WeChat ban part of a broader US-China tech war

Article originally published in Channel NewsAsia.

Tencent, China’s Shenzhen-based digital platform giant, recently surpassed Facebook as the most valuable social media company in the world – at least, temporarily.

At the end of July, 2020, Tencent reached US$665 billion in market capitalization to Facebook’s US$656 billion.

To many, this was validation of how China’s massive digital landscape, combined with innovative business models by its BAT (Baidu, Alibaba and Tencent) companies, had produced another world-beating digital platform. 

In the run-up to its valuation zenith, Tencent enjoyed a 70% surge in value over a four-month period, in large part, due to China’s COVID-19 lock-down situation, which resulted in skyrocketing revenues from Tencent’s gaming apps, social-commerce and other online apps.

But that all suddenly changed less than two weeks later.

These actions have sparked a race to the bottom – at least, from a free markets perspective – for the world’s free-trading nations. Governments are increasingly intervening in commerce by blocking technology transfers and transactions, as Washington’s recent choking off of vital US semiconductor technology to Huawei demonstrates.

The Dutch government continues to withhold critical export licenses for sales to China by ASML, a Dutch semiconductor manufacturing equipment company. Similarly, Germany has blocked the sale of advanced technology to China and recently announced the establishment of a new state-owned investment fund designed to buy stakes in local companies targeted by non-European Union states for strategic tech acquisitions.

The US has rolled out its own version of “chequebook diplomacy,” designed to counter Beijing’s cheap credit programs that promote the sales of Chinese telecommunications equipment from companies like ZTE and Huawei, along the Digital BRI and beyond.

One of Washington’s recent initiatives has been to allocate US$60 billion to the US International Finance and Development Corporation in 2019, to steer foreign telcos and governments away from Chinese companies.

Australia and EU have rolled out similar countermeasures. The EU signed a deal with Japan to build infrastructure between Europe and Asia in 2019, as a counter to China’s massive BRI investments. Australia, meanwhile, announced a US$1.5 billion Pacific Fund to counter China’s growing infrastructure footprint throughout the Pacific islands in 2018.

The Trump administration justified the recent executive order against WeChat on the basis that WeChat’s collection of data on the activities of overseas Chinese citizens and its propagation of disinformation that advances Beijing’s political narratives are inimical to these sacred values.

Additionally, one of Mr Trump’s recent executive orders cites WeChat as complicit in Beijing’s censorship of alleged human rights violations against the Uighur and other Muslim populations in China’s far Western province of Xinjiang.

Tencent has also come under scrutiny in Washington for the role it allegedly plays in building surveillance technology and related infrastructure for the Chinese Communist Party. Beijing’s imposition of its controversial security law in Hong Kong, for example, has increased the likelihood that Tencent could be held complicit in what Washington describes as Beijing’s denial of basic rights of the people of Hong Kong.

Data as a strategic commodity

The reality also is that data has increasingly become a strategic commodity in the techno-nationalist landscape and increasingly linked to national security.

In addition to telecommunication equipment manufacturers such as Huawei, Chinese digital platform companies have come under suspicion regarding data privacy breaches linked to browsing, search and location functions within apps. 

Making this a virtual no-win situation for Chinese companies are two Chinese laws: The National Intelligence Law and the Cybersecurity Law, both passed in 2017. Both require Chinese entities to turn over data, encryption codes and any other requested information to the Communist Party when asked.

The implications for Tencent are potentially far-reaching. Should Washington choose to put Tencent on a restricted entity list, it could suffer a fate similar to Huawei. 

Like Huawei, Tencent is dependent on US semiconductor technology for microchips – in this case, for its servers and hard infrastructure. And, like Huawei, loss of access to microchips could cripple the company. In both cases, third parties like Taiwan’s TSMC, are restricted from selling microchips made with US manufacturing equipment and intellectual property.

Even if no restrictions on semiconductors are enacted, concerns about data privacy and security could result in a ban on Tencent’s cloud computing services. A similar ban could hit Alibaba.

The ring-fencing of the internet

The Trump administration announced two weeks ago it is looking to implement a Clean Networks program, which would ban any Chinese technology from US telecoms carriers, apps, digital cloud and 5G or 6G networks – effectively ring-fencing the American internet. 

A fragmented future

Unfortunately, as has been the case with previous US technology bans, sanctioning Tencent may see many American companies become collateral damage. 

Blacklisting Huawei has cost the US semiconductor industry billions of dollars in lost revenue. Blacklisting Tencent would affect Apple, which hosts WeChat and its sister app, Weixin, on its iPhones and put in jeopardy its US$44 billion market share in China to local competitors such as Xiaomi, Oppo, Vivo and Huawei.

Tencent has a stake in a number of American companies such as Warner Music, Reddit, Lyft, Snap and a host of American gaming apps. All may have to decouple.

Which begs the question: Can the US and China work out some kind of modus vivendi that would permit trade and collaboration, in general, while strategically decoupling in other areas? 

Can there be limits placed, with the recognition that trade and collaboration benefits both sides? Or is the world heading for a broad, accelerating techno-nationalist decoupling?

What happens to Tencent in the coming weeks and months could provide the answer.

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