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China Eases Its Crackdown On The Technology Sector: Recent Developments

Posted: 26th May 2022 10:49

Through a series of top-level meetings, China’s economic officials have signaled an easing of the year-long crackdown on the country’s technology sector. This offers a glimpse of recovery for the first time since late 2020 when about a dozen leading tech corporations, including Alibaba, Tencent, Didi, and Meituan were met with the consequences of heightened government monitoring and stricter regulatory enforcement. Investors now hope that the Chinese government will do more to support the tech sector and facilitate its healthy development. The easing of the crackdown can also be read as a stimulus measure by the government to counter the economic challenges caused by the stringent COVID-19 curbs in the wake of multiple outbreaks in 2022.

The China Tech Crackdown: Impact And Lessons

After years of explosive expansion amid loose regulations, China’s technology sector experienced a tough year in 2021. The State Administration for Market Regulation (SAMR) took aggressive steps to reign in monopolistic behavior, levying a record US$2.8 billion fine on Alibaba and a US$530 million fine on Meituan, to set an example.

Following this blow, investment and financing in China’s internet sector shrunk in the first quarter of 2022, down 42.6 percent quarter-on-quarter and plunging 76.7 percent from a year ago, according to a report from the China Academy of Information and Communications Technology (CAICT). The downward trend was demonstrated by the layoffs in internet companies, totaling 216,800 from July to mid-March, although the Cyberspace Administration of China (CAC) reported a net increase with 295,900 new hires in the same period.

Rapid development of these technology corporations has resulted in problems surrounding data and algorithm security, abuse of dominant market positions, and infringement on user personal privacy. The expansion also left some firms overstretched as they attempted to duplicate their technology business models in new and emerging industries. This series of issues triggered a shift from the mostly hands-off approach of the Chinese government towards its tech giants to tightening regulations.

China has made major legislative and administrative moves that impacted the technology sector, with an emphasis on anti-monopoly practices and the protection of personal data. For example:

This batch of regulatory measures reveals China’s determination on improving the country’s platform economy governance system. Companies are expected to be more responsible toward consumers and society and will be punished if they do not comply with government regulations and security standards. To ensure long-term healthy and sustainable development of the tech sector, China is acting fast, with strong resolution and force.

Timeline For A Soothing Transition In 2022

Since the beginning of 2022, authorities have softened their tone regarding regulations affecting the technology sector, sending positive signals to the market. China may soon reveal more policies intended to promote investment and support technology companies. This could be a way to ensure economic growth without compromising the country’s stringent zero-COVID policy.

  • On January 19, nine Chinese ministries and commissions jointly issued the Opinions on Promoting Standardized, Healthy, and Sustainable Development of Platform Economy (Fa Gai Gao Ji [2021] No.1872). The Opinions reaffirm the government’s commitment to regulate monopolies, unfair competition, user data abuse, and other outlawed behaviors of platform companies.
  • On March 16, the Financial Stability Development Committee of the State Council proposed to promote the stable and healthy development of the platform economy to improve international competitiveness. The special meeting mentioned setting up “red lights” and “green lights” to further standardize and transparentize the regulations on the platform economy.
  • On April 29, a politburo meeting stressed the need to bolster the healthy development of the platform economy, complete the “special rectification”, and implement normalized supervision. This meeting delivered firmer positive signals and boosted confidence in the economic expectations of the tech sector.
  • On May 5, the State Council Executive Meeting, chaired by Premier Li Keqiang, asked to introduce specific measures to support the standardized and healthy development of the platform economy as soon as possible. Following this instruction, the People’s Bank of China (PBOC) announced normalized supervision of the tech sector’s financial activities. JPMorgan Chase & Co. has also raised ratings on Chinese tech companies in the wake of the government’s reconciliation with the industry.
  • On May 18, the Chinese People’s Political Consultative Conference (CPPCC) held a symposium with tech companies on the digital economy. Vice Premier Liu He encouraged platform enterprises to play a constructive role in the national economy by participating in scientific and technological innovation projects, sending yet more signals of support. China will also support tech firms pursuing listings both at home and abroad.

The year-long rectification process has reshaped the technology industry in China. Authorities have clearly defined the “red line” by outright opposing monopoly and bringing unchecked capital expansion under control.

Despite last year’s bitterness, the technology sector is likely to have established a new outlook, backed by the national macroeconomic strategy. Outcomes from the meetings will also point to the direction of the industry’s long-term development. Industry stakeholders should pay attention to the specific policies and their implementation that are a result of the government’s regulatory easing.

How To Understand The Recent Easing Of The China Tech Crackdown?

While the tightening of regulations and strict monitoring is winding down, uncertainties still remain. The new status quo will likely see regulators have greater inputs for or wield more influence on the technology sector’s business strategy and decision-making process. The year-long crackdown also reveals the government’s intention to bring tech companies under its control.

What Will Happen To Didi?

Didi, the ride-sharing app that stood at the center of last year’s regulatory whirlwind, indicated that it must delist itself from the New York Stock Exchange (NYSE) to resolve the ongoing cybersecurity investigation in China. Last June, shortly after its US$4.4 billion initial public offering (IPO) in the U.S., Didi became the subject of a series of investigations at home. 26 of its apps were taken off China’s app stores at the request of the country’s cyberspace administration. The company will hold a shareholder vote on May 23, 2022 to decide on its delisting proposal. It is uncertain what the outlook for the company is as Beijing is in discussion with American regulators to allow on-site audit inspections of Chinese companies listed in New York.

Is More Government Control Expected In The Tech Sector?

It’s reported that China’s regulators are considering pushing some technology giants to offer the government a one percent share (also known as “golden shares”), giving it more direct influence in corporate decisions. The Chinese government already possesses this one percent stake in some internet companies like ByteDance and Weibo. For years, Beijing has been seeking to extend its reach on influential social media and news platforms, and the “golden shares” is the latest move in that effort.

Related to this restriction is China’s increased restrictions on news media platforms, despite new market openings in the 2022 Negative List for Market Access. To tackle data misuse and disorderly competition, the PBOC will set up an ethics governance system by the end of 2022 for financial institutions and technology companies involved in the financial services to tighten supervision.

What Is The Role Of Private Enterprises In China’s “Common Prosperity” Campaign?

One of the objectives of the China tech crackdown has been to reduce inequality, as the government has long held the belief that private sector enterprises need to aspire to higher socio-economic objectives than just financial returns. Though top-level officials have clarified on multiple occasions that the crackdowns are actually about creating a fairer business environment, and that common prosperity doesn’t mean sacrificing wealthier individuals and companies to help the poor, it is yet to be seen how the government will promote the development of private enterprises while still striving for social good.

Key Takeaways

Although uncertainties remain, the recent easing of the year-long tech crackdown has given a positive signal to the market. The macroeconomic and political factors that have been weighing heavily on Chinese stocks are taking a turn for the better.

As an important force in China’s participation in international market competition, the platform economy continues to wield power as a sector of strategic importance. Faced with multiple economic headwinds in 2022, the Chinese government will expect tech giants to play a bigger role in helping the country maintain the growth momentum. The research and exploration of new technologies such as 5G, artificial intelligence, and algorithms are also inseparable from the country’s broader economic goals.

The regulatory environment is expected to be less stringent and more friendly to tech sectors in 2022. Nevertheless, this doesn’t mean the government’s antitrust and data privacy protection push is going away either. Rather, we think the thread will be pulled in a more cautious and delicate manner to avoid all unnecessary collateral damages. More attention can now be given to the actual rollout of specific policies.

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