China’s Crackdown on Tech Giants & China’s Tech Entrepreneurs

President Xi Jinping is making ambitious plans to pull ahead of rivals by turning his country into a digital powerhouse. But Xi’s drive toward tech dominance is being threatened by an unexpected speed bump: China’s forceful crackdown on Jack Ma’s business empire.

For Xi, whose government unveiled its latest five-year economic blueprint on March 5, the risk is that a jittery entrepreneurial class holds back his campaign to reduce the country’s reliance on U.S. technology. China’s increasingly top-down model of innovation stands in contrast to that of the U.S., where technological progress has long been fueled by the independence of founders such as Jeff Bezos, Bill Gates, and Elon Musk. No country has built a world-class technology industry while muzzling its entrepreneurs.

For years, China’s tech entrepreneurs were considered rock stars: Icons whose rags-to-riches career paths, guile and contempt for the rulebook earned them cult-like status. But over the past few months regulatory scrutiny, combined with growing anger at their obscene wealth, accumulated on the backs of downtrodden workers, is wobbling the perch of these previously untouchable tycoons in the communist-ruled state.

One high profile casualty has been Alibaba founder Jack Ma, who in October publicly chided Chinese officials for a lack of imagination and “pawnshop mentality,” prompting their leader, President Xi Jinping, to torpedo the planned record $37 billion public listing of Alibaba’s fintech arm, Ant Group. It was subsequently ordered to restructure. In April, Alibaba was fined $2.8 billion for breaching anti-monopoly rules.

Tensions between Ma—once China’s richest man—and officials might have catalyzed regulators, but the wheels of a harsh new regulatory regime were already gathering pace. In early March, the community group-buying services of food delivery company Meituan, e-commerce giant Pinduoduo, ride-hailing service Didi Chuxing and Alibaba-backed Nice Tuan were each fined 1.5 million yuan ($200,000) for unfair competition practices. Then, last month, China’s chief antitrust watchdog published remarkably similar statements from 12 top tech companies in the country, expressing that they committed to avoiding engaging in anticompetitive behavior.

A case in point is Alibaba, which began life as an online marketplace but whose Fintech arm, Ant Group, stealthily expanded into services like banking, insurance and microlending—the latter contributing nearly 40% of Ant’s revenue today. But while Chinese banks are obliged to keep at least an amount equivalent to 30% of lending portfolios in reserve, Ant Group’s opaque classification helped it sidestep these regulations and the unit only backed around 1% to 10% of loans itself, with the rest coming from large commercial banks. Regulators decided that the 2.15 trillion yuan ($330 billion) of outstanding debt that Ant Group was exposed to at the end of June, according to its initial public offering prospectus, presented significant systemic risk to China’s entire financial system.

Even before Jack Ma was cut down to size, the title of China’s wealthiest tycoon appeared a poisoned chalice. Wang Jianlin, the flashy founder of commercial real estate conglomerate Dalian Wanda, was China’s richest person in 2016 before the government forced him to divest overseas assets. Then came Hui Ka Yan, China’s richest in 2017, whose China Evergrande Group real estate firm was ordered to cut back on debt after falling short of tightened rules on corporate leverage.

What’s clear is that the playing field for China’s tech sector is undergoing a sweeping releveling. Critics say the tech industry had, in the pursuit of growth at all costs, coalesced behind a few monopolistic giants, while crowding out true competition and innovation. China is not the only country grappling with antitrust issues

China’s government ordered the country’s leading ride-hailing platform, Didi, removed from app stores for “serious” problems related to the collection and use of customer data, China’s internet regulator, the Cyberspace Administration of China, did not explain what problems it had found. The tensions with the United States likely motivated Chinese officials to pay extra attention to Didi and its New York I.P.O.

Beijing has been turning up the regulatory heat on Chinese internet companies in recent months, accusing them of competing unfairly against rivals and using consumers’ data to extract greater profits from them.

Up until around 2015, the message for China’s tech titans was “growth at all costs, But now the government wants more stable and sustainable growth.

Why the assault now?

The Chinese Communist Party’s drive for greater regulation dovetails with growing public dissatisfaction with income disparity and the immense wealth tycoons accumulate in what remains, in name at least, a socialist state. China today produces billionaires faster than any other country on earth. Its capital, Beijing, boasts more millionaires than any other world city. The pandemic has proved to be a boon, with China’s billionaires’ wealth swelling by some $1.94 trillion, not least among tech bosses, whose business models are often well-suited to lockdown conditions.

Tech entrepreneurs were seen as heroic disruptors in recent years, railing against an ossified planned economy. But as the billionaire class has bloated, perceptions have changed. Maoist slogans decrying them as “capitalist bloodsuckers” have begun reappearing on social media. WeChat Pay and Alipay also have a virtual duopoly over e-payments in the country, which gives them an overwhelming advantage over competitors.

The recent moves against tech giants are twofold: those running financial services are being reined in, while firms that deal with consumers are also being told to clean up their act.

This is aimed at limiting the risk posed by tech companies and their lending practices, which Beijing fears could upset the country's financial system. The main concern is (about these firms) pushing people to borrow more than they need or can afford to pay back.

The country’s leaders have said little about their intentions, apart from protecting consumers and maintaining financial stability by mitigating risks. Experts think they may have grown frustrated with the swagger of tech billionaires and want to teach them a lesson by breaking up their companies -- even if it means short-term pain for the economy and markets. What’s known is that the Communist Party has grown increasingly concerned about the growing clout of its internet firms, mostly private entities over which they have little direct control.

Xi’s administration is particularly concerned about eradicating systemic risks -- such as unsupervised growth of consumer debt -- in part to ensure the Party’s dominion. Expect more regulations on that front. Market observers don’t rule out that Beijing may also seek greater oversight over not just data but also mergers and acquisitions, given China’s internet firms have over the years invested in hundreds of the country’s most influential up-and-comers in a plethora of realms from online health care to artificial intelligence.

Why was Jack Ma singled out?

The charismatic impresario behind two of the country’s largest corporations, Ant and Alibaba, Ma is arguably the one person most closely identified with the meteoric rise of China’s internet sector. Long a regular on the global conference circuit, the flamboyant billionaire all but vanished from public view after Ant’s IPO got derailed and, according to a person familiar with the matter, was advised by the government to stay in the country. The government sends a very clear message to all these tech conglomerates that it is the government that is responsible. The Jack Ma incident shows that nobody is safe,” says the entrepreneur who’s spending more time on overseas expansion. As an old saying goes: ‘Accompanying a monarch is like accompanying a tiger.’ You cannot predict when the tiger will turn against you.”

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Early movers Alibaba and Tencent grew massively and came to dominate the entire ecosystem. Together with Ant they had a combined market capitalization of nearly $2 trillion in early November -- easily surpassing state-owned behemoths like Bank of China Ltd. as the country’s most valuable companies. Their networks of investments encompass the vast majority of Chinese startups in arenas from artificial intelligence (SenseTime, Megvii) to fresh veggies (Meicai) and digital finance (Ant Group). BOTTOM LINE - China wants to become self-sufficient in tech areas like chips and software. But the government’s takedown of its most famous entrepreneur has shown the risk of too much success.

https://economictimes.indiatimes.com/tech/newsletters/ettech-unwrapped/the-great-fall/articleshow/84913059.cms?from=mdr


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