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SHANGHAI: Tighter regulations, billions in value of stocks lost abroad, and government promises to toughen up even more – Chinese tech giants are reeling from what looks like a sustained Big Brother attack on innovation and enterprise.
But there is a reason the mounting crackdown is largely eliciting a shrug from Chinese consumers: It is widely seen as necessary.
Concern is rising in China over chaotic online lending and allegations of powerful platforms squeezing merchants and misusing consumer data, reflecting Facebook’s global malaise with big tech, Google and others also facing scrutiny at home and abroad.
“With China, it’s immediately about the Communist Party. But if the UK government were doing this, people would probably agree,” said Jeffrey Towson, head of research at Asia Tech Strategy.
“These actions seem quite reasonable.”
Companies such as e-commerce giants Alibaba and JD.com, along with messaging and gaming colossus Tencent, are among the world’s most valuable companies, reveling in China’s burgeoning digital lifestyles and the ban on gaming. government of major US competitors.
But they have become victims of their own success.
The issues came to light last October when Alibaba co-founder Jack Ma committed the cardinal sin of publicly criticizing China’s regulators for their increasingly dire warnings about the financial arm of his company, Ant Group.
Ant Group’s Alipay platform is ubiquitous in China, used to buy everything from meals to transportation, groceries, and travel tickets.
Slow regulatory oversight also allowed Ant to expand into loans, wealth management, and even insurance. Tencent’s fintech profile has also increased.
Consequently, they have become “too powerful players capable of pushing regulatory limits without regard for systemic risks,” consultancy Eurasia Group said in a research note.
These ambitions have collided with Beijing’s longstanding campaign to purge its chaotic financial system of a dangerous accumulation of debt.
SIZE MATTERS
Chinese debt soared to 335 percent of gross domestic product by the end of 2020, according to the Institute of International Finance. Previous lower levels had already raised concerns from the International Monetary Fund.
The official response to Ma’s unusual outburst has been uncompromising: Ant’s record $ 35 billion initial public offering in Hong Kong-Shanghai was abruptly suspended, Ma disappeared from public view for weeks, and regulatory screws were tightened.
China is expected to force Ant and Tencent to start running their loan operations as banks, resulting in increased scrutiny and financial accountability, things that fintech leaders had largely avoided.
“They will have to meet capital requirements and establish financial holding companies. They cannot escape,” said Ke Yan, principal analyst at DZT Research.
The Wall Street Journal reported last week that Alibaba was also being pushed to divest a wide range of media assets, including a possible sale of Hong Kong’s South China Morning Post.
The tumult has slashed billions from the stock values of Chinese tech companies.
In China’s crackdown, size matters.
While just over 20 percent of US retail spending is done online, China is projected to exceed 50 percent this year. Major Chinese platforms have hundreds of millions of users, amplifying concerns about industry concentration and data privacy.
Ma’s unusual outburst was seen by many as a direct challenge by Big Tech to the authority and influence of the Communist Party.
But Ke says, “I don’t think (the crackdown) was caused by Jack Ma. It has been planned for a long time.”
The concern over the growing influence of technology is not unique to China.
“Most of the major governments globally are focused on this in a way that they weren’t two years ago. Everyone seems to think that big tech has gotten too powerful,” Towson said.
“VERY CHINESE APPROACH”
Such crackdowns are not unusual in China.
Its economy has transformed so rapidly in recent decades that regulators often catch up and eventually make headlines with drastic measures that analysts say are often necessary, albeit late, attempts to address the problems that appear.
“It’s a very ‘Chinese’ approach: ‘Let it run so we don’t stifle innovation, and we’ll get in a bit later,'” Towson said, adding that China is “legitimately concerned” about how fast fintech has grown.
Many Chinese web users say that the crackdown should have come sooner. Consumers are increasingly expressing concerns about privacy as the use of facial recognition and other advanced technologies expands in China.
More measures could come. President Xi Jinping last week called for stricter supervision to avoid online monopolies and financial chaos.
This could “break through the walled gardens built by Alibaba and Tencent,” Eurasia Group said, leading to “a more level playing field for smaller companies and presenting better options for consumers.”
Ant’s eventual initial public offering is expected to shrink dramatically, but China’s moves are unlikely to “materially change the competitive landscape and potential growth” in such a crucial sector, investment group CLSA said in a report by research.
“Regulatory risks are exaggerated,” he added.
It may take time for “the dust to settle,” Ke said, but adds: “There is still a lot of growth behind these companies.”
