Xi Jinping risks toppling China’s tech house of cards

China’s President Xi Jinping is on a mission to re-engineer the world’s second-largest economy. But he must be delicate in this endeavor or risk toppling the Chinese tech powerhouse that took four decades to build and sits at the foundation of the nation’s economy.

Data security, privacy protection, curbing monopolies and common prosperity are all worthy causes, but the line between disciplining the market and distorting it is fluid and thin. So far, Beijing’s efforts to tame the tech sector are not only self-contradictory but appear to be ignorant of history, while offering little in the way of transparency and predictability.

Against the backdrop of the partial U.S.-China tech decoupling, such confusion has the potential to cause real damage to the future of China’s technology sector.

The biggest misconception about how China achieved its tech prowess is that it is a result of government support and industrial policy, with terms like state capitalism and whole-nation model often thrown around when experts discuss China’s “impressive” tech power. They are the same terms being used to justify U.S. plans to spend hundreds of billions of dollars to boost its own innovation to “outspend” China.

History shows that government support — at the very least — did not always produce the desired outcome. China’s semiconductor industry is one example where decades of heavy government intervention failed to achieve official objectives.

Government subsidies, instead of producing national champions, often propped up commercially unviable zombie companies and led to fierce price wars that ultimately slowed the sector’s development. Overall, research has found that although industrial policy in China improves output while the policy is in effect, there is no evidence that output continues to improve once state support is taken away.

China’s most valuable tech companies, including Alibaba Group Holding, Tencent Holdings, ByteDance and Meituan, were all founded by individual entrepreneurs and financed by venture capital. It was actually government nonchalance — not active support — that made way for these companies’ robust growth.

It is these same companies — winners that prevailed in a fiercely competitive market — that form the core strength of China’s tech industry. They represent the most advanced segment of China’s economy, and their capabilities are on a par with — or are even superior to — their international peers.

Aside from the success of the copy-to-China model in the e-commerce sector, China’s tech advances are a byproduct of global supply chain migration. Global companies reallocating low-end and low-value supply chains to China created the world’s factory, on top of which emerged Chinese consumer tech companies like Xiaomi, Vivo, Midea, Lenovo and drone maker DJI.

Workers on the assembly line at a plant of Lenovo and Motorola phones in Wuhan, pictured on Aug. 20: China’s tech advances are a byproduct of global supply chain migration.

Still, Beijing’s policymakers seem to be ignoring the lessons of the recent past. Moves to buy stakes in Chinese tech companies, appoint their own directors, as well as advocating how private enterprise can help achieve the political goal of common prosperity, could end up damaging the very mechanisms that were the real drivers of China’s tech advances.

Painful memories of failed state-led semiconductor projects during the 1990s show the danger of government intervention when it comes to enterprise operations. When such programs are being developed, it is often impossible to know where to intervene and when to stop. When global supply chains and the accompanying know-how no longer migrate to China, the local tech sector will face higher hurdles to upgrade itself.

Moreover, the haphazardness of some regulatory actions, including Ant Group’s abrupt cancellation of initial public offering and Didi Global’s curiously timed data security investigation, could further tear the bonds linking the global digital economy. They risk cutting off or limiting an important financing channel for Chinese tech companies and hurting their ability to achieve economies of scale. All of which contradict China’s 2035 objective to be at “the forefront of innovative countries.”

While China’s tech sector has always operated under a degree of policy uncertainty, the compounding effect of recent government actions has created real concerns regarding how Beijing will manage the sector going forward. Already, it is hurting Chinese tech companies’ global competitiveness. America’s largest tech companies are now worth several times more than China’s tech giants. Just two years ago, the valuation gap seemed to be swiftly closing.

At the most fundamental level, Xi Jinping shares the same utilitarian view on science and technology as previous Chinese rulers across millenniums: Technology is a governing tool that can be used to ensure economic development, social stability and the ruling party’s grip on power.

“The belief in the value of scientific truth is not derived from nature but is a product of definite cultures,” said German sociologist Max Weber. Lacking such a culture may be the reason why long-term and sustained tech progress in China cannot be taken as a given.

Combined with risky and haphazard government intervention, it could too easily weaken a powerhouse already built on less-than-solid foundations.

Author: Nina Xiang, Nikkei Asia

Nina Xiang is the founder of China Money Network, a media platform tracking China’s venture and tech sectors. She is the author of “Red AI: Victories and Warnings from China’s Rise in Artificial Intelligence” and “US-China Tech War: What Chinese Tech History Reveals About Future Tech Rivalry.”

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