On July 2, 2021, just one day after Xi Jinping celebrated the centenary of the Chinese Communist Party (CCP), the Chinese government abruptly announced a cybersecurity review over DiDi. As the most popular ride-hailing company in China, which offers daily service to 550 million users through an app, DiDi had a low-key IPO in the United States only days earlier. The review included extremely harsh measures such as banning DiDi from adding new users. Afterward the stock price of DiDi tumbled.
Dramatic as it may seem, the DiDi episode was not the first time investors in the Chinese tech sector got shocked. In November 2020, the dual IPO of Alibaba’s subsidiary Ant Group in Shanghai and Hong Kong, supposedly the biggest IPO in the world if successful, was suddenly suspended indefinitely by Chinese regulators one day before the event. In April 2021, the government opened a case to investigate the allegedly monopolistic practice of Meituan, China’s largest on-demand delivery service app. In July, the Ministry of Industry and Information Technology initiated a campaign against the entire internet industry of China.
These antitrust actions by the Chinese government coincide with the international tide of checking the growing power of the tech giants. However, it is noteworthy that the experiences of tech companies in China reflected not only their enduring tension with the government, but also a fundamental difference between two economic models. While the tech companies prefer a liberal market economy that gives them autonomy over their business and property, the ruling CCP favors a statist model that puts governmental guidance and command at the center of everything. Essentially, it is a struggle for information control that underlies the conflicts between the tech giants and the Chinese government in the past, at the present, and very likely in the future.
Excluding Foreign Tech Companies
China has always been a big proponent of “internet sovereignty,” an idea that extends the sovereignty of a country to the internet used inside its borders and thus justifies governmental regulations. As early as 1997, China established the Great Firewall Project, a sophisticated internet censorship system that blocks Chinese internet users from accessing certain foreign websites that the government arbitrarily deems as harmful to national security.
Foreign tech companies in China became early victims of internet censorship. In 2010, the popular search engine Google retreated from China because of its unwillingness to comply with orders from the government that the company filter and remove politically sensitive information. Also around 2010, Facebook was blocked in China as its role in the Xinjiang riots annoyed the government. Since then, Facebook had made attempts to return to the Chinese market, without any success.
Only those who conceded to the authority of the government were allowed to keep their operation in China. Apple, the biggest tech company in the world, for example, had to make several compromises in order to sell its smartphones and associated services in the Chinese market. It turned off the news service, so Chinese users had no access to foreign news outlets. It removed apps from its store at the government’s request. Furthermore, Apple was pressured by data sovereignty laws to store user data generated in China in a state-owned enterprise. Another tech giant, Microsoft, followed a similar path to maintain its presence in the Chinese market.
Foreign tech companies were offered only two options by the Chinese government: get locked out of the lucrative Chinese market, or be co-opted into the censorship system if they want to make any money. It seems unlikely that the Chinese government would change course in the near future.
Controlling Domestic Tech Companies
As some of the most competitive tech giants were excluded from China, domestic Chinese tech companies seized the opportunities to fill the gap. For almost a decade, they enjoyed a wildly growing market that dramatically boosted their business and market values. A few company founders even became the wealthiest people in the country. However, their growing economic and social influence has generated uneasiness and sometimes even resentment in the government.
For one thing, the Chinese government started to realize that these companies seem to know Chinese people much better than it does. The big data that these companies collect through their business covers almost every aspect of Chinese people’s daily life, ranging from their shopping patterns and eating habits to their education status and financial conditions. Unlike state-owned enterprises, these private-sector companies sometimes wouldn’t unconditionally yield their data and information to the government when asked, an alarming collision with the statist model. For instance, Alibaba initially refused to share user information with the government. This disobedience, many believe, was partly responsible for the suspension of Ant’s IPO.
To reassert its control, the Chinese government took action. First, it promulgated laws that forced tech companies to hand in their data when requested. The 2017 National Intelligence Law contains an article stating that “any organization or citizen shall support, assist and cooperate with the state intelligence work in accordance with the law.”
Second, it mobilized its agencies and state-owned enterprises to offer substitute services to compete against private tech companies. In 2020, China issued digital renminbi, becoming the first major economy in the world to test central-bank-backed digital currency. Ostensibly, China claimed it was reacting to the increasing popularity of Bitcoin, but — according to people familiar with the matter from the state-owned banks authorized to distribute digital renminbi — a big reason the central bank made such a rush was that it wanted to regain control over the mobile payment industry. The sector is currently dominated by WeChat Pay and Alipay, whose popularity posed a serious threat toward the monetary authority of the central bank.
Finally, the government launched a big antitrust campaign that gave the major tech companies a very hard time as described at the beginning of this article.
Encouraged by the momentum of strengthening the role of the government in the economy, multiple government agencies began waving their sticks against tech companies to gain greater political clout. For example, it was the central bank and other financial regulators that halted Ant Group’s IPO. For Meituan, the General Administration of Market Supervision was the investigator. In the case of DiDi, the company initially received mixed signals from different regulators regarding its IPO decision, and eventually it was the Cyberspace Administration that picked on DiDi, implying an uncoordinated cross-agency regulation. How these power struggles will reshape the landscape of the Chinese tech sector remains to be seen.
Forecast
The struggle for information control between tech companies and the Chinese government will definitely continue. Under the influence of the increasingly conservative Communist Party ideology and the momentum of the statist economic model, the Chinese government is likely to become even more assertive and aggressive. This is certainly bad news both for foreign tech companies that are interested in the huge Chinese market and for the domestic companies that have ambitions to build international brands.
The Chinese government must realize that its crackdown on tech companies in the long run will only drive away investment and discourage innovation. The Chinese government risks becoming the primary obstacle to the advancement of the internet industry of China.
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