China's golden age of big tech is over

China's golden age of big tech is over

It all started with a stop to an initial public offering. In November 2020, the initial public offering (IPO) of Ant Group, Alibaba's fintech arm, was blocked. Or maybe not. Perhaps it all started earlier, in 2018, when the State Administration of Market Regulation (Samr) was formed, the market control body that has gradually targeted dozens of Chinese digital companies for alleged violation of antitrust rules. In 2021, SAMR handled 175 monopoly cases of various kinds, up 61.5% over the previous year, and imposed fines and confiscations of 23.59 billion yuan (3.53 billion dollars).

Everything can end with a green light for an initial public offering. In recent weeks, the possibility has been feared that the authorities may eventually give the go-ahead for Ant's famous IPO, the stop of which had opened the dance, at least in the media, of the so-called "squeeze" on Chinese digital giants. An irrefutable sign of a slowdown, perhaps made so as not to burden too much on an economy that gives worrying symptoms of a slowdown. Precisely in the year of the XX Congress of the Chinese Communist Party. Or maybe not. Maybe the job isn't done yet. And maybe it won't even end.

Quite simply, more than a declaration of war on the champions of innovation who have helped lead Beijing from what it was to what it was, it is and will be a rectification, ergo control of their actions. National security is the pillar on which the harmonious society envisioned by President Xi Jinping rests. Therefore the security of the Party, which in a populist way has been able to intercept the discontent towards the excessive power of some of these platforms, at least partially moving against the exploitation of workers and the famous 996 model.

That wasn't the only reason for the "crackdown". It served (serves) to protect the Party against any possible power group capable of advancing political-social demands, or simply any center that could act as a bank for such demands. Here then are the maneuvers towards associations in a broad sense, no matter what sector, color or trend. Finally, to complete the triptych of motivations underlying the government's action with a more practical question but still connected to political-social control, data. The Chinese web is navigated by almost a billion users a day and the data they generate represent an enormous source of income and information. Pillar of the economic power of the digital giants and partial cause of the construction of those monopolies for which there is no longer room in Xi's vision of "common prosperity", that immense amount of data could also become a potential negotiating lever. Development that the government wants to avoid.

Xi's divide and rule Xi has adopted a "divide and rule" model which, for example, has also affected Alipay, the super app for over a billion users that together Tencent's WeChat Pay dominates the huge digital payments market in China. Authorities asked Ant to unpack Alipay's business, which included linking payments with traditional bank credit cards and microloan services. The latter were called to merge into a separate application exclusively dedicated to loans. Ant was previously asked to separate the backend of its two lending businesses, Huabei and Jiebei from the rest of its financial offerings, involving outside shareholders.

Rectification campaign "victims" include most of the main Chinese technology companies, such as Tencent (protagonist at the beginning of 2022 of the worst quarter on the stock exchange since the 2004 listing), Meituan, Pinduoduo, Didi (whose international listing ambitions have been definitively frustrated), an online private tutoring company such as New Oriental Education and Tal Education and all those who were active in cryptocurrency mining. The giants have been redirected to sectors that are more strategic to the government's long-term goals, such as semiconductors. They have been harnessed by increasingly stringent laws and regulations such as that on privacy, which are also carefully observed by the West.

Now, many foreshadow a relaxation. In particular, after a high-level meeting between government officials and managers of the digital giants chaired by Liu He, the president's top economic advisor. On that occasion, Liu expressed the government's support for the digital economy, underlining the desire to find a balance in the relationship between state and market. Among the signs of "return to normality" was cited the ok for the diffusion of a dozen new video games after the prolonged stop in recent months (from which, however, the giants Tencent and NetEase were excluded), as well as the possible green light for 'Ipo of Ant, however, for now denied by the authorities. Meanwhile, Alibaba's fintech arm has appointed two new managers with the task of trying to comply with the government's requests to get to the coveted listing. Laura Cha has extensive regulatory experience, having previously worked as Vice President of the China Securities Regulatory Commission.

The new normal of Chinese big techs But Chinese tech companies are returning to a new normal . The behemoths are growing much slower than in the past. The space to expand into new sectors beyond their core businesses has all but disappeared. What the government called "reckless expansion" is not appreciated. Just as those who criticize his work are not appreciated, as Jack Ma had done quietly. And as Wang Xing, the founder of Meituan, had perhaps done even more hermetically, posting on social networks an ancient poem that according to some contained criticisms implied to Xi. Many have had to carry out mass layoffs, also due to the uncertainty linked to the pandemic and the zero Covid strategy. These elements are also leading several big internationals to reconsider their presence in China. Some Xiaomi-related companies have faced greater scrutiny from Chinese regulators, several of them being forced to pause their planned initial public offerings after being questioned about their close relationship with the smartphone giant. A signal that no one, even those who had escaped the radar until now, will be excluded from the new normal.

A few weeks ago, Xi wrote in an article on economic policy published in Qiushi: "We must study how to enhance the positive role of capital in the socialist market economy, effectively controlling its negative role", exposing the the need to regulate the market "not only to prevent capital predators from acting without scruples, but also to enhance the function of capital as a factor of production". Despite the rectification campaign, Beijing has bet heavily on the digital economy. Industrial digitization is a key component of the 14th five-year plan and of the government's development plans until 2035.

Simply, you have to "stay on the line". Development must be orderly, harmonious. In compliance with the principle of unpacking, in recent months Xi personally inaugurated the new Beijing stock exchange, dedicated to small tech companies. Loosening? Perhaps. Loose bridle? Certainly not.

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