Cowed By Regulators, China’s Tech Giants Toe The Line

After Chinese regulators proposed sweeping antitrust regulations and took the unprecedented step of halting the IPO of Alibaba-affiliated Chinese fintech giant Ant Group earlier this month, major tech companies in China are tempering their attitudes and falling in line with the Chinese government. On Monday, state-affiliated tabloid Global Times reported that Alibaba’s chairman Zhang Yong had “expressed gratitude” towards regulators, noting a sharp difference between his tone and that of a speech given by company founder Jack Ma several weeks earlier:

Alibaba’s chairman expressed gratitude toward regulatory governance at a conference attended by internet giants and regulators on Monday, a stark contrast to Jack Ma Yun, founder of Alibaba, who blasted global financial regulatory authorities for stifling innovation back in October.

The chairman’s remarks came after a suspension of the dual listing of Ant Group, which was widely expected to become the world’s biggest ever IPO.

[…] He said China’s digital economy, which can hold its head high globally thanks to a number of excellent Internet companies and platforms that have emerged as a result of China’s reform and opening-up, is due to the government’s encouragement on development and innovation, and the fact that China is now the world’s largest market also provides huge opportunities for companies like theirs.

Alibaba pledges to actively learn and respond to government policies and rules to build a healthier platform economy, Zhang added. [Source]

The prospect of greater government scrutiny over China’s tech giants has dampened enthusiasm among investors as well. The Financial Times reported that new regulations, alongside the Trump administration’s recent orders to prohibit American investors from investing in companies with ties to the Chinese military, had heightened the risks of investing in Chinese tech companies:

Investors are reviewing their record holdings of mainland internet companies after Beijing proposed sweeping new antitrust rules for China’s technology industry.

Leading groups including Tencent, Alibaba and Meituan-Dianping have attracted record investment during the Covid-19 pandemic, according to data from Copley Fund Research, which tracks the investment activities of more than 180 of the world’s largest funds.

[…] Wong Kok Hoi, chief investment officer of Singapore-based APS Asset Management, said his view of the sector had “changed drastically”, adding: “I believe the bull run in the tech sector in China has halted.” [Source]

It was widely reported that Jack Ma’s incendiary speech in October – in which he accused Chinese regulators of having a ‘pawn shop mentality’ – was the trigger for the delay of Ant Group’s IPO. But observers have disagreed about whether the fallout from the speech was an accidental or deliberate move by Jack Ma. English-language media had widely framed Ma’s speech as a misstep, suggesting that he had become cocky and gone too far. Other experts such as Kevin Xu, the author of bilingual China/tech newsletter Interconnected, saw the speech as an inspired, strategic move by Ma to give himself a voice in government discussions about tech regulation:

Sadly, most of the media coverage has been flat and simplistic, roughly summarized as: Jack Ma spoke out of turn and Chinese authority showed him who the boss is by canceling Ant’s IPO and he lost billions. It’s almost as if no one actually read the full speech or bothered to spend some mental cycles absorbing and contextualizing it, even though most of these coverage cited the speech in one way or another.

[…] Entrepreneurs at the calibre of Ma, Musk, Bezos, Zuckerberg, Gates, etc., don’t care about money, even though the only thing the rest of us seem to notice about them is money. As cheesy as it sounds, for them, it is about building a world they want to see and live in, and money is just the instrument they need to get there. It’s a rarefied field that many entrepreneurs aspire to, labor for day in and day out, but don’t achieve simply because it’s near impossible.

The hallmark of a consequential speech is not its soaring oratory or flowery turn of phrase, but its ability to move the needle in a society and leave something behind that could stand the test of time — legacy. While I wouldn’t quite place Ma’s speech in the pantheon of historical speeches, I do think it has moved the needle, which is particularly remarkable given China’s unique environment when it comes to public speech-making. [Source]

Subsequent reports that Xi Jinping personally oversaw the halting of Ant Group’s IPO after becoming incensed with the speech, before greenlighting new and more significantly more onerous capital requirements for fintech firms, may undermine theories that the speech could have bought Ma influence among regulators.

The widely publicized apology by Alibaba’s chairman this week suggests that the humbling of China’s tech giants still has some ways to go.

The Chinese government’s apparent enthusiasm for exerting greater control over China’s tech sector has contributed to growing worries about the vulnerability of private firms in China. Those concerns were compounded last week after well-known entrepreneur Sun Dawu was detained on charges of “picking quarrels and provoking troubles” amid a public feud over a long-running land dispute with a state-owned farm. (CDT has translated a 2009 op-ed on heroism by Sun that has circulated online since his detention.) The Economist reported this month on the growing obstacles faced by entrepreneurs in China amid escalating state intervention:

At a summit with China’s richest entrepreneurs in late 2018 Xi Jinping sought to allay concerns that the state had declared war on the country’s private sector. Although officials in Beijing had spent the previous year bringing to heel unruly tycoons, China’s president insisted that rumours of a forceful push for party influence in the private sector were untrue. He exhorted the business leaders to “take a pill of reassurance”.

[…] Many of the businessmen who once fancied themselves as a Chinese Warren Buffett are in prison or worse. Wu Xiaohui, the chairman of Anbang, which bought the Waldorf among other assets, was handed an 18-year prison sentence in 2018 for financial crimes. Ye Jianming, who attempted to buy a $9bn stake in Rosneft, a Russian oil producer, was detained in early 2018. His whereabouts is still unknown. Xiao Jianhua, a broker for China’s political elite who once controlled Baoshang Bank, was kidnapped by Chinese agents from his flat at the Four Seasons Hotel in Hong Kong in 2017 and is thought to be co-operating with authorities in the unwinding of his financial conglomerate.

[…] The party has also been increasing its influence over private firms in more subtle ways. Under a strategy referred to as “party building”, firms have been asked to launch party committees, which can opine on whether a corporate decision is in line with government policy. The number of committees in publicly traded but privately controlled companies is still low. According to a survey of 1,378 Chinese listed firms by Plenum, a consultancy, of the 61% that were privately controlled only 11.5% had party-building clauses in their charters compared with 90% of state-owned firms. [Source]

On the other hand, in the context of the tech sector at the very least, some observers view Beijing’s antitrust moves as a possible remedy to a greater problem for the economy, namely the anticompetitive practices of China’s tech behemoths. For the London School of Economics’ China Dialogues blog, Xin Sun and Jiawei Hai wrote that a return to ‘comprehensive reform’ might be necessary to tackle worsening competition in the private sector:

In conclusion, during Xi’s era, the asymmetric alliance between the Party and the private sector formed since the reform remains in place. In the meantime, the political and regulatory restrictions faced by private firms have been tightened. Firms that cross red lines are relentlessly penalized. However, we believe the largest hurdle to innovation and efficiency lies in the deteriorating competitive environment faced by private firms as well as other deeply-rooted structural deficiencies in China’s business environment. To address these perennial issues requires the Party and its leaders to not only preserve the alliance with the private sector but also return to the political agenda of comprehensive reform that has been abolished for nearly two decades. [Source]


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