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Common Prosperity and Digital Billionaires: Why China is Cracking down on Big Tech
Taiwan could be the Pearl Harbor of WWIII
Articles about China after 2020
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  • (august 2021) Common Prosperity and Digital Billionaires: Why China is Cracking down on Big Tech

    In October 2020 Alibaba's founder Jack Ma, China's most famous billionaire, dared to accuse Chinese regulators of stifling innovation. One month later the government cracked down on Ant Group/Alipay, China's largest digital payment platform, owned by Alibaba, and perhaps the world's biggest "fintech" operation. Its IPO, which would have been the biggest in history, was scrapped. Jack Ma was summoned by China's Securities Regulatory Commission, disappeared for a few days, and has been missing since from public view. In April 2021 the government launched an antitrust case against Alibaba, including a $2.8 billion fine for antitrust violations. Ma's personal fortune dwindled as Alibaba's value dropped $70 billion.

    At the same time (in April 2021) China's government accused the other digital giant, Tencent (the company of WeChat), of violating antitrust laws. In July China's market regulator, the State Administration for Market Regulation (SAMR), blocked Tencent's scheduled merger of Tencent's videogame operations with two leaders in the videogame live streaming industry, Huya and DouYu, of which Tencent is the biggest shareholder. The two companies are worth $5.3 billion and together control about 40% of the market. Tencent itself already controls 40% of the online gaming market and would become by far the biggest player in the market after that merger. At the same time China's regulator ordered Tencent to terminate exclusivity agreements with music producers.

    Also in July 2021 the market regulator hit DiDi (China's leading and ubiquitous ride-hailing service) right after its $4.4 billion IPO in the USA: the app was removed from China's mobile stores. It turns out that the regulators had asked Didi to comply with a new consumer data protection law and to postpone the IPO and Didi had refused.

    The government launched an antitrust investigation into the practices of Meituan, China's largest food-delivery app, after journalists working for government news media publicly exposed how it exploits its workers and how it abuses food vendors. The government ordered Meituan to start paying its workers the local minimum wage and provide them with benefits. Meituan lost $60 billion in market valuation.

    In July 2021 China doubled down on Internet companies (Alibaba, Didi, Tencent) accusing them of having violated antitrust laws since 2011 while making mergers or acquisitions. Tencent got the point: in August 2021 it announced that it was setting aside $7.7 billion to assist the Communist Party in creating "common prosperity". At the end of July the government cracked down on "edtech", another lucrative market, the market of online tutoring: rich families can afford to buy tutoring that will guarantee their children a place in China's highly competitive universities. China basically turned the whole lucrative field into a nonprofit operation.

    In August 2021 China's Security Regulatory Commission hit BYD, China's biggest car maker by market valuation. BYD had planned an IPO of its computer-chip making unit, BYD Semiconductor, on Shenzen's stock market ChiNext (the NASDAQ of China), but the regulators blocked it and launched an investigation into the law firm advising the company, Tian Yuan Law Firm. BYD Semiconductor is China's biggest maker of microcontroller chips for vehicles, which competes worldwide with Germany's Infineon and Japan's Rohm Semiconductor. Meanwhile, also in August 2021, the Chinese government took a stake in two more major tech companies, ByteDance and Weibo. Also in August 2021 the powerful State Administration for Market Regulation released a draft regulation curbing "unfair competition in the internet sector." At the end of August, China's Supreme Court denounced the "996" culture that had been commonplace in big tech companies (and not only), the practice of working from 9 AM to 9 PM six days a week. Just two years ago Jack Ma hailed it as a big advantage that Chinese firms had over the rest of the world. Now it is basically criminalized.

    Two things are important here. First of all, these are very popular actions. The average Chinese citizen feels the unfairness of so many billionaires enjoying the life of sultans while average salaries, skyrocketing house prices, and poor benefits make life harder for everybody else. And even more unfair is education inequality which makes children of rich parents likely to become rich themselves, and that education inequality begins with online tutoring, which is expensive. Education is theoretically free in China but in order to pass the selective admission examinations children must be tutored and tutoring takes up an increasing percentage of household budgets. A 2019 survey by 51job showed that about 40% of parents spend 20-30% of their income on their children's education.' Overnight, China banned for-profit tutoring.

    Secondly, note that China's crackdown on "big tech" has only affected digital technologies. So far companies that produce physical products (the Huaweis and Xiaomis of China) have been exempted despite some of them being de facto monopolies (Huawei and ZTE control China's telecom market). And there are two explanations for this: 1. these companies have always had closer ties to the government and the military; 2. China's wrath has been explicitly directed at the digital world in what appears to be an ideological attack on capitalism that doesn't serve the nation (more about this later). In fact, manufacturers of computer chips and electric-car batteries and anything related to 5G is enjoying subsidies and protection.

    The ideological factor in penalizing digital technology is probably the main reason for China's crackdown, and here the hyper-capitalist West may have something to learn from China's Communist Party. Just reading the speeches of China's president Xi and reading the articles in the Communist Party's journal Qiushi ("seeking truth"), the theoretical political-science journal that "explains" socialism with Chinese characteristics, it is obvious that this year's big topic is "common prosperity". Deng's reforms were useful in creating wealth in China. Now the Communist Party wants to distribute this wealth fairly among the Chinese. This new mission of social equality easily explains why China's government has cracked down on edtech and why it is targeting the least "socialist" segment of its economy, the digital economy, but not the "socialist" economy of manufacturing companies that make things. No matter how many times Qiushi repeats that China is a socialist, not capitalist, country, the West still thinks of China as a one-party capitalist country. Every now and then the West should accept what China's Communist Party writes and says: it is a socialist country that has found its own way to create wealth but whose mission is still social equality. And this view has a strong appeal on the masses.

    Abroad, the Communist Party is blamed for cyber-laws that violate the privacy of citizens but in China ordinary citizens also praise it for a law introduced in July 2021 that provides some data-privacy protections for consumers and will take effect from November, the "Personal Information Protection Law." This law mandates that tech companies can collect information about a user only if the user explicitly authorized it, and tech companies must obtain government approval before transferring such data to foreign entities. Modeled after the European Union's General Data Protection Regulations, this law means that China now has stronger data-privacy laws than the USA. For example, US internet users still live in the age of "personalized recommendations" (an algorithm analyzes your data and tries to make you buy things that it guesses you may want) while Chinese internet users can opt out of it and never see personalized recommendations again.

    From the point of view of an ordinary citizen, these combined actions by the Communist Party amount to a "finally!" kind of moment. China's crusade against "big tech" appears to be done mainly with the interests of consumers in mind, to protect consumers from giant corporations and to advance "common prosperity".

    The government actually has indirectly shown that there's another reason for the crackdown on digital technology. It is not only the Communist Party of China that sees the consumer Internet companies as a problem. Similar argument are being advanced in the USA and in Europe. The philosophical question is what consumer internet contributes to society. It was obvious what car manufacturers and electronics companies contributed to society. At the most basic levels they greatly improved the quality of life of all citizens. They also helped the USA win wars. It is not clear what Facebook and Twitter contribute to the welfare of the nation, what short video platforms and online gaming platforms contribute to social progress. They seem to belong to the realm of entertainment, which traditionally was not considered part of the "real" economy the way materials science and semiconductor technology was. It used to be that progress was measured in terms of scientific inventions. Now it's supposed to be measured in terms of minutes of commercial advertising, in terms of how many active users a network effect generates, and in terms of how much a household spend online. From the point of view of Wall Street, it is obvious what the capital gains can be, but from the point of view of Main Street, it is debatable what are the social benefits of many of these Internet and mobile applications. It sounds like the Chinese Communist Party had this same debate and concluded that making cars, phones and trains is important whereas playing games and chatting is a distraction or just entertainment. A writer in a government publication called video games "spiritual opium". And so China is now treating "hard" and "soft" technologies differently. It is subsidizing hard tech while crippling soft tech. A few months ago Xi said: "We must recognize the fundamental importance of the real economy, and never deindustrialize."

    Wealth redistribution is something that would be popular in many parts of the world... maybe China is simply ahead of the curve. Could it be that soon the West will follow China's example and start cracking down on its own "soft tech"?

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