For years, China’s tech entrepreneurs could do no wrong. They built fast-growing, massive companies, dominating everyday lives. They minted plenty of wealth for their investors and even more for themselves. The Chinese government soon made it abundantly clear who are the ones ultimately calling the shots.
Alibaba Group co-founder Jack Ma felt this more than anyone else when the Chinese government killed the IPO of Ma’s payments firm Ant Group. If it had raised US$34.5 billion ($49.4 billion) as planned, this would make Ant Group the largest IPO ever. Ma had reportedly angered the authorities when he said regulators had stifled innovation and state-owned banks had the mentality of pawnshops.
Ride-hailing firm Didi Global, meanwhile, pushed ahead with its US listing despite reports that Chinese regulators asked it not to amid worsening US-China relations. Didi was subsequently delisted from New York and was fined US$1.2 billion by China’s cybersecurity regulators for supposedly flouting data laws.
Other affected businesses include Tencent Holdings and ByteDance, with China’s State Administration for Market Regulation (SAMR) levying fines of US$2.8 billion and US$530 million on Alibaba and Chinese shopping platform Meituan, respectively, in a bid to reign in monopolistic behaviour.
Smaller private technology firms also found themselves at the receiving ends of regulators’ sights. Employment website BOSS Zhipin and truck-hailing platform Full Truck Alliance were subjected to persistent cybersecurity reviews. Applications to list on the Shanghai Stock Exchange’s Star Market also face stricter scrutiny.
This regulation was spurred by the party’s “common prosperity” drive to achieve greater equality. However, the widespread regulatory action has left domestic and regional business owners and investors unsure about any future of innovation and growth in China. “A closer look at the policies enacted and the companies targeted during the crackdown reveals that these measures may advance China’s interests as well as Xi’s,” says Kevin Klyman, a technology researcher at Harvard Kennedy School’s Belfer Center for Science and International Affairs. “Recent Chinese regulations on data protection, cybersecurity and anti-competitive practices benefit consumers and advantage domestic firms by reducing competition from foreign firms that cannot comply.”
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The regulation cost the industry a hefty obliteration of US$1 trillion market value. Investment and financing in 1Q2022 for China’s internet sector was down 76.7% y-o-y, reports the China Academy of Information and Communications Technology (CAICT). The sector then cut some 216,800 jobs from July 2021 to mid-March.
“Xi’s attitude towards the tech sector likely comes from a place of wanting [China] to be more self-reliant,” says Redmond Wong, market strategist for Greater China at Saxo Markets Hong Kong, “[although] this might have come across as too aggressive, triggering the nerve of [foreign players looking in].”
Beijing has seemingly softened its tone to counter the economic challenges brought by China’s stringent zero-Covid policy. For example, 33 stimulus measures were rolled out in May, which included policy support for listings of internet companies in overseas and domestic markets.
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With a slowing economy and a brewing real estate crisis, such a regulatory “truce” was likely inevitable, says Brock Silvers, chief investment officer at Kaiyuan Capital. “China did not willingly opt to ease its tech crackdown; it was forced to do so by economic reality,” Silver tells the International Financial Law Review.
Will the truce mean clearer skies are on the horizon for China’s tech companies? “These regulatory measures, if taken, will significantly improve investor sentiments and boost tech valuations,” says Angela Zhang, associate professor of law at the University of Hong Kong. “Regulators will continue routine enforcement, and firms need to adjust their legal compliance to meet the demand from regulators.” She continues: “This will continue to impact business practices, although the extent remains to be seen.”
