China expects total surrender from businesses

By Li Yuan,

When Pony Ma, head of the Chinese internet powerhouse Tencent, attended a group meeting with Premier Li Keqiang in 2014, he complained that many local governments had banned ride-sharing apps installed on smartphones.

Li immediately told a few ministers to investigate the matter and report back to him. He then turned to Ma and said, “Your example vividly demonstrates the need to improve the relationship between the government and the market.”

By then, Tencent had invested $45 million in a ride-hailing startup called Didi Chuxing, which later became a model in the government’s push to digitise and modernise traditional industries. When President Xi Jinping met with global tech leaders in Seattle in 2015, Didi’s founder, Cheng Wei, then 32 years old, joined Amazon's Jeff Bezos, Apple’s Tim Cook and Ma at the gathering.

But the relationship between Beijing and the tech sector has splintered badly in the past year. Didi is now a target of the government’s regulatory wrath. Days after the company’s initial public offering in New York last month, Chinese regulators pulled its apps from app stores on the grounds of protecting national data security and public interests.

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At the heart of the Didi fiasco, and to a large extent China’s increasingly aggressive antitrust campaign, is the question of what Beijing expects from private enterprises. The answer is a lot more complicated than in the United States or Europe.

China’s Big Tech wields as much power as the American tech giants in the national economy. Like their American counterparts, the Chinese companies have appeared to engage in anti-competitive practices that hurt consumers, merchants and smaller businesses. That deserves scrutiny and regulation to prevent any abuse of power.

But it’s important to keep in mind that the Chinese tech companies operate in a country ruled by an increasingly autocratic government that demands the private sector surrender with absolute loyalty. So unlike the antitrust campaigns that European and American officials are pursuing in their regions, China is using the guise of antitrust to cement the Communist Party’s monopoly of power, with private enterprises likely to lose what’s left of their independence and become a mere appendage of the state.

The developments at Didi amount to “a shock-therapy type of enforcement,” said Benjamin Qiu, a partner at the law firm Loeb & Loeb in Hong Kong. “We could see more control by the state, with in-effect data nationalisation as the end result.”

Americans and Europeans who are, understandably, frustrated with their regulators’ lack of progress in reining in Big Tech shouldn’t be too impressed by how swiftly Beijing is bringing its tech titans to heel. Like many things in China, efficiency comes at the cost of law and due process.

The Communist Party made it clear last year that it needs “politically sensible people” in the private sector who will “firmly listen to the party and follow the party.” They should contribute more to the longevity of the Communist Party and help make China great again, the party said.

The message, people in the tech industry said, is that businesses need to prove that they’re useful and helpful in advancing the government’s goals while avoiding causing trouble.

Didi didn’t heed the message, these people said. They were surprised that Didi defied some regulators’ objections and rushed its IPO through in the current regulatory environment.

For some government officials, Didi’s US listing was “yang feng yin wei” ("to comply publicly but defy privately"). The phrase is revealing because it is often used to describe a subordinate’s betrayal of a superior.

“At a moment like this, internet companies that are ‘politically incorrect’ will only meet a dead end,” Li Chengdong, an internet consultant and investor, wrote of Didi in a social media post.

For the companies, it’s helpful to know Beijing’s priorities. Domestically, that is to reduce inequality and promote what the party calls “collective prosperity.” Internationally, it is managing the geopolitical tension with the United States.

As China’s economic growth slows and opportunities dwindle, the country’s rising inequality is becoming a time bomb in the eyes of the party, which is paranoid about social unrest and any scepticism about its legitimacy. And the tech companies are increasingly being blamed for the wealth gap, with their founders criticised as villains who take advantage of consumers and force their employees to work long hours.

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Beijing was not happy last year when some big internet companies invested heavily in apps that sell vegetables to local residents. That’s because the apps could replace the mom-and-pop vegetable stands where many lower-income people make a living.

Beijing also went after Ant Group, a financial technology giant controlled by billionaire Jack Ma, partly because it believed that Ant made it too easy for young people to take out personal loans, building up social discontent.

The government cracked down on the online education industry, too, which officials believe profits from playing on the anxieties of parents. That, in turn, has increased the cost of raising children, thus jeopardising Beijing’s new policy of encouraging couples to have more than one child.

In April, one government official spent 12 hours as a meal-delivery worker, only to make about $6. That set off widespread discussions about how badly online platforms treated their workers.

Tencent, Didi and e-commerce giant Alibaba — known as “platform” companies — are now second-class citizens in the eyes of the government, a Beijing-based venture capitalist told me. (First-class companies develop “real” technologies such as semiconductors and artificial intelligence that can help China become more self-reliant technologically, he said.) For the government, the platforms have too many users, too much data, too much capital and too much power, he said.

In the past six months, the tech giants and some star entrepreneurs have pledged their loyalty and made gestures with money and resignations.

Tencent announced in April that it would spend $7.8 billion on green energy, education and village revitalisation.

In April, five days after Xi visited his alma mater, Tsinghua University, in Beijing, Wang Xing, founder of the meal-delivery company Meituan and also a Tsinghua graduate, set up a foundation at the university. In June, Wang donated shares that were worth more than $2 billion to his own foundation.

After the deaths of two of his employees and much online criticism, Colin Huang, founder of the e-commerce platform Pinduoduo, said in March that he would step down to make way for the next generation. He is 41 and was just named China’s second-richest person.

In May, Zhang Yiming, 38, founder of ByteDance, the parent company of TikTok, announced that he would also resign as CEO. A month later, he unveiled a $77 million donation to set up an education foundation in his hometown. The Wall Street Journal also reported that he shelved ByteDance’s IPO plans in March after meeting with regulators.

A business unit of Tencent said last month that its employees were now required to leave the office by 6 pm Wednesdays and 9 pm other weekdays. ByteDance announced this month that it would abolish the requirement of working Saturdays every other week, a common practice at many Chinese companies.

After the Didi crackdown, similar announcements kept coming. JD.com, an e-commerce platform, said Tuesday that it would increase its employees’ average annual salary to 16 months of pay from 14 months. On Friday, Lei Jun, founder of the smartphone maker Xiaomi, donated shares worth more than $2 billion to two foundations.

What do all of these actions have to do with antitrust and curbing the power of Big Tech? Not much, directly. But the companies and entrepreneurs are effectively telling the government that they know who the master is and that they need to do things that at least look as if they will reduce social inequality and discontent.

The other “sin” Didi committed is that it went public in New York at a time when the geopolitical tension between China and the United States is intensifying and the two countries are fighting for tech supremacy.

There’s a growing concern in China that many tech companies, backed by Western venture capital firms and listed in New York, could become economic pawns if bilateral relations deteriorate. China has announced that it will require domestic tech companies to submit to a cybersecurity checkup before they list their shares abroad, which will probably thwart most IPO plans.

“China needs to prepare for the worst-case scenario,” a Weibo user, Xiong Weizhou, commented on his verified Weibo account. “It could be a war with Taiwan or sanctions by the US and Europe. Important Chinese companies shouldn’t become the nation’s soft underbelly.”