How is China’s Crackdown on Big Tech Impacting Emerging Markets?
The current wave of regulatory intervention by the Chinese government has been far reaching, addressing matters including anti-trust, data protection, property speculation, climate change and various interventions in relation to social abuses. In the internet platform space, financial technology (Ant Group), ecommerce (Alibaba, JD.com, PDD, etc.), gaming (Tencent, NetEase etc), food delivery (Meituan, etc.), education technology (Tal/Oriental Education etc) and ride-hailing (Didi) have all been targeted.
The objective behind all these policies can be traced to China’s stated long-term aspirations, which includes creating a more sustainable economy—with less pollution—that benefits the broader Chinese population instead of just the elite. On the issue of education reform specifically, there is a clear intention by the government to improve incentives for families to raise more children, in order to alleviate demographic headwinds. The latest moves are also targeting companies not fully aligned with the overall strategy of the government and serve as another clear indication that China is strongly motivated by self-sufficiency—and is willing to sacrifice short-term growth in the pursuit of same.
From a timing perspective, Chinese President Xi Jinping is evidently craving legitimacy of rule ahead of China’s 20th Party Congress in 2022, where he is expected to extend his leadership beyond 10 years, disturbing the established order. China remains, at least by name, a socialist state, and in a country with extreme income disparity, the public perception concerning the contrast between the billionaire owners and gig-economy workers at China’s internet platforms makes them a very easy target politically.
The internet platforms have arguably become a victim of their own success. In addition to bad press about income disparity and worker practices, the monopolistic behaviour and increasing power accumulated through harvesting data on Chinese consumers make them an obvious target for anti-trust and data protection legislation. The government is legislating to improve consumers’ data protection against private companies, and particularly tightening private companies’ ability to transfer sensitive data abroad. Only the government is allowed unfettered access to such data.
China’s top strategic priority is arguably to become self-sufficient, especially in regards to key technologies of the future like semiconductors, medical devices, AI (artificial intelligence), green technology and various forms of automation. The ample war chest of the internet platforms puts them in pole position to invest in the development of these new technologies, and the Chinese government is, amongst other things, using anti-trust legislation as leverage to force these companies to reinvest in areas aligned with the overall strategic direction of the country, instead of harvesting monopoly rents for their owners. This type of industrial policy obviously undermines property rights, which has knock-on effects for the incentives of entrepreneurs and investors alike.
Amid this backdrop, we believe it’s crucial for those investing in China to understand the strategic direction of the country, where the government would like capital to be allocated to, and which business models are perceived to work in the interest of the nation’s unfolding strategic plan—and, conversely, which ones are in the bad books.