Is Beijing Changing Tack on Big Tech?

The government is not seeking to roll back regulations that have just been put in place. Rather, it is signaling that most of the rectification has been completed, and supportive policies may be coming down the pipeline.

The most recent spate of regulations on antitrust, privacy, and cybersecurity have been in the works for years. They are largely meant to update the previously very loose regulatory environment of the platform economy in China to the level of oversight in developed economies. A few of the regulations exceed what the West has instituted but are actually in line with what’s being contemplated in Europe and the U.S. The most important thing to understand about the Chinese government is that officials believe regulations are necessary for the success of the industry, as they have very specific goals for what is considered “healthy development.” These metrics are rarely tied to financial performance.

Nonetheless, it is significant that the Politburo is taking the time to communicate a positive message at a time when markets are weak and platform companies can’t seem to get a break, not just from Chinese regulators but from U.S. regulators as well. For instance, forced delistings from U.S. markets would be very undesirable for shareholders and companies alike; U.S. capital markets remain the most liquid and high-quality in the world, and losing access isn’t necessarily the end of the world for companies but it is nonetheless a large blow.

To put it simply, the Chinese government is pushing for growth of the digital economy, in which platform companies perform a large role—but government leaders are intent on doing so on their own terms.

The crackdown has ended, but regulations are here to stay.

Beijing did not decide to punish its tech companies on a whim. It is no coincidence that a series of restrictive policies towards the tech industry were introduced just two years after Beijing consolidated three lower-level agencies into the ministerial-level State Administration for Market Regulation (SAMR) in 2018. While there is no convenient time to execute this regulatory campaign, 2021 offered a relatively stable environment compared to the trade war that began in 2018, the first wave of the pandemic in 2020, and the 20th Party Congress in 2022.

Thus, Chinese Vice Premier Liu He’s speech is not a surprise and implies that China’s wide-ranging crackdown in the tech industry is nearing its end. For the political year 2022, with the 20th Party Congress to be held this fall, a promising growth rate and stability are now Beijing’s top priorities, especially as Beijing is concerned with the impact of the war in Ukraine and the domestic transmission of Omicron. By relaxing restrictive policies toward tech and preventing turbulence from casting a cloud over China’s economic recovery, leaders hope to rebuild market confidence.

In fact, even without the 20th Party Congress this year, I would expect Beijing’s tech crackdown to wind down. Although there are many politically-driven explanations for Beijing’s crackdown, its primary objective was to regulate a market run amok with monopolistic and anticompetitive behavior that had sparked complaints and public discontent against tech giants’ practices. After over a year of regulatory pressure, many of the predatory and anticompetitive practices by China’s tech giants have been rectified, which authorities say allows more room for small- and medium-sized enterprises to grow. Now, with a more balanced playing field, Beijing does not have the same incentive to continue its regulatory campaign against big tech in China.

The curtailments to the monopolistic practices of tech giants are beneficial for the healthy development of China’s tech sector and will likely remain in place, especially since the antitrust bureau within SAMR was elevated to the deputy-ministerial level in November 2021 and increased its staffing demand last year. But as Liu He noted, leaders in Beijing intend to make China’s tech policies more consistent and predictable as to minimize the disruptive impact on capital markets.

The Chinese government’s recent regulatory actions on tech platforms have broadly taken three forms since the beginning of 2021. First, longstanding legislative efforts to produce a new Data Security Law and Personal Information Protection Law came to fruition, with the two broad frameworks taking effect last year. Second, the Party-state took targeted and seemingly punitive measures against individual companies, such as Ant Group and Didi Chuxing, that appeared to question or defy central authority. Third, restrictions around specific industries such as online education and an emerging draft regulatory regime to govern platforms according to their scale and area of business put the market on notice that increased supervision was here to stay. Together, these actions have led to the perception of a crackdown on big tech—or, more properly, on online services.

On one hand, Liu He’s recent statements and the general change in tone from the top signal that, amidst economic uncertainty due to stubbornly recurrent pandemic lockdowns, authorities do not want to unnecessarily depress capital markets and general vitality in tech sectors. A lively market is certainly part of what regulators mean when they seek to promote a “healthy” digital economy.

On the other hand, increased regulatory attention is here to stay, even if the details remain uncertain. June marks the five-year anniversary of the 2017 implementation of China’s Cybersecurity Law, and major elements of the law are now increasingly fleshed out. Still, key elements have yet to be revealed. A recent U.S.-China Business Council survey of U.S. companies found that none had yet undergone reviews for moving certain types of data out of China—even though the Cybersecurity Law has required them for years. That part of the years-old law is still, for practical purposes, not finalized. With the data security and personal data laws less than a year old, many details remain to be set regarding regulations and standards, and questions about enforcement are extensive. A sprawling regime to categorize platforms by size and type and build up regulatory tools customized to those details is now in draft, portending years of further development if implemented. In March, new rules governing the use of algorithms took effect, and their enforcement is a stated focus for the Cyberspace Administration of China this year. There is no sign that in the medium to long term Chinese government efforts to more thoroughly govern digital technology are losing steam; on the contrary, China is among the world’s most forward-leaning markets in terms of tech regulation, and this is unlikely to change.

How should observers interpret the ebb and flow of enforcement signals from top officials while the bureaucracy plows forward, producing increasingly detailed and often burdensome requirements? The example of the five-year-old Cybersecurity Law should be instructive. Just because rules are on the books does not mean they can or will be universally enforced. Their actual effect comes from their role as guidelines shaping how businesses run and the introduction of new tools for regulators to deploy. Even if the campaign-style enforcement messaging quiets, and even if the details remain uncertain or unstated, the effect of an enveloping regulatory framework persists.

China’s regulation of Big Tech may become more subtle in the future, but the regulatory campaign is far from over, and its underlying doctrine remains unchanged. If the way the country sticks to the “dynamic zero-COVID” policy is any indication, then we are in for a long game.

Vice Premier Liu He’s statement on March 15 was in part a response to the SEC’s naming of five Chinese companies for potential delisting from U.S. markets under the HFCAA, which triggered a massive sell-off of Chinese shares. Liu’s message was that the government supports Chinese companies’ IPOs in overseas markets and that Chinese and U.S. regulators have made progress toward reaching an agreement on audit supervision. This sent the Chinese stock market into a week-long rally, pushing the SSE Composite Index up 4.6 percent. But with no long-term bullish signals, investor confidence soon faltered, and the SSE Index tumbled to its lowest point since June 2020. Similarly, the market rallied 3.1 percent after the Politburo meeting on April 29, but the rally has also stalled, as no follow-up policies were announced.

There is no doubt that top economic officials in China are deeply concerned about the state of the economy, though reassuring the market with regular positive statements has become a staple in the government’s repertoire. In September, Liu He emphasized that China’s unwavering support for the private sector had not changed and will never change. Those words did not stop tougher regulatory measures on the sector, some of which are necessary and well-overdue, and they are unlikely to stop further regulatory actions in the pipeline, such as the amendment to the Anti-Monopoly Law later this year. The narratives on capital (a euphemism for the private sector) in Xi Jinping’s speeches from last December and this April are remarkably consistent: Both highlight anti-monopoly goals and preventing the expansion of capital in a disorderly fashion, but they also stress encouraging, supporting, and guiding the “healthy development of capital.” To characterize the recent regulatory actions as “crackdown” would be an oversimplification. In essence, the Party intends to use all its tools to maintain comprehensive control over where and how the private sector develops.

China’s economic development is always heavily dependent on the government’s industrial policies, and in recent years, Xi Jinping has repeatedly stressed the importance of preventing a deviation “from the real sector toward the virtual one,” a key policy objective that is often overlooked. Consequently, financializaton and the real-estate sector became the first regulatory targets as financial and human resources are shifted toward manufacturing. The virtual part of Big Tech, i.e. the online industries, is hammered by regulators partly because it requires enormous capital investment and diverts large numbers of engineering talents, while the real, or manufacturing, part of Big Tech, such as AI, robotics, clean energy, semiconductors, and pharmaceuticals, is prioritized under the “Made in China 2025” plan. In fact, any non-manufacturing sector (or sector that does not support manufacturing) will face an uphill battle in China. Any sector that has the potential to change how people think or how society works, resists the Party’s comprehensive control, or takes too big a portion of the country’s workforce/investment will find itself in the regulator’s way. Private education, entertainment, online financing, social networking, livestreaming, and gaming have been hit hard so far, but more sectors will be affected. The Party may well achieve limitless control over the industries. The question is, can Big Tech, along with the entire Chinese economy, thrive under this heavy-handed approach?