Why China Keeps on Targeting Its Technology Giants
China’s hands-off approach to the technology sector minted billionaires and giant companies at a breathtaking pace. Now President Xi Jinping’s government is reining in the country’s most powerful corporations, including Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Didi Global Inc., along with their ultra-rich founders. The scrutiny is one of the largest concerted actions against private enterprise in decades, wiping out $1.5 trillion in market value last year — and new blows keep coming.
1. Who is China targeting?
Maintaining social stability is a signature goal of Xi and the ruling Chinese Communist Party, so any company or person it perceives as threatening can find themselves in the cross-hairs. Such a sweeping definition could include just about any large business. Alibaba has been targeted by antitrust authorities for alleged monopolistic conduct in e-commerce, while Meituan is being scrutinized for food delivery. Didi’s position as the biggest ride-hailer in China, and the massive amounts of data that generates, caught the attention of the Cyberspace Administration, China’s internet watchdog, while the Ministry of Education went after tutoring firms that profit from the intense competition to get into the country’s top universities. The speed of change has been dizzying: Rules issued in 2021 to curb monopolistic practices were drafted and finalized in just three months.
2. How is China cracking down?
With fines, regulatory orders and forced restructurings. For example:
- Chinese authorities told the nation’s biggest state-owned firms and banks in February to check their financial exposure and other links to Ant Group Co., renewing scrutiny of billionaire Jack Ma’s financial empire. Ant, which was about to go public before being stopped by regulators in 2020, agreed last year to turn itself into a financial holding company, making it subject to capital requirements similar to those for banks.
- Alibaba, which owns a third of Ant, was hit in 2021 with a record $2.8 billion antitrust fine and was told to change its business practices. It and some two dozen other tech firms were also ordered to carry out internal inspections and address issues such as data security.
- The top state economic planner on Feb. 18 demanded that Meituan and its peers lower the fees they charge restaurants in pandemic-hit regions. (The antitrust watchdog had already ordered them to ensure their delivery workers earn at least the minimum wage.)
- Didi’s June 2021 listing in New York is being unwound under pressure from Chinese authorities; it also faces the prospect of massive penalties.
- Tencent, operator of the WeChat super-app, was ordered to give up exclusive music-streaming rights.
- The tutoring sector, where companies such as TAL Education Group garnered multibillion-dollar valuations, saw its future redefined in one sweeping order that banned them from making profits via some of their most lucrative businesses or raising capital, and limited what they can teach.
3. How much is at stake?
A rally that pushed Hong Kong’s Hang Seng Tech Index, which tracks the mainland’s biggest tech companies, to its highest level since its July 2020 inception started to unravel in February 2021, wiping out $1.5 trillion in value that year. In late February of 2022, three of China’s most valuable businesses — Alibaba, Tencent and Meituan — shed more than $100 billion in the span of three turbulent days. And that was just after investors including Charlie Munger said they spotted bargains among Chinese tech stocks and Macquarie Group issued a report headlined “peak crackdown.” Bloomberg Intelligence has estimated that measures proposed to curb market concentration in China’s online payments market could slash Ant’s valuation by roughly two-thirds to just over $100 billion and endanger the growth of Tencent’s fintech division, estimated to be worth $120 billion before the crackdown. TAL’s shares dropped 71% on the day that changes to after-school tutoring were reported.
Ant, Tencent dominate mobile payments market in China
4. What explains the crackdown?
Analysts and investors say regulators are simply reasserting their oversight power, or that those in power have grown frustrated with the swagger of tech billionaires and want to teach them a lesson. Alibaba, Tencent and Ant had a combined market capitalization of nearly $2 trillion in 2020 — easily surpassing state-owned behemoths like Industrial & Commercial Bank of China Ltd. as the country’s most valuable companies. And it’s clear that the Communist Party had grown increasingly concerned about the growing clout of internet firms, which are mostly private entities over which it has little direct control. Much of that concern centers around their grip on the hoards of data that they vacuum up from hundreds of millions of users, considered key to driving the country’s economic and geopolitical goals as well as shoring up the Party’s power base. The Cyberspace Administration cited data and national security as its prime reason for investigating Didi and now mandates a data security review for all companies seeking overseas listings. More broadly, Xi’s administration blames widening social disparities in part on the online boom, particularly in the pandemic era, and is moving to address discontent among the populace that could threaten its authority.
5. Is there more coming?
It’s hard to say. Xi’s administration is still concerned about eradicating systemic risks — such as unsupervised growth of consumer debt — in part to ensure the Communist Party’s dominion. Beijing may also seek greater oversight over mergers and acquisitions, including the hundreds of startups backed by the biggest technology firms. Regulators have begun issuing token fines for deals closed years ago, spurring fears of a bigger probe into M&A. It’s also signaling a tightening of rules around data collection: The government is said to have proposed a state-backed venture with the tech giants that would oversee how information is collected from hundreds of millions of consumers.
6. Is this really so surprising?
In some respects, it is. The government has played an important role in developing the tech sector in a way that facilitated the development of behemoths. China effectively created its own version of the web, one blocked off from the rest of the world by what’s known as the Great Firewall. In the absence of Facebook parent Meta Platforms Inc. or Twitter Inc., WeChat and Sina Corp.’s Weibo flourished as social networks. On the other hand, China has a tradition of cracking down in fits and starts, or making examples out of high-profile companies. For instance, Tencent became a target of a campaign to combat gaming addiction among children in 2018.
7. Will any tech companies get broken up?
After the $2.8 billion fine, Alibaba executives said they were unaware of any other antitrust investigations. Yet the government remains concerned about Alibaba’s influence over public opinion given its diverse media assets and a significant stake in Weibo. However, authorities in Beijing are expected to tread cautiously, looking to rein in the growing clout of the tech giants without undermining some of the country’s biggest corporate success stories. Education firms are overhauling what they teach, and how they charge for it, to comply with the new rules. Some have cut back on advertising to eliminate a key area of criticism about how they market services to students and parents. Analysts anticipate that at least some of the major education technology players will have to restructure their business, either spinning off divisions in violation of the new regime or even delisting.
9. How is big technology responding?
All of the companies are pledging to atone for their transgressions, a common response when China applies scrutiny. Some high profile deals have been scrapped, including the IPO of e-commerce startup Xiaohongshu and a merger of video game streamers that was valued at $6 billion when it was proposed. Some tycoons are donating billions from their vast fortunes to charities amid the rising concern about inequality. Xiaomi Corp. co-founder Lei Jun handed over $2.2 billion of shares in the smartphone maker to two foundations and Meituan’s Wang Xing gave away a $2.3 billion stake. ByteDance’s Zhang Yiming gave about $77 million to an education fund in his hometown while Tencent’s Ma has pledged $7.7 billion of the company’s money toward curing societal ills.