Why is Xi attacking Chinese Big Tech?
A look at the actions of Xi, the CCP, and the varied departments causing a panic for tech in China and investors all the world around
Hi All,
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Similar to many of you I have been following the recent, shall we call them, uh attacks from various departments within the CCP against tech in China. Remember this started when Jack Ma (Alibaba) chose to launch an uh, well, attack on China’s financial watchdogs. Well at the time when they bit back by blocking Ant’s planned IPO. Jack Ma vanished for a few months and kept a low profile, and played golf
It looked like everything was back on track minus Ant which seemed to want to make another attempt at an IPO and then just suddenly from nowhere Xi and the CCP seemingly started attacking Chinese Big Tech. Today I take a look at why now and what are the impacts?
A lot of this is quite hard to make sense of and I’m not a China expert but as we know China had its “Sputnik” moment recently when they realized that they have no real semiconductor firepower and they’ve realized that they cannot count on the United States to supply them with technology - they need to cultivate their own domestic alternatives.
So what happened in the past few months? Ok lets see ..
The Ant IPO was blocked/stopped
Jack Ma disappeared, and came back
Calm before the storm!
Alibaba fined $2.8 billion after a months-long antitrust investigation
Rideshare giant Didi was asked to not IPO (but they did anyway)
Rideshare giant Didi was asked to stop signing up new users a few days after their IPO
Rideshare giant Didi was banned from China’s app stores.
The Cyberspace Administration of China (CAC) issued a rule that any Chinese company with more than 1 million users must undergo a security review prior to going public likely in order to prevent listing in the US
China launches an investigation into Meituan (China’s Uber eats). The investigation is to dig deeper into “suspected monopolistic practices” as well as saying that online food platforms must ensure workers make at least the local minimum income.
The Hang Seng Tech Index, launched a year ago to give investors greater exposure to China’s internet giants has since seen more than $551 billion in market value wiped
Bar tutoring for profit in core school subjects to ease financial pressures on families that have contributed to low birth rates
China’s Supreme People’s Court issues rules that went into effect Aug. 1 that say that hotels, shopping malls, airports and other commercial venues must get consent from customers to use facial recognition and the technology can’t be excessive and must protect data
Parts of the Chinese government are considering a “forced” delisting of Didi (uh how even???)
Regulators are considering serious, perhaps unprecedented, penalties for Didi -- range of potential punishments are : a fine, suspension of certain operations, or the introduction of a state-owned investor
Beijing said it plans to tighten rules for homegrown companies looking to raise money overseas
Special rectification meeting attended by Alibaba, Tencent, ByteDance, Pinduoduo, Baidu, Sina Weibo, Kuaishou, Jingdong, Huawei, Didi, Meituan, OPPO , VIVO, Xiaomi, Bilibili, 360, Suning, Ctrip, 58.com, Zhihu, Momo, Xiaohongshu, NetEase, WIFI Master Key, MojiWeather and other major Internet platforms (Link in Chinese)
This might seem sudden but I can bet that Xi and the CCP and all its regulators had been planning this for the past few months. Reminds me of the printer scene from Office Space only way more brutal. Apologies Ron Livingston for making you Xi!
Didi’s stock (source Bloomberg News)
Why Now?
I quite honestly think the CCP (and all its varied departments, which honestly I DO NOT understand, so I’ll just call them the CCP/China Govt interchangeably) after they had their “Sputnik” moment have been planning this. If I’d wager a guess this has probably been in planning since Trump added Huawei and others to the “Entity List” which prevents American companies from doing business with them. The CCP and Xi were personally pissed at this attack and knowing that they lack capabilities in Semiconductors and Mobile Operating System’s probably started paying more attention to this (Huawei announced the P50 which has the Harmony OS. If you’re interested in reviews of the Harmony OS, click here
With this backdrop my guess is that the CCP probably tried to coax employees from Chinese Big Tech to work in semiconductors at companies such as SMIC. The article talks about huge payouts for executives but lets face it Alibaba/Tencent can easily top that.
Xi and the CCP probably figured that one way to attract talent to semiconductors and operating systems is probably to dissuade Chinese employees from joining Chinese Big Tech. I mean the skills are not fully fungible so I don’t really get the point, if this is the reason. In part, in the long run, it might make more Chinese students learn how to build semis and core tech. Employees don’t see the financial gain with staying at Chinese Big Tech and maybe just maybe decide to jump
As Lillian Li wrote about China’s 14th 5 year plan in Chinese Characteristics, she covered the industries that are important to China in the next 5 (and probably many more years after):
New Generation Artificial Intelligence
Quantum Information
Integrated Circuits (or Semiconductors)
Neuroscience and Brain-Inspired Research
Genetics and Biotechnology
Clinical Medicine & Health
New energy
Autonomous vehicles
High-end medical devices
Innovative medicines
Cloud computing
Big data
Internet of things
Industrial internet
Blockchain
Virtual and augmented reality
As part of this overall strategy (and you’ll notice that some of Chinese Big Tech is already in some of the above businesses, Alibaba cloud for example, Tencent self driving car development) however Xi also realizes that as he lets Chinese Big Tech continue to develop such technology he not only wants the data/technology to remain in China but he wants to ensure that data is secure (I assume he has checked if his number appears on HaveIbeenPwned)
The reasons for this unprecedented attack by China on Chinese Big Tech are:
Growth Areas/Self Sufficiency
The areas that China wants to focus on will require lots of investment as well as smart people. The Chinese government will invest in these areas but they are also sending a signal - at large to the VC community, Entrepreneurs, as well as employees - here are the companies to invest, start, and work in. Beijing would strongly prefer more investment to flow into what it regards as real technology like microchips, batteries, robotics and advanced materials. Certainly an overall conclusion with Alibaba and Tencent have losing 9% and 11%, respectively in a couple of weeks and Semiconductor Manufacturing International Corp., or SMIC, and Hua Hong Semiconductor are up 25% and 22%,
Data
Xi is all too well aware that data/privacy practices are important and the CCP has complete control of the narrative but ensuring that no snooping eyes - except for CCP’s knows about Chinese internet users - they want to ensure that the best practices are followed for securing data -- and for all we know creating MORE backdoors for the CCP to monitor its netizens
Anti-Competitive practices/Entrepreneurship
There are two ways to think about this. One is that Alibaba/Tencent/Baidu and their whole large merry band of subsidiaries pretty much own all of the Chinese startups or invest in them. This makes it harder for new ideas to bubble up and become larger before being acquired (there are successful examples, Bytedance for example). I wonder though, will such policies prevent entrepreneurship in China? I doubt it because the CCP’s message probably is “it's OK to get big, but don’t mess with us, and also .. don't get TOO big”. Besides, every Chinese entrepreneur can’t just bolt and move to the United States (Haven’t you heard? The United States makes it hard for immigrants!). I still am a bit worried about the effects of “snap your fingers” and “kill Chinese Big Tech in one fell swoop”. The growth of tech has been disorderly and China wants, likes, NEEDS order!
Raising Money/IPOs
Investors, American or Chinese or whatever want returns within a few years and IPO’s are obviously the best way to cash out for an investor. However the US regulators have announced that they will not allow Chinese companies to raise money in the United States unless they fully explain their legal structures and disclose the risk of Beijing interfering in their businesses. To that effect, there is no major U.S. IPO of a Chinese company today with LinkDoc Technologies pulling its IPO and Hello Inc holding their IPO’s. In the short and mid term, investment will have to come in from China until VC’s at large are comfortable that China will “leave them alone” if they invest in industries key to China’s growth.
In the short term I expect more “printer smashing” by Xi and the CCP as they try to remove the “disorder” with Chinese Big Tech. I don’t think any of this means that Alibaba, Baidu, Tencent and all the other massive companies will fall apart; they will just have more controlled growth and investments based on Xi’s vision. I expect to see the news coming out of China to get worse before it gets better from an investment/risk perspective
Thank you for reading. Stay safe, be well! If you enjoyed reading this please consider sharing with a friend or two (or sign up here if you came across this or were forwarded this)
More reading on the issue
China Tech Crackdown: Xi Charts New Model After Emulating Silicon Valley
U.S. SEC says Chinese IPO hopefuls must provide additional risk disclosures
Tencent Is World’s Worst Stock Bet With $170 Billion Wipeout
Meituan Stock Dives 15% After China Issues Food Platform Curbs
Why is China smashing its tech industry? - by Noah Smith - Noahpinion
Didi Global Considers Going Private to Placate China and Compensate Investors - WSJ