Tech in China: Flying too close to the Sun?


Key Points

  • Tech companies in China have taken major blows as a result of a governmental crackdown in the last 12 months
  • Platform companies that dominate the market have received record fines and forced to restructure as Beijing attempts to prevent monopolistic behaviour
  • Specific sectors within tech have been more significantly impacted by changes

Reading time 5 min

Over the past year, China’s tech sector has seen substantial setbacks as it has come under scrutiny from policymakers in Beijing. In this article, we take a deeper look into what has happened and try to explore why.

1. Timeline

November 3, 2020: Chinese authorities tank the Ant Group IPO. The Ant Group, an affiliate company of Alibaba, owns China’s largest digital payment platform Alipay which has over 1 billion users. The group was set to raise US$34.5 billion, the largest IPO in the world at the time.

November 10, 2020: Beijing unveils regulations to tackle monopolistic practices specifically targeting the internet industry for the first time. Huge sell off in Chinese tech equities, as from Nov. 9 to Nov. 11, $BABA drops 13.8%. Similarly, Tencent goes down by 11.1% in the same timeframe.

January 20, 2021: Alibaba group CEO Jack Ma resurfaces for the first time since crackdown.

February 7, 2021: Beijing puts anti-monopoly laws into writing, finalising regulations unveiled on November 10.

April 10, 2021: Alibaba gets fined a record $2.8 billion for abusing market dominance

April 12, 2021: Chinese Authorities for the Ant Group to restructure, becoming a financial holdings company that is overseen by China’s state-controlled bank.

April 29, 2021: 13 more firms are forced to an Ant Group-like overhaul, including Tencent and Meituan.

July 10, 2021: China tightens rules on foreign IPOs, as companies with 1+ million users require cybersecurity clearance when listing abroad.

July 24, 2021: For-profit education sector gets dismantled, as companies that offer curriculum teaching outside of school get banned.

August 17, 2021: The “common prosperity” drive, which includes income regulation and redistribution, prompted several tech billionaires to donate.

August 30, 2021: Beijing continues to curb the largest tech companies, restricting children’s video game playing time to just 3 hours a week. [1]

2. Who’s being targeted?

MacroPolo, the in-house think tank of the Paulson Institute, categorised Chinese tech companies into “bits” and “atoms to simplify firms into those focused on software and hardware. Some of the larger firms in the big tech space are highly diversified. In MacroPolo’s analysis, each company is categorised based on its main business line. [2]

“BITS” vs “atoms”

Of China’s 500 most valuable private companies in 2020, 238 are tech firms that can be divided into “bits” and “atoms”. 62 have been subject to some sort of regulatory action – 59 of the 62 are “bits”/software-focused companies.

Platform vs small-mid sized firms

Unsurprisingly most of the tech crackdown has been focused on larger firms. 93% of platform companies e.g. Didi and Meituan received fines or were forced to restructure. There is also a strong correlation between company size and reprimands received (supporting the anti-monopoly theme).

Y-axis: % of firms to receive reprimand; X-axis: size of firm

3. Why?

Restructuring China’s economy

Not all tech companies have been slashed by the Chinese government. In fact, much of policymaking has seemed to be sector-specific aimed at Big Tech (advertisement/cloud), gaming, etc. However, the “hard tech” sector has seen continued government support. This crackdown is a manoeuvre to transition China’s economy to one with a larger focus on manufacturing and “hard tech” (semiconductors, batteries, biotechnologies).

Antitrust

A recurring theme in policymaking and this article, curbing monopolistic behaviour of large companies has been a priority of the Chinese government. In particular, a focus to cut down the influence of such platform companies (e.g. Alibaba/Tencent/Didi/Meituan) within China.

Consumer Protection

This crackdown is also an attempt to protect consumers. A separate data security law was introduced in September as China makes moves to tackle data privacy – something the US has been attempting to legislate upon tech giants. In addition, breaking up large FinTech firms will help decrease instances of predatory lending, a rising issue in China.

Public response

Some of the specific tech sectors that have been targeted are of no surprise; EdTech, as a result of the increasing pressure on Chinese parents to spend additional money on their children’s education outside of school; Gaming, which has long been controversial in the public eye, with restrictions on playing time already being introduced in 2018.

Interagency turf war

David Wertime of Protocol suggested that these changes may have come as a result of turf wars as regulators battle for control and attempt to increase their influence. This is not the first time this has happened – the State Administration for Market Regulation was in 2018 to reduce rivalries between antitrust agencies. [3][4]


Disclaimer: Our content is intended to be used solely for informational and educational purposes, and not as investment advice. Always do your research and consider your personal circumstances before making investment decisions. ChineseAlpha is not liable for any losses that may arise from relying on information provided.


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