[Global Focus] China Self-Targets Its Big Tech... Why

Alibaba, Didi Chuxing, Tencent, and Other Big Tech Taming
Inside the New Strategy to Foster New Growth by Resolving China's Monopoly Issues

[Asia Economy Beijing=Special Correspondent Jo Young-shin] On the night of July 2, the day after the grand celebration of the 100th anniversary of the founding of the Chinese Communist Party, the Cyberspace Administration of China (CAC), the country's top internet regulatory body, announced an investigation into Didi Chuxing. The announcement of the investigation into China's number one and the world's largest ride-sharing company sent shockwaves through the New York Stock Exchange. It was a major adverse event just three days after Didi's listing on the NYSE.

The tense atmosphere continued. On June 30, the Ministry of Industry and Information Technology of China summoned 25 leading platform companies representing China, including Alibaba, Tencent, ByteDance, Baidu, JD.com, Didi Chuxing, Meituan, Xiaomi, and Trip.com, and threatened to conduct a dedicated crackdown on the internet industry until January next year. The Chinese authorities even banned private education using internet platforms and made a shocking announcement to restrict the gaming industry.

Western media outlets, including those in the U.S., criticized these moves with terms like "insubordination," "disciplinary action," and "Communist Party risk." On the other hand, within China, there is analysis that regulatory authorities are using this opportunity to resolve the long-standing issue of information monopolies by giant platform companies and to foster new industries.

◆ Big Tech in China Thoroughly Scrutinized = The CAC is investigating how Didi Chuxing manages data related to national security. Even the Chinese Communist Party has stepped in. The Party Central Committee and the State Council General Office issued a crackdown opinion document on illegal securities activities based on the law. The document contains a formidable phrase: "Apply a zero-tolerance principle in case of violations."

The Chinese government's pressure on internet platform companies began last November with the suspension of the Ant Group's IPO, an Alibaba Group affiliate. The China Securities Regulatory Commission temporarily halted the listing just two days before the scheduled IPO, citing "significant issues before listing." At that time, Ant Group planned to raise $34 billion through simultaneous listings in Shanghai and Hong Kong, but the regulatory intervention caused the $34 billion to vanish like a mirage.

The Wall Street Journal (WSJ) pointed out the instability of the Chinese market, stating, "Since last November, Chinese authorities have taken more than 50 regulatory actions across finance, IT, real estate, education, and culture sectors citing national security and other reasons. It is unclear when these measures will end."

The sudden pressure from the Chinese government on domestic big tech companies has led Western countries, including the U.S., to criticize China as a risky and unreliable market. Some analyses suggest that from February to July, within six months, Chinese companies listed on the Chinese stock market lost a market capitalization of $760 billion (approximately 870 trillion KRW). After the announcement of the investigation into Didi Chuxing in early July, the net worth of 24 company founders, including Ma Huateng (Tencent) and Colin Huang (Pinduoduo), reportedly decreased by about $8.7 billion (approximately 99 trillion KRW).

When the decision to suspend Ant Group's IPO was made last November, Jack Ma's October 24 speech at the Shanghai Bund Financial Summit came under scrutiny. Western media, including the U.S., analyzed that Jack Ma, founder of Alibaba and largest shareholder of Ant Group, was punished for offending the Chinese top leadership by likening state-owned banks to pawnshops. At that time, Chinese state media did not respond at all to Western media criticisms such as "disciplinary action" and "insubordination."

◆ Disruptive Regulation or Structural Improvement? = However, considering that China is about to open its capital markets, including finance, as promised to the U.S., a completely different interpretation is possible. According to the "Non-bank Payment Institutions Regulations" released in January, suspicions arise that Chinese authorities used the market turmoil caused by the suspension of Ant Group's IPO to carry out separate work. According to these regulations, if a single corporation's market share in the online and mobile payment market exceeds 50%, or if two corporations' combined share exceeds 66.6%, they become subjects of antitrust investigations. If three corporations' combined share exceeds 75%, they are also subject to investigation. While Western media focused on Jack Ma's fate, China built a market with an "unassailable" presence.

Looking at the size of the fine imposed on Alibaba reveals the Chinese government's intentions. In April, the Chinese government fined Alibaba 18.228 billion yuan (approximately 3.112 trillion KRW), which is 4% of its 2019 revenue, for violating antitrust laws. Considering Alibaba's net profit of 140.3 billion yuan in 2019, this is not a large amount. China's antitrust law allows fines up to 10% of the previous year's revenue. As seen in Alibaba's case, this clearly shows that Chinese authorities are not pursuing self-destructive regulatory policies.

◆ The China Where Making Money Was Easy Is Gone... China Is Reshaping Its Landscape = There are three major commonalities among Didi Chuxing, Yunmanman, and Huochebang, which are currently under investigation by Chinese authorities. They are companies listed in the U.S., possess vast amounts of personal data on Chinese people's daily lives, and enjoy monopolistic positions in China. Chinese authorities emphasize the need for investigations into these companies by applying the national security framework, including concerns about data leakage overseas.

Chinese media such as Caixin report that the investigation into Didi Chuxing is extensive from the perspective of preventing national security risks, safeguarding national security, and prohibiting monopolies, placing emphasis on "security." Violations of national security are considered treason. Companies enjoying monopolistic status cannot defy government orders under this framework.

However, the general consensus is that the real emphasis is not on security but on "monopoly." According to Global Times, Didi Chuxing had 500 million users last year. Its market share is estimated to be around 95%.

A source in the Chinese IT industry analyzed, "Chinese monopoly companies with foreign capital inflows have become trapped in the security framework set by Chinese authorities. Once Didi Chuxing's monopoly issue is resolved, the monopoly issues of other data-based companies will naturally be resolved."

Some interpret that the Chinese government is attempting to change the structure and fundamental framework of the Chinese economy. At a Politburo meeting attended by President Xi Jinping on June 30, the need for innovation investment in manufacturing companies was emphasized, highlighting the discovery of small and medium-sized manufacturing enterprises with expertise (technological capabilities). The meeting also included content about establishing special measures to build networks that can lead basic scientific research and applied technology promotion for scientific and technological innovation.

Policy goals to support the development of new energy vehicles to achieve carbon neutrality were also specified. By clearly identifying small and medium-sized enterprises, science and technology, and new energy vehicles at the meeting deciding the economic policy direction for the second half of the year, it is expected that the Chinese government will provide full support in these areas. This is also interpreted as encouragement to invest in manufacturing-based companies rather than IT platform companies.

The Wall Street Journal, citing experts, analyzed that regulations on China's big tech companies could positively impact the Chinese economy in the future. It also reported that semiconductors, new energy vehicles, and artificial intelligence (AI) will be priorities for the Chinese government.

A representative from Robeco Asset Management's emerging markets team said, "Making money in China used to be too easy," adding, "That perception has definitely changed recently, and now is the time for that change." However, he added, "We realized that there is one more powerful entity (the government) in China."

This content was produced with the assistance of AI translation services.