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Trade and technology

How China's Tech Crackdown Impacts Foreign Investment

Published 11 April 2023

China's recent acquisition of "golden shares" in major tech companies has raised concerns among foreign investors about potential government interference in the market. These shares will allow the Chinese government to have a direct say in these businesses, including their content and certain business decisions. Although Beijing has signaled the end of its two-year crackdown on the internet industry, it is still focused on maintaining control over the platform economy. Alex Capri, Research Fellow at the Hinrich Foundation, shares his thoughts with the Association of Foreign Press Correspondents.

The return to the use of "golden shares" marks a shift in Beijing's approach to regulating the tech industry. While China needs the private sector to boost jobs and growth, the government is not willing to relinquish control over these firms. This could present a "nightmare" scenario for foreign investors, according to Alex Capri, a research fellow at the Hinrich Foundation. The US administration's executive orders that limit securities investments in Chinese entities suspected of aiding China's military could also add to foreign investors' difficulty in performing due diligence in China's opaque system. As a result, the acquisition of "golden shares" remains a key concern for foreign investors.

Capri's insights, shared with the Association of Foreign Press Correspondents (AFPC-USA), sheds light on the motivations behind Beijing's initiatives. This critical issue is likely to impact the investment decisions of many foreign investors in China, and Capri's analysis will help inform their decisions going forward.

How did the Chinese government embark on its crackdown on technology companies? What precipitated it?

China's crackdown on the tech sector, especially the platform economy, is part of a wider and deeper shift toward authoritarianism and "socialism with Chinese characteristics." The spectacular growth of companies such as Alibaba, Tencent, and Didi, ultimately, was detrimental to the Chinese Communist Party's (CCP) hold on power. A tipping point occurred with the blocking of Ant Financial's IPO in 2020, after Jack Ma, Alibaba's co-founder and CEO made disparaging comments about China's regulatory agencies.

The blocking of Ant Financial's IPO, which was worth just under $40 billion, reflected three important factors that would spark a much wider CCP crackdown on big tech.

First, the sheer size and wealth of these platform companies was causing systemic risk to China's economy and spooking China's central bank. The amount of micro-lending, micro-investment and market speculation taking place via hundreds of millions of investors in the platform economy was a legitimate stability risk and needed to be fixed.

Secondly, it became clear that the CCP would not tolerate any company or celebrity executives garnering too much public acclaim or admiration. On the flip-side, huge wealth disparities had become apparent, as tech founders had become fabulously wealthy, and this flew in the face of the party's "harmonious society" idea. While this concept goes all the way back to Deng Xiaopeng, Jiang Zemin and Hu Jintao, the predecessors to Xi Jinping, under Xi, harmonious society means, unequivocally, total and absolute control of the party across China's economy and society.

Thirdly, the crackdown is about the growing strategic value of data. Large tech platforms are a treasure trove of data and a source of techno-authoritarian power—for surveillance, censorship, narrative wars and just plain old tradecraft. Geopolitics has hugely influenced the need to protect and to hoard strategic data. We're seeing this play out with the Congressional TikTok hearings in Washington. Please see my quotes, throughout, in a CNN Business article dated March 23.

Why have Chinese regulators shifted their focus and largely ended their crackdown on tech giants?

To be clear, Chinese regulators have not ended their assault on big tech, especially when it comes to social media, gaming and the sharing-economy. What they have done is shifted away from the blunt instrument of penalties, delistings, revocations of business licenses and other punitive measures. The new approach is preemptive rather than reactive. The CCP is looking to influence and steer companies and sectors by placing the party apparatus deeper inside an organization.

How has the Chinese government used "golden shares" to further state control over tech companies and internet content?

Owning a portion of a company provides access to the inner workings of an organization and provides influential links to the C-Suite and the boardroom.

How do these "shares" complicate or disincentivize foreign investment?

Foreign investors, especially within the G7 countries (including the entire EU as a non-enumerated member) are facing an increasing number of outbound investment controls that will make due-diligence regarding Chinese investments a nightmare. The issue for large institutional investors like BlackRock—or even a corporate investor pursuing a local "in-China-for-China" strategy—is how can they prove that a local investment in China isn't somehow linked to the Chinese military (the PLA). Because of ubiquitous civil-military fusion initiatives linking the CCP to the PLA, "golden shares" could become a show-stopper for large swathes of American and Western investment—assuming the Biden administration and other governments choose to seriously enforce outbound investment restriction.

How does China intend to grow the private sector as its economy has reopened and how does the country expect to meet its growth targets?

China's most recent 5-year plan is highly techno-nationalist. It’s looking to develop self-sufficiency in key strategic sectors including semiconductors, AI and fintech, massive digital infrastructure and connectivity initiatives, electric vehicles and the like. Beijing is looking to promote more national champions, while gladly accepting technology transfer from foreign entities in areas where it still lacks requisite expertise. The Dual-Circulation approach remains key, as does the idea of prioritizing the growth of the domestic economy. Defense spending has increased, and it's focused on tech.

How could the end of China's "zero Covid" approach continue to impact the government's initiatives and affect its economic outlook for 2023?

Foreign investors are piling back into China, post “zero Covid". Beijing's goal of 5% growth this year, therefore, shouldn't be ruled out, as I posed in my recent Forbes column, "Is China-Decoupling A Myth?”

The answer to the above question involves a wicked paradox. For now, a generation of Western executives that have built their careers off-shoring to China, continue to be driven by a strong case of China FOMO (fear-of-missing-out), despite a clear paradigm shift toward re-globalization, and eventually, towards more localization— for lots of reasons including climate change and the next pandemic. For now, however, trade volumes, overall, have actually increased between the US and China over the past two years.

But this is all very misleading since strategic decoupling in key technologies such as semiconductors, AI, quantum computing, the Internet of Things, EVs, Biotech and other areas is indeed occurring. The problem is there's a massive "grey zone" of dual-use" technologies that will eventually fall prey to export controls, sanctions and blacklisting. This will continue to shrink the playing field in China for foreign corps. Thus, to answer the question, this will also affect Beijing's post-COVID growth plans, in the longer term.


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Alex Capri

Alex Capri is a research fellow at the Hinrich Foundation and a lecturer in the Business School at the National University of Singapore. He also teaches at the NUS Lee Kuan Yew School of Public Policy.

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