State leadership gives tech companies more leeway again

With massive interventions, the state has significantly expanded its control over companies in recent years and brought them in line with the Communist Party. They are designed to serve the interests of the party and help modernize the industry. The official signals of relaxation are also likely to be related to the fact that the Chinese economy has recently been weakening.

The tech companies, used to being successful, have felt the effects of the interventions painfully. They grew much more slowly recently, and profit margins fell.

China’s tech industry is unsettled

The example of the Alibaba financial services subsidiary Ant shows how far-reaching the state interventions were in some cases: The financial group, which owns the widespread payment app Alipay, had to spin off its highly profitable consumer credit business. The connections to the parent company Alibaba were largely cut, reports the business magazine “Caixin”, as was the exchange of data between the companies.

Alibaba founder Jack Ma recently announced that he would relinquish his controlling interest to Ant. Only then did the financial regulators signal that the regulatory efforts at a good dozen financial subsidiaries of the tech companies, including Ant, were “almost complete”.

The uncertainty in the once self-confident industry was clearly noticeable during company visits by the Handelsblatt last year. They are trying hard to get a better image. Tech companies such as Baidu or JD.com specifically refer to their important contribution to the development of the real economy.

The online retailer and logistics group JD.com, for example, describes itself as a “digital company with characteristics of the real economy” in a presentation. A company representative emphasizes that “industrial partners along the supply chain” are being strengthened. Small and medium-sized companies in particular are helped in this way, according to the party guidelines. This is important for development in China.

Gold stocks: State has increased control over tech companies

China’s tech sector is working under completely new conditions, explains Antonia Hmaidi from the German China think tank Merics. “The state has increased control over companies,” she told Handelsblatt. Alibaba and Tencent are to set up a consortium for the development of chips in which the government has a strong interest. “Western governments are now facing new challenges in dealing with Chinese IT platforms as they are dependent on the party state,” warns Hmaidi.

In this context, China experts also refer to the growing influence of the state leadership on the tech companies with the help of so-called “golden shares”. These give the owner special rights, such as a wide say in the appointment of board members and other company decisions, although the state ownership is usually only one percent of the share capital. At the moment, the state leadership seems to be primarily concerned with controlling the content distributed via the tech platforms more closely.

Through the “China Internet Investment Fund”, which is affiliated with the Internet regulator CAC, the state already holds numerous shares in the short video service Kuaishou and the surveillance specialist Sensetime, among others. This emerges from a list on the fund’s website. According to media reports, he also holds shares in the Chinese Twitter counterpart Weibo, which belongs to Tencent, and in the Tiktok parent Bytedance.

As the “Financial Times” (“FT”) recently reported, the state is said to have recently secured a stake in an Alibaba media subsidiary. In the case of a Tencent subsidiary, entry is therefore imminent. The companies are apparently trying to attract local authorities as shareholders. These are likely to have an increased interest in further growth in their region and act less strictly, whereas in the Beijing central administration the proof of loyalty to the line plays a more important role.

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So far, however, the new control mechanism has only affected the media subsidiaries of the tech companies, emphasize experts from the China think tank Trivium. Beijing would thus remain true to its original intention of only controlling the content on the platforms. Should gold shares also become mandatory outside of the media industry, the Trivium experts would “start to worry”.

China’s corporations cut off international business

However, globally active Chinese tech companies in particular seem to fear that state participation will damage their international image. As the “FT” reported with reference to Bytedance’s internal documents, the company is trying to decouple its global units more, apparently to remove them from the control of state supervisors in management.

Since the end of 2020, as part of the rectification campaign, the state leadership has significantly expanded control over the tech companies, which had previously grown de facto unregulated. Officially, the aim is to protect competition, protect consumers and prevent “uncontrolled capital growth”. But as is so often the case in China, the party also wants to expand its control and power.

In November 2020, for example, the government put the internet giant Alibaba and its founder Jack Ma in their place. Ma had previously publicly criticized the “pawn shop mentality” of the regulators. Financial regulators then halted the $2.8 billion Ant IPO. State and party leader Xi Jinping himself gave the order, the Wall Street Journal reported at the time, citing insiders.

High penalties followed for Internet platforms such as Alibaba or Meituan because they are said to have abused their market power. In July 2021, the taxi service provider Didi was targeted by the Chinese internet regulator CAC. She accused him of endangering China’s national security by going public in the United States. Further blows against online gaming companies such as Tencent, the internet tutoring industry and numerous fintechs followed.

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