Chinese regulators are signaling they may ease a year-long crackdown on Chinese tech giants as the country’s leaders prioritize shoring up a flagging economy.
Why it matters: Loosening restrictions on one of China’s most vibrant sectors could remove one source of downward pressure on an economy gutted by COVID lockdowns. But it could also slow progress towards Chinese President Xi Jinping’s goal of restructuring a major sector of the economy.
- China’s manufacturing output plummeted in April and consumer demand fell as COVID restrictions impacted 373 million Chinese residents — more than a quarter of the population.
- Internet companies, which have faced the lion’s share of China’s regulatory campaigns, are a key source of employment in the country and rake in 20% of the aggregate net profits of China’s top 500 companies.
- The crackdown has forced major companies to cut jobs, with e-commerce giant Alibaba projected to reduce its workforce by up 15% this year. Internet company Tencent is also looking at significant layoffs.
- Loosening some restrictions could save jobs and protect revenues.
What’s happening: Xi said the country would pursue “healthy development” of internet platforms after a meeting of top party leaders last week, fueling expectations that the end of the tech crackdown may be in sight.
- Chinese tech stocks surged after the announcement. Hong Kong’s Hang Seng Tech index rose 10%, while shares of tech giants Alibaba and Tencent rose 15% and 11% respectively.
- Xi and other top leaders are expected to meet with top tech company executives this week, Reuters reports.
- Regulators may promise to no longer levy unexpected huge fines on internet companies or demand sweeping corporate restructuring, the South China Morning Post reports.
Background: For more than a year, Chinese regulators have targeted some of China’s biggest tech firms as Xi has pursued policies to fix what he calls the “disorderly expansion of capital.” China’s tech industry has been trending towards the creation of monopolies that hinder domestic innovation and put more economic power in the hands of companies while threatening the Chinese Communist Party’s ability to control a massive political and geopolitical lever.
- Food delivery giant Meituan lost half its market value — tens of billions of dollars — last year after regulators required food delivery apps to cut their fees.
- After riding hailing app Didi went ahead with its New York initial public offering (IPO) despite a warning from China’s cybersecurity watchdog, regulators issued fines, temporarily prohibited new user sign-ups, and embedded government officials directly within the company’s ranks. Didi also lost billions in market value.
- Regulators also halted the planned IPO of Alibaba’s finance arm ANT Group, at the time projected to be the largest IPO in history,
The big picture: The regulatory crackdown represents a “dramatic clash between public and private power,” analysts at Lawfare Blog wrote earlier this year.
- Some analysts have criticized the crackdown as a sign of the excesses of China’s party-state capitalism, needlessly crushing a vibrant industry for primarily political reasons.
- But the regulations also target monopolistic behavior, a widely acknowledged problem in the tech industries in both China and the U.S., and aim to address corporate policies that squeeze money from employees and consumers.
- The measures also redirect capital to strategic industries Chinese leaders have identified as key to China’s future economic competitiveness, including semiconductors, batteries, and biotechnology, the U.S. Chamber of Commerce wrote in a February 2022 report.
Between the lines: U.S. analysts have worried Beijing’s pressure on some Chinese companies to avoid listing on foreign stock exchanges and keep user data inside China’s borders could inhibit and further bifurcate the development of the U.S. and Chinese tech sectors.
- They are already starting to divide due to U.S. national security concerns about Chinese government and military cooperation with Chinese tech companies.
What to watch: The Chinese government is expected to take a 1% stake in more of China’s top tech companies, the Wall Street Journal reports, and insist on more sway in company decisions, while easing the regulatory environment.