Why is China targeting its own internet companies?
For months, the Chinese government has been pressuring big tech companies. It penalized the recently public ridesharing company Didi for the way it collected user data. It has stopped two major video game streaming platforms from combining, closed online tutoring sites, hit e-commerce giant Alibaba with nearly $ 3 billion antitrust fine, and this week a state newspaper called Online Games “Spiritual opium”.
But the crackdown has not targeted all tech companies in the same way.
Greg Ip is the Wall Street Journal’s chief economic commentator. It writing that the Chinese government views the tech industry in two distinct ways: the nice to have and the necessary. The following is an edited transcript of our conversation.
Greg Ip: Mainstream Internet businesses are an interesting technology. They improve lives, but they are not necessary for China’s economic development. On the other hand, the way President Xi Jinping sees it, there are certain technologies that you need. You have to have state-of-the-art semiconductors. You have to have the best technology to make electric cars and their batteries if you want to remain, as China already is, the world’s largest manufacturer. Xi Jinping has redoubled his efforts to become self-sufficient in all of these things. So what you see happening is that even though they have unleashed this multi-pronged regulatory attack on mainstream internet businesses, they continue to lavish all kinds of favors and support on these other businesses. vital manufacturing companies. And all of this reflects the differential priorities that Xi Jinping and the ruling Communist Party have for consumer internet technology compared to [hardware] Technology.
Meghan McCarty Carino: And some of those companies are very large, successful software companies. I mean, Alibaba is the Chinese answer to Amazon. Why is the government scrutinizing these mainstream Internet companies so much?
IP: These companies are not only big and prosperous by Chinese standards. They are large and successful by world standards. And I think that is to say that, first of all, the Chinese authorities do not want to put these companies out of business. They like having them and they believe that they are part of the development of China. What they don’t want them to become is large and independent enough that they become, in a sense, a separate center of power that actually threatens the Communist Party’s own management of the economy. And they don’t want the negative collateral damage that these companies are supposed to create, either.
McCarty Carino: And you point out, we see a kind of tension of what’s going on in politics in the United States. How would you describe how it is similar or different?
IP: The fact that the Chinese think manufacturing is really important is not unique to the Chinese. There are a lot of people in the United States who feel the same way. A lot of people in Germany think like that about German manufacturing. A lot of people in Japan think this about Japanese manufacturing. And so, in many countries, including the United States, you will see a lot of political pressure to offer various subsidies and protections to major manufacturing industries. I think what separates China from all these other countries is that in a market democracy like the United States, the government can nudge, it can incite, it can suggest, but in the end. account, how capital is allocated to businesses that live and to businesses that death will ultimately be determined by the private sector, by the private market. It’s not like that in China. It’s really the opposite, [it’s] that despite all the progress China has made to become a market economy, it is still state capitalism. The state decides which industries should be prioritized, and the state takes a very active role in deciding which companies banks will lend to, which companies will get equity and other types of investment from large investment funds.
McCarty Carino: Because we are certainly seeing in the United States right now some sort of [a] government push to step in and regulate Big Tech, social media. How is it different?
IP: Well, I think, let me give you an example. Thus, the Federal Trade Commission had filed a complaint against Facebook for monopolistic behavior. They had been working on this case for a long time, in fact, during the [Donald] the Trump administration. And a judge dismissed this case. They said, you don’t have enough evidence here to show that Facebook is a monopoly. Essentially, the US government needs to go back to square one. It can take years and years and years for the government to successfully sue a US company for any of these issues. This does not happen in China. In essence, the Communist Party is a prosecutor, judge and jury. Once they decide that a business has crossed the line, there are several ways they can pursue it. They may say that you have to comply with new antitrust competition requirements, that you have to pay your workers more, etc., etc. China just doesn’t have those checks and balances that draw a clear line between what the state can do and what the private market can do.
McCarty Carino: Do you think that kind of aversion to this industry, to disruptive companies, is going to be the new normal in China?
IP: I think Chinese companies will be nervous about getting too big, will be quicker to identify and deal with anything that might be perceived as socially harmful in their business models. At the margin, this could mean that China will be a slightly less innovative company, but I say at the margin because there is so much turmoil among small businesses in China that I don’t see it as a lasting setback.
McCarty Carino: And what happens to these companies: Tencent, Didi, Alibaba?
IP: Well, that’s kind of the $ 500 billion question, isn’t it? I think they will continue to have a business model. Many of them will have to restructure. We’ve seen companies like Ant [Group], for example, must transform into a business more conducive to regulation. This stuff is going to happen. They won’t be as profitable, I guess. But keep an eye out for what’s going on the other side of that clear line I’ve described between nice to have and necessary. I think what really matters, not only to the Chinese but to the United States, is the progress President Xi Jinping is making in trying to build some of these cutting edge companies. We all know that, for example, the US government is very concerned that Huawei [Technologies] is today the world’s largest supplier of telecommunications equipment. It is the leader in fifth generation telecom networks. Well, keep an eye out for the semiconductor SMIC or Tsinghua. These are the companies that China hopes to be with Huawei in five to ten years, challenging companies like Intel and Samsung and Taiwan Semiconductor for leadership in the chip business. Keep an eye out for Comac. It is the company that they hope will one day challenge the Airbus and Boeing duopoly. So, while all of this action is happening on the Internet side of consumers, don’t lose sight of what the Communist Party is trying to build on the other side. And to some extent, that’s where a lot of the significant conflicts between the Chinese model and the American model are going to take place.
Related Links: More information from Meghan McCarty Carino
Of course we have a link to Grep Ip’s whole room, where he explains how Internet service companies can compare to hardware manufacturers. For example, Alibaba – before the recent liquidation – was worth 20 times more than a heavily subsidized Chinese chip maker.
This editorial in a state newspaper calling the spiritual opium of video games scared investors enough to lower the value of Tencent more than 10%.
Reuters columnist Pete Sweeney writing that such repressions seem to have a unifying concern: a perceived rupture of family values. Rising living standards have resulted in longer working hours, increased pressure on children, and escapes into virtual worlds. He writes that this is why the government is trying to give people back the time they hope they are not wasting playing video games.