Why is China Cracking Down on its Own Technology Companies?

In 2020, Chinese regulators levied strict antitrust penalties against Chinese e-commerce giant Alibaba. The same year, they proceeded to open an investigation into Didi, a ride-hailing application, 2 days after its initial public offering on the New York Stock Exchange and eventually pulled the app off stores on allegations of illegally collecting and using personal data of its users. This caused investors to dump the stock. Didi’s valuation, as a result, has decreased by half. On July 23rd, 2021, China cracked down on SupChina. These movements have been part of a broader trend in China of regulating technology companies, especially those in gaming and online retail.

These moves have caused significant harm to Chinese companies and the Chinese economy. The MSCI China Index has fallen and gaming company Tencent has lost $170 billion in market value. This begs the question ‘Why is China cracking down on its own technology companies?’

One possible reason is regulators in China want to limit overseas listings out of the fear that American data disclosure laws could hamper its own national security. China’s state administration stated that it regulated Alibaba because Alibaba punished merchants who sold goods on rival platforms.

Another possible reason for this phenomenon is that China wants manufacturing and industrials to drive its economy rather than its technology companies. Technology companies tend to create many social problems that aren’t reflected in their market value. Compromised user data, spread of misinformation, monopolization, and rising wealth inequality are all problems that have magnified with the advent of the information and technology-based economic structure. Moreover, technology companies greatly diminish government control of the economy, something which is in direct opposition to the Chinese Communist Party’s model of strict government control.

To add to this, manufacturing yields numerous societal benefits that aren’t reflected in their finances. It creates jobs, increases productivity, increases military strength, gives workers essential skills, and is advantageous from a geopolitical perspective. It also enhances the human capital of a nation.

It remains to be seen which economic model- manufacturing-focused or technology-focused- will be more effective for future economies.

Sources:

https://www.wsj.com/articles/jack-mas... https://www.bloomberg.com/news/articl... https://www.cnbc.com/video/2021/08/03...