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Why Is China Knocking Down Its Tech Companies?

China has been launching numerous multi-pronged crackdowns on tech giants, leaving both decades-old tech firms and startups alike; in an environment of uncertainty. But what is leading the Chinese government to head these crackdowns on its most profitable companies?

The Crackdown of Tech Giants in China

The entire crackdown of tech giants was conducted over the course of a few months. With three key moments:

  • The suspension of Alibaba’s parent company Ant Group’s IPO in November 2020. This crackdowns have lead the collapes of Jack Ma’s business empire.
  • The ban of DiDi, a cab service company, from accepting any new users under cybersecurity review
  • Initiation of new regulaion over China’s after-school turoting or ATS sector. And by the late July, the government banned all for-profit tutoring.

In early July, the Chinese state newspapers affiliated with the government criticized online gaming and tagged it as “opium for the mind” and “electronic drugs.” The news was only published in a newspaper, but it had a major impact on investors’ fragile sentiment, resulting in massive losses to gaming companies.

In just mere five months, China’s MSCI index has fallen exponentially. During the same period, some of the world’s largest tech and internet companies incurred losses in billions of dollars. A famous name, Tencent, also known as WeChat, incurred a loss of 170 billion dollars. But, Tencent was not alone; several Chinese tech companies’ market rates have fallen sharply.

For now, the government crackdowns are primarily focusing on the following sectors:

But why is China knocking down on its tech companies with such a huge user base? The answer to this question gives us a glimpse of the future perception of China’s economy by the Chinese Communist Party.

What is Driving the Crackdowns?

Many experts believe that the stock listing of DiDi in the US was the primary reason behind the mandated cybersecurity review of the company. In addition, the US data disclosure rules imposed on DiDi after its introduction in the US market might have been seen as a threat to national security.

On the other hand, the competitive education system of China has given rise to huge private tuition providers. The companies succeed in manipulating parents, using the pretense of their child’s future and the fear of being left behind. Thus, parents end up spending excessive money on After School Tutoring. This high financial and mental pressure of raising a child hinders Chinese parents from having children altogether. Some also argue that the communist party aims to strengthen its ideological control over the country’s education system.

The recent crackdowns might also be pointing fingers at the Social Credit program of the Chinese Party. The government might be tracking every individual and company in China and punishing them for transgressions ranging from dealing with business partners that violate environmental protections to littering.

The Big Plan

Technology can be classified into two major parts:

  • Must Have
  • Good to Have

The Chinese president categorizes companies like Ali Baba, DiDi, and Tecents games into the good to have technologies group. President, Jinping has mentioned his concern about the rise of good to have technologies on multiple occasions.

Lei Jun, the founder of Xiaomi, once said, “Even a pig can fly if it stands at the center of a whirlwind.” The government believes that the profit earned by the above companies comes more from rents than from actual value-added. Benefiting from the first-mover advantage, the companies have succeeded in creating strong network effects.

This is undoubtedly a major concern not only for China but for countries throughout the globe. Online gaming, shopping, and other in-hand services made available by technology; aim more at distraction and reaping benefits rather than adding true value to users.

Furthermore, the spiking growth of the tech-giants has created an abundance of high-paying job opportunities for the youth. Thus, instead of working on important studies like material science and manufacturing, millions devote their brilliance to game development and ad optimization.

As Dan Wang, GaveKal Dragonomics quotes in his 2019 letter, “A large population of people who play games, buy household goods online, and order food delivery does not make a country a technological or scientific leader.”

Therefore, the Chinese government is shifting its population focus from user consumer technology companies to the high-end manufacturing sector. The companies manufacturing batteries, chips, air crafts, and other necessary tech products will be playing an important role in the coming future. Though the leading internet companies have collapsed in the last few months, the stock value of a few semi-conductor companies has surged.

The Mystery of China’s Tech Companies’ Crackdowns

The complicated Chinese government, party, and business system is extremely difficult for outsiders to understand. What exactly is being ordered by these actions remains unclear, as well as the outcome. Thus, it’s incredibly hard to figure out what’s going on.

As some observers see it, the US and EU are engaged in antitrust campaigns similar to this one. Historically, Chinese leaders strive to prevent alternative centers of power from emerging. But are Western leaders so different in this respect? According to the new antitrust movement in the U.S., one of the goals is to curb the power of Big Tech companies; therefore, the Chinese tech crackdown might be seen as a Neo-Brandeisan movement on steroids.