors have rung out in shrill tones. There is talk of an attack by the Chinese government on the country’s technology companies, a rigorous crackdown on the private sector, or even a return to a Maoist command economy. George Soros warned the international investor class of a rude awakening in Xi Jinping’s China, and for the German news programme Tagesschau it was once again clear that even private companies are dependent on the goodwill of the Communist Party.
Jan Turowski directs the Rosa Luxemburg Foundation’s Office in Beijing.
Translated by Gegensatz Translation Collective.
China’s technology industry has grown rapidly in just under two decades, catching up with Silicon Valley in many areas and even outperforming it in some fields — one of the most notable successes of China’s economic development. As a result, the government’s crackdown seems surprising, if not irrational, at first glance. After all, the technology-heavy Nasdaq Golden Dragon Index, an exchange-traded fund for US-listed Chinese stocks, lost well over 40 percent of its value between February and the end of July 2021. But we should consider the different measures taken against different companies by different government actors separately, and in the context of strategic economic policy macro trends, geopolitical considerations, development phases and innovation cycles. Considered in this way, the current regulatory campaign appears to be well-thought out, focused on the long term, and strategically motivated.
The “Great Crackdown"
The first thing to catch the attention of the Western media was the Chinese authorities’ action against Jack Ma, the founder of Alibaba, in the autumn of 2020. The IPO of Ant Group, the FinTech spin-off of Ma’s company, would have been one of the largest in history, with valuations of up to 37 billion US dollars — until it was banned at the last moment. Since then, no fewer than 50 regulatory actions have been taken against dozens of companies for various violations and oversights. Sometimes, multiple actions by different authorities were directed against the same company, giving the impression of targeted campaigns. However, in these cases, several state actors were actually taking independent action against different violations or regulating markets and industries in general.
Authorities first acted in the area of FinTech regulation. Ant Group not only offered insurance and wealth management, but also linked a lending service and its virtual credit card product Jiebei with its mobile payment service Alipay. The payment apps WeChat-Pay and Alipay have turned China into a virtually cashless society in just a few years, creating enormous development potential but also massive risks in terms of the economy as a whole. Here, the Chinese central bank intervened and demanded that if Ant Group acts like a bank, it must also be regulated like a bank. As a result, leverage, product, and liquidity risks must be controlled, reckless financial practices must be prohibited, and money market funds must be reduced.
Next in line were anti-monopoly laws, taken care of by the state market regulator SAMR. Monopoly control over key sectors of the Chinese economy and protecting small innovative companies had already been under discussion for a long time, and concrete measures had already been announced since 2020, in particular in connection with the fourteenth Five-Year Plan. It is now obvious that the main companies to be hit were giant technology companies, which play a key role in the digital platform economy and had already achieved monopoly market power.
Alibaba was again affected by these measures, but action was also taken against other companies such as Pinduoduo or Jingdong, which prohibited merchants operating on their online platforms from using other distribution channels or refused to allow payments with rival systems. Food delivery service Meituan, in turn, was targeted by regulators for prohibiting restaurants cooperating with it from offering their food on other delivery services as well. Tencent, whose WeChat is the world’s most popular super-app, with 1.2 billion users, finally came under fire from the authorities for, among other things, exclusive copyright agreements for 66 million licensed music tracks.
The third area of authorities’ attention includes the regulation and monitoring of various industries and sectors by the responsible ministries. For example, significantly improved labour rights, stricter working time standards, and guaranteed minimum wages were established for the courier drivers of food delivery apps. Meituan’s shares promptly plummeted, and the company said it had “received and carefully studied” the new regulations and would “strictly comply” with them.
The Ministry of Education’s crackdown on the EdTech and tutoring industry attracted greater media attention. A series of regulations banned profit-oriented tutoring for the state school curriculum, regulated operating hours, prohibited the pursuit of foreign capital, and even required portions of companies to be converted into non-profit organizations. These measures resulted in major EdTech companies such as TAL Education, Gaotu Techedu, and New Oriental losing 90 percent of their value within 24 hours.
Estimates suggest that against the backdrop of a hyper-competitive school system, well over half of Chinese parents spend about 20 to 30 percent of their annual family income on extracurricular tutoring. Parents’ concern for ensuring the best opportunities for their children, a school system fixated on exams and the massive marketing of private EdTech and tutoring companies — these three factors increasingly fuelled each other over the years, growing the industry to a value of more than 150 billion US dollars, but also leading to children being overchallenged and producing massive social injustice in education. Now, the Chinese government no longer wants to allow profit-driven tutoring at all, which will force the industry to completely reinvent itself.
Authorities’ fourth concentration, cyber-security and data protection, covers three areas of regulation. First is China’s Personal Data Protection Act, which, contrary to Western presuppositions, requires companies such as Alibaba, Tencent, ByteDance and others to obtain the consent of data subjects before collecting personal information, and to strictly protect this data.
In addition, the Chinese Cyberspace Administration (CAC) has issued tough rules on the transfer abroad of sensitive consumer data or data relevant to national security, in light of growing tensions with the US. The ride-sharing app DiDi was dramatically affected by this, coming under massive regulatory pressure shortly after its IPO in New York, which caused its stock prices to plummet. Beijing clearly wants to achieve three things with this action: US authorities should no longer be able to force Chinese companies to disclose sensitive data; companies should receive lasting protection from being either forcibly delisted in the US or, depending on long-term geopolitical circumstances, sold to US companies, like TikTok owner ByteDance; and it should be made clear, albeit rather quietly, that there are other stock exchanges besides Wall Street — for a long time the gold standard for international IPOs — especially in China.
Given that Big Data is a key fuel for future technological development, this initiative is ultimately also about making billions of users’ data available as a valuable, but nevertheless public and indispensable, asset for technological and social development. The CAC has therefore taken significant action against companies that try to compartmentalize and monopolize Big Data.
Entering a New Innovation Cycle
The intensity and timing of these regulatory measures may come as a surprise. However, they are anything but radical in themselves, given the politico-economic dimensions of the digital revolution, which is fundamentally redefining the relations of production and forms of work. Platform economies tend to be monopolies, and large technology companies control data and information flows as well as digital infrastructures, thereby accumulating enormous power. Yet, in China, the government’s regulatory measures seem to deliberately accept a weakening of its large companies — even destroying their international competitiveness.
If we want to understand the greater macropolitical significance of these measures, we must also consider China’s economic and technological development in recent decades. For, irrespective of whether the country can be described as socialist or capitalist, it is clear that since the opening of China this development has largely been determined by continuous state control of investment in the areas of innovation and infrastructure.
Within the framework of such a managed economy, private enterprises were able to grow during multiple waves of development and innovation. In the late 1980s, companies such as Huawei, Haier, Hisense, and ZTE appeared who began with “reverse engineering”, but today set their own technological standards through continuous incremental product innovation. In the 1990s, companies like Ping An and Fosun emerged from the command economy and completely transformed business models — and even entire industries. The third and fourth waves of innovation at the turn of the millennium saw the founding of the very companies that are now the focus of government regulatory measures. Alibaba, Tencent and Baidou adapted Western models to Chinese market conditions so radically that we have to consider them market innovators. Shortly thereafter, companies like Xiaomi and Jingdong followed suit, developing and perfecting new business models based on the sheer size of the Chinese market. The next wave in the 2010s was characterized by service innovations: Mobike, Toutiao, UBTech and DiDi found new ways to successfully offer services to consumers. These waves of innovation built on each other, developing products, business models and markets further and further, adapting them to Chinese conditions and improving them to such an extent that they were superior to their Western templates in many areas. But the original ideas still came from the West.
Since 2019, a new wave of young and exciting companies has appeared, such as iCarbonX, Ling.ai, Neolix, and Starfield. Unlike their predecessors, these companies are no longer characterized by incremental innovations, but by radical innovations in the fields of robotics, artificial intelligence, the “Internet of Things”, and green technologies.
The Chinese government wants to promote this development in a targeted manner. The extensive government measures can only be understood against this backdrop, and it is a strategic goal of the government not to stifle technological progress and ground-breaking inventions beneath the monopolistic weight of current tech giants. Government investment management means redirecting scarce resources toward strategic technologies. Western media and stock market analysts focus too much on the famous examples like Alibaba, BYD, and Tencent. They overlook the fact that tens of thousands of start-ups have been founded in recent years alone, working in all kinds of future-oriented sectors — partly with state-owned companies and partly with the big tech firms — and whose development and opportunities for expansion have been strengthened by regulations.
When Xi Jinping announced in a speech in 2015 that China will be a leading player in global innovation by 2030, he was laughed at around the world. The gap between China and the US and Europe seemed too great. But if we consider the short intervals between innovation cycles in China — four or five years — Xi’s claim seems more than realistic today.
Shared Prosperity and Inclusive Growth
Chinese technology and market innovation cycles have taken shape in a very specific politico-economic context. State regulatory measures against technology giants coincide not only with a new innovation cycle, but also with a new paradigm of macroeconomic governance. They hence have not only a functional, but also a thoroughly normative emphasis.
The decades since the opening of China have been characterized by enormous growth, which has brought the Chinese population an unparalleled increase in prosperity within just one generation. The economy has been able to move up the global value chain and companies have been able to grow rapidly into global players. But all this has come at the high price of massive social inequality, unequal life chances, and unfair treatment.
At the beginning of 2021, China’s government declared that absolute poverty had been successfully eliminated, then proclaimed “shared prosperity” to be its new political watchword. A clear shift away from a purely expansive, quantitative approach to growth in the early phase of reform to more qualitative and sustainable growth targets had already been evident since the early 2010s. However, the focus of economic policy nevertheless remained on growth-based poverty reduction, in which glaring social inequality was to be accepted for the time being. The slogan “shared prosperity” is anything but new and has been used with increasing frequency, especially in the last decade. It goes back to Deng Xiaoping’s famous statement in 1986 that “some people and some areas will get rich first”, which even then was communicated as necessary for subsequent “shared prosperity” and has not been forgotten since.
In the wake of China’s late-blooming modernization, the country’s private enterprises have been able to grow into giant corporations and billionaires have become incredibly wealthy — all within a relatively unregulated environment of accelerated market expansion and transforming social systems. With China’s per capita income and gross national product still lagging far behind the US and Europe, growth will remain important. But “shared prosperity” is now about ensuring more inclusive growth via a more equal distribution of social wealth, both material and cultural. The Chinese government promised in December 2020 to end the “disorderly expansion of capital”.
The main reasons for the great social inequality in China are the income gap between urban and rural workers and the wage gap between coastal and inland cities. Lower incomes have risen in recent decades, but higher incomes have risen much faster. The explosion of costs in education, healthcare, and housing has exacerbated social pressure on the lower and middle classes in recent years. According to the new watchword of “shared prosperity”, education, health, and housing are the “three mountains” that must be climbed in regulatory policy to make a better life possible for all Chinese households.
China’s regulatory measures against the tech industry must be viewed against this backdrop. In fact, they are probably just the beginning. The Chinese government’s initiatives address specific social and economic problems. User data should be protected and algorithms should not work against the interests of consumers. Monopolies must be prevented and more competition made possible. Food delivery drivers should earn a minimum income and be insured. These problems are similar to those facing the West. For this reason alone, it is worth taking a look at China.
 The term FinTech (“financial technology”) is used to describe new technologies that optimize and automate the provision and use of financial services. Financial operations and processes are controlled by means of specialized software and algorithms used on computers, and increasingly also on smartphones.