Beijing’s intervention in Chinese markets, including tech, could strangle ‘economic dynamism’, author says

China’s regulators should strike a delicate balance to empower the nation’s tech firms to secure a competitive edge in the high-stakes tech race with the US while avoiding unexpected repercussions from overly stringent interventions, according to a scholar.

Angela Zhang, an associate professor in law at the University of Hong Kong, also said the US’ tech-containment strategy could ultimately backfire, as it is just a matter of time before China catches up and gains leverage in the realms of semiconductors and artificial intelligence.

In her new book, High Wire: How China Regulates Big Tech And Governs Its Economy, Zhang said some critics contend that Beijing’s legal campaign against tech firms casts “a bleak outlook not only for China’s tech sector, but for its economy as a whole, warning that the crackdown is driving China into the unknown and will strangle its greatest source of economic dynamism”.

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The shift of control also provides opportunities for more state participation in the industry that weakens the influence of private tech giants, Zhang explained in an interview with the Post.

China started the regulatory crackdown on tech firms in late 2020 and warned of “barbaric growth” and “disorderly expansion of capital” in the internet sector. The regulatory storm lasted for more than two years, wiping out trillions in value from tech giants and killing the world’s biggest IPO.

It seems like a good intention to rechannel resources ... But it creates a lot of unintended consequences
Angela Zhang, law professor/author

But in the face of a national economic slowdown and heightened tech war with the US, central leadership said in late 2022 that the government would support internet companies to reach their full capacity to support growth, create jobs and take part in global competition, signalling an end to the crackdown.

“Overall, I’m quite sceptical about government intervention,” Zhang said. “It seems like a good intention to rechannel resources driven by the external environment and geopolitical tensions. But it creates a lot of unintended consequences, including a slowdown of the Chinese economy and a lot of employment problems.”

Technological advancements still rely largely on the private sector, which is the “most dynamic and innovative” driver, Zhang added.

Whether state investments in the industry will be successful and efficient remains a “question mark”, and the dwindling stake of private companies could lead to more unemployment from lay-offs.

There is also an apparent division of labour between state funds and private corporations, as government-related resources focus on hard tech development that goes in line with national policy, while giants such as Alibaba and Tencent dominate the consumer tech segment, according to Zhang. Alibaba owns the South China Morning Post.

Her book highlights that China’s transactional volume in the sharing economy reached 3.7 trillion yuan (US$511 billion) in 2021 – almost double the 2015 total.

In 2020, more than 800 million people participated in China’s sharing economy, 84 million of whom were service providers, while 6 million were employees of platform companies, according to information outlined in her book, which was published last month.

Regarding the hybrid model that Beijing has adopted for the industry’s development of hard and soft tech, Zhang said that she is “not entirely sure about the economic consequences”, with “heavy-handed” state intervention and generous subsidies.

With funds being channelled into the sector, “you will have the overcapacity problem, which is exactly what we are seeing in the EV and solar-panel industries”, she added.

“It could create competition within the domestic industry ... that could [cause] bankruptcy of the firms,” she said. “And the export of these products will be subject to a lot of restrictions from different countries with anti-dumping duties.”

Basically, policies of the Chinese government have become “a global issue”, Zhang continued, explaining that how Beijing decides to regulate and govern the big tech industry is not just a domestic issue any more.

According to the latest figures from the Ministry of Industry and Information Technology, the tech sector generated a total manufacturing value of 12.33 trillion yuan between January and September 2023, and that marked an increase of 7.1 per cent from the same period of 2022.

The official figures also showed that the industry segment accounted for 14.3 per cent of the country’s total GDP and 13.6 per cent of China’s total tax income in 2022.

Amid the US’ “small yard, high fence” push to ban China’s access to hi-tech products, Beijing has paced up self-reliance efforts to break the containment while spearheading the development of cutting-edge tech and frontier industries.

Zhang said it is just “a matter of time” for China to catch up with global leaders in the development of artificial intelligence and semiconductors.

Although different types of technology have different routes of development, “China’s AI supply chain is simpler, and the Chinese government does have a strong advantage in mobilising resources with talents”, she explained.

“It’s really hard to stop a country like China from achieving ... technological capacity.”

After the wave of crackdowns in the tech industry, Zhang said that the Chinese government will not commit to stricter AI regulations going forward because now the “government is deeply embedded in the ecosystem”.

“You’re asking the government to regulate itself, because [it] owns these companies,” she noted. “So, the government is not going to take a very harsh stance in regulating [the AI industry]. Rather it will take a consensual approach [with companies].”

The US Senate passed a sell-or-be-banned bill in late April to force ByteDance, the Chinese owner of popular social media app TikTok, to divest its US operations within a year or potentially face a nationwide ban.

Aside from TikTok, online retail platform Tmall and fast-fashion seller Shein are gaining global attention, Zhang said, while Chinese tech firms do not have a very large presence like those US tech companies overseas.

“But the Chinese identity is holding them back, and I see that this trend will further continue and will become worse,” she added, noting that the operating environment for Chinese tech companies will be “hostile”.

Tougher internal operations will push firms to go out and tap the global market, Zhang explained, but the Chinese tech-business sector will face pressures from both the domestic and overseas markets.

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