Why Big Tech May Never Recover in China

ANDEven by its own standards, the technology sector has had a extraordinary year. Valuation increases for companies like Nvidia, goalIt is Amazon increased the technology sector’s share of the S&P 500 to a Unprecedented 30%. Amid this boom, it’s almost easy to ignore the challenges facing tech giants elsewhere. particularly in China.

The main Chinese technology companies, namely Alibaba and Tencent, saw their market capitalization plummet by up to 75% compared to the peaks recorded three years ago. A key factor was the broad regulatory crackdown initiated by the Chinese government in late 2020, which lasted an unprecedented 18 months. Only after a massive sell-off of Chinese stocks in March 2022 that led lawmakers to reverse stroke and ease regulations.

During this tumultuous period, Chinese authorities quickly introduced a series of stringent antitrust, data and labor regulations, while also imposing astronomical fines on companies such as Alibaba It is Meituan for engaging in monopolistic practices. Simultaneously, large technology companies such as Tencent, Alibaba and Ant Group were forced to leave of non-essential companies or undergo significant restructuring to reduce their influence in the technology sector.

Chinese authorities stated that these frantic actions were aimed at correcting the myriad regulatory problems caused by years of uncontrolled growth and disorderly competition among local tech giants. However, these frantic enforcement actions have also sown confusion and raised concerns about the capriciousness of China’s regulatory policies.

From 2021 to 2022, total investment capital in the Chinese Internet industry plummeted by a staggering 80%, from $49 billion to just $10 billion. Simultaneously, the total market capitalization of Chinese internet companies has declined from $2.5 trillion at its 2020 peak to $1.4 trillion in 2022. As investors pulled out of Chinese consumer technology companies, new market entries in the sector decreased.

The crackdown has disproportionately burdened smaller companies, which lack the extensive internal resources that large companies have at their disposal to deal with the costs associated with increased regulatory compliance. This inadvertently gave big tech companies a competitive advantage, further cementing their dominance in the market.

Even foreign technology companies – apparently not targets of the repression – felt the pain. In 2021, both LinkedIn and Yahoo announced their cancellation of China, attributing its decisions to rising compliance costs and an increasingly challenging operating environment.

One of the main consequences of the retreat of private investors was the opening to the State. In recent years, state entities have invested aggressively in “gold shares”In certain subsidiaries of Chinese social media companies such as ByteDance (TikTok’s parent company), Alibaba and Tencent. These shares, which typically represent a nominal stake of 1-2%, give the government the power to appoint a representative to the board of directors and exercise veto rights over important business decisions. Although this scheme only affected these social media companies, it made investors vigilant about the Chinese government’s control over its technology companies.

This reinforced state control also raises new suspicions among foreign policymakers regarding social media applications owned by Chinese Big Tech. The recent US bill forcing TikTok to divest from its Chinese parent company, ByteDance, or face a nationwide ban exemplifies this trend.

While the crackdown has eased since early 2022, it has clearly left an indelible mark on Chinese technology regulation and undermined trust in state-business relations. Investors, having suffered unexpected and severe crackdowns, are now highly sensitive to even small regulatory changes. A vivid illustration of this occurred last December, when China’s gambling regulator announced draft rules to curb excessive gambling. The announcement caused panic among investors, destroying US$80 billion of market value of the main Chinese gaming companies. In a dramatic turn of events, the gaming regulator scrapped the proposed regulation and fired the official responsible for it.

Today, the technology sector is still characterized by stricter laws and more powerful regulatory agencies than before the crackdown. And when the next crisis requires strong state intervention, there is now an even greater likelihood of regulatory overreach. Without strong institutional oversight, there is a risk of excessive enforcement and administrative abuse. Worse still, the crackdown has led to institutional changes that are likely to create more cycles of volatility in the years to come.

The ramifications of all this go far beyond the economic and financial consequences. The country has relied on its technology companies to help achieve technological self-sufficiency to catch up with the US. But the crackdown has crippled its most competitive tech giants, pushing its goal of achieving technological supremacy even further out of reach.