ET NOW Spotlight | Deepening Crackdown On Big Tech In China Could Signal Policy Shift

ET NOW Spotlight | Deepening Crackdown On Big Tech In China Could Signal Policy Shift

[Music] hello and thanks so much for tuning in this is spotlight on et now and i’m alex matthew every week we get you the biggest story that we think that you should absolutely know about this week we’re talking about china there’s been massive selling of equity in china as well as in hong kong and of us-listed chinese companies there’s billions of dollars of wealth that has gotten eroded in just a few days but that is the outcome the cause is what you should be focusing on and the cause is that the xi jinping led administration in china is making big moves in the regulatory space that could all be tied together and that could mean a massive shift in policy direction first take a look at the context the fortunes of several of china’s large tech companies have been tied to that of alibaba founded in 1999 by former english teacher jack ma the company was a forerunner and perhaps the biggest beneficiary of china’s desire to cultivate an ecosystem similar to the silicon valley of the united states alibaba has filed for its ipo welcome back alibaba is filing for its ipo alibaba went public 15 years after it was founded and opened the floodgates for funding in chinese tech companies in 2015 a year after alibaba’s 21.8 billion u.s ipo venture capital deals in chinese tech companies rose to 56.4 billion dollars up from just 5.2 billion dollars in 2013. companies like tencent didi baidu and methuan and several others benefited able to flourish in an economy that insulated them from global competition and allowed them to grow exponentially often inorganically in september last year jack ma was china’s richest person alibaba’s fintech unit the ant group was all set for a record-breaking initial public offering in shanghai and hong kong on the 21st of october mars and group got the final approval for its offering in shanghai three days later mark criticized china’s regulators for stifling innovation in a public speech that has now become infamous and his fortunes and that of several of his peers have changed quite dramatically since that day what followed was a ruthless crackdown ma went missing in november only to emerge three months later the ipo of his ant group was put on ice in december an anti-trust probe was initiated against alibaba and in april this year the company was fined 2.75 billion dollars for violating anti-monopoly rules and abusing dominant market position but a fine was far from the only consequence that alibaba and the ant group had to face it seemed that the freewheeling internet age capitalism and the wealth and influence that it brought had collided with the goals of the chinese communist party and the party was intent on displaying to the world that no one company or individual was larger than its goals the ant group found its business prospects curtailed its most lucrative business extending small online loans to shoppers in partnership with banks is now capped at 300 billion yuan that’s approximately half of what it was last year but the chinese government and its regulators didn’t stop with alibaba and ant group in april as many as 34 leading internet companies were warned by chinese regulators to rectify anti-competitive practices within a month then in the past few weeks the chinese government has taken a number of steps to curtail the freedoms that its consumer-facing tech companies have enjoyed first on the 2nd of july after dd chushing’s 4.4 billion ipo in the us chinese regulators ordered a security review and then demanded that the company’s apps be removed from mobile stores dd stock plummeted and as of earlier this week traded at about 35 below its issue price but that wasn’t all in a separate development china launched a crackdown on its online education companies which it said had been hijacked by capital it announced that a large number of these companies would not be allowed to make profits and would be restricted from raising capital overseas regulators also stepped in to say that food delivery companies like mitwan would have to ensure that workers made at least the local minimum income but why is the chinese communist party shaking things up so violently given the lack of transparency in the policy formulation of china’s administration there are a number of theories that are being floated the first and probably the most popular is that the government’s action against these companies has been long overdue after all regulators in the us and europe are also grappling with the immense power accumulated by the world’s tech giants the chinese administration being authoritarian is simply able to act more quickly another theory is that the chinese government is attempting to reorient the businesses that it is prioritizing in line with its industrial policy the country has made it clear that it wants to achieve independence in semiconductor and artificial intelligence technology to this end it wants to direct capital to the businesses that it feels are most crucial to the strategic growth of the chinese economy while the platform companies generate huge profits quite a few of them have sizeable foreign investor holdings and what’s more they don’t contribute to much in the way of technological advancement and the final theory being propounded is that the chinese president xi jinping is focused on more inclusive growth providing cheaper housing for citizens and reducing the cost of education for children the bottom line though is that a seismic shift could well be underway in china a shift that could have several more twists and turns before the final goal of xi jinping’s administration becomes clear in mumbai for et now this is alex matthew when it comes to china’s latest regulatory decisions it seems that if there are dots to connect that will make a larger picture we simply can’t see enough of the dots yet my guest today is an expert on the chinese economy and probably already sees the larger picture barry norton professor of chinese economy university of california thank you so much for taking the time i want to start by asking a question i think everybody is asking across the globe which is why why has the chinese government made so many moves in the regulatory space so quickly why is it taking a hammer to its tech companies it’s a fantastic question alex and the all that we can see is that china seems to have decided that it’s being forced partly by its own choice but partly by the response of the american administration to adopt a much tougher much more government-led and much more self-reliant approach to industrial policy so it really seems to to have decided that that the old model that it was following where in addition to of course all this enormous government support you also had a very uh loose attitude toward private firms because it was understood that they were the ones who had made tremendous technological breakthroughs and and that’s changing now uh the the government has clearly indicated that it wants direct control over several key areas and and it’s moving uh with you know facebook has this uh motto move fast and break things right suddenly the chinese government is moving fast and also definitely breaking things you know what china has been doing is taking a series of ish of issues which are certainly each one of which is a legitimate issue and is something that countries all over the world are struggling with data security excessive monopoly power by a few powerful firms and financial security which is certainly much more important in china than than in other countries because they have a lot of problems and it’s taking the opportunity to deal with these regulatory issues to tighten direct government control so it’s quite clear that in each case although the issue is an important issue it’s also kind of a pretext for a much tougher model that very much accords with xi jinping’s model of what of how the chinese economy and chinese society should work at what point do you think that this started because a lot of people are talking about the jack ma incident as the first step in the process of tightening of a regulatory policy that the chinese government took and it has accelerated over the last couple of weeks yeah i think that’s completely fair i mean as as outside analysts we can see a few crucial decisions that were made earlier but it was really the crackdown on jack ma where for the first time we saw xi jinping really personally saying i don’t need the support of private businesses i can bring a dispute with a a greatly respected and of course fabulously wealthy chinese capitalist and bring that right up to the top and show him that i am the boss and the communist party is the boss so i think that’s absolutely right in a sense that’s where it started and the other similarity between the ant financial case the one you’re referring to and the most recent case about the after-school private educational firms is in both cases the government seized on a legitimate issue and a legitimate issue where they probably have a certain amount of public popular support but then use that issue to hammer home a very very tough message and therefore lying behind all these individual issues because there have been several of them this is just the most recent uh has been the very clear message look we don’t care about the wealth of private businessmen we’re going to subordinate the workings of a market economy to our definition of what china’s political goals and public policies are to be and so that’s a tremendous change because in the past china tried to you know understanding very well the fabulous growth of china over the last 40 years came from the development of market forces china’s tried to you know traditionally be gentle and be hands off with respect to the most dynamic private firms and so what this shows and this is the reason the market is reacting so strongly this shows that that’s changed and the government doesn’t feel that it needs or is willing to rely on the private sector anymore my last question to you professor is what according to you is the end goal and what according to you is the end result of this is china as you said is becoming more self-reliant and therefore does it uh break away it’s been trying to integrate itself with the world economy does it now start being more protectionist in its approach well i think the simple answer to that question is yes i think they are quite shocked by the impact of some of the american sanctions in particular the so-called entity list where we know no longer uh allow american companies or other companies that use american technology to supply for example huawei huawei’s a you know a very capable firm in some respects china’s best firm you could argue and yet they are struggling they are really struggling to replace some of the supplies that have been cut off by the united states so i think for somebody like xi jinping that shock reinforces his desire that was there already to have much stronger government control much stronger party control and much greater self-reliance so in the most recent five-year plan it actually says self-reliance in science and technology is a key part of our strategy that’s a huge change and frankly from my standpoint makes no sense whatsoever i mean china has benefited enormously from openness so now it’s backpedaling and becoming more controlled i think not immediately but in the medium to long term this will certainly be bad for china from china’s economy absolutely professor thank you so much for taking the time and for putting things in uh perspective we now see a little bit more of that larger picture uh once again thank you so much for taking the time it’s my pleasure to talk with you thank you for having me now it’s clear that there’s a shift underway in china but what does that mean for the humongous tech companies that seem to be on the wrong side of this shift joining me now is rebecca fannin author of tech titans of china and founder of silicon dragon ventures thanks so much rebecca for taking the time i do want to ask you because you’ve studied these companies in so much detail and their rise there seems to be a very clear move away from the silicon valley model into something that has got a a lot more government control what does it mean for the likes of alibaba 10 cent and baidu well in china there has been a crackdown on chinese tech companies um like alibaba baidu tencent uh bite dance uh you name it meituan many of them dd as well many of them have fallen under new restrictions and the whole chinese tutoring market as well so i think um this is a new era for china tech and it could be detrimental to chinese innovation overall why do you say that it will be detrimental to chinese innovation does that mean that people will be more careful in the ventures that they launch that they will try to tour the government line yes i think the chinese tech companies will be more cautious about the expansion plans and the new innovations that they are planning uh though you are seeing the super apps for instance uh being uh hit pretty hard because of this uh whole idea of one company owning too much of a particular market and so you’re seeing that happen so i think those companies that have been able to expand by going into related services that they can fold under one umbrella i think we’ll see a slowdown in that kind of innovation overall um on the other hand i think that the restrictions on the larger chinese tech companies could actually benefit the smaller companies the emerging companies the startups who um have actually been overshadowed by these giants in mind attack so i think we could see a counteraction to that where this could actually benefit the chinese startups i i do want to ask you about that because the implications for something like this alibaba for example is got a huge amount of foreign holding several of these large tech companies have humongous foreign holding a lot of investments have poured in what are the implications for those investments do they shift out now and like you’re saying there could be a lot of startups that emerge onto the scene now that they’re not suppressed so to speak is there still an opportunity for investments there do you think that those investments will shift out of china altogether well we’ve already seen a slowdown in investment venture investment into china from the u.s a dramatic slowdown and i think that will continue um i think uh yeah we’re at the we’re at a real uh low point right now in u.s china relations and a lot of the money that went into china tech came from sand hill road originally so i think that we will see uh that continue to uh slow down uh it has um fallen it really has plunged uh just in the last two years and uh i don’t see a lot of new funds coming up that are targeting china tech today um i don’t see um a lot of investor enthusiasm for chinese tech ipos in fact it’s the reverse uh so this could benefit other markets uh such as we’re seeing with india and india’s prospects are what we want to focus on next thank you so much for laying the ground rebecca it’s been a pleasure speaking with you let’s talk about india’s startup ecosystem it’s been absolutely booming off late you’ve had a unicorn pop-up almost every other week and just a short while back you had zomato become the first indian unicorn to list on the exchanges and what a debut it was for zomato as well is this going to be a huge factor in the growth of the sector here in india karan mola the executive director at chirate ventures is of the opinion that indian companies stand to gain from the flight of capital from china listen it from what we’ve seen in talking to large long only investors the interest is very much there in the in the india story and that’s really what’s supporting it whether it’s fis or diis um and that’s something which at least in mainstream deck in india uh we really have not seen for a long time you know besides the the nokris and the making my trips and uh um you know the likes but i think that’s kind of where the linkage is happening whereas um with what’s happening in china and edtech you know was the most recent example uh i think companies like buy jews and unacademy and vedanta many others are very clear beneficiaries because you’re going to see a lot of capital which is industry specific right which is uh focus on let’s say edtech or healthcare and these are in the you know hundreds of millions of dollars maybe billions of dollars that will get concentrated in growth markets elsewhere and right now at least it doesn’t seem like there’s any other growth market uh other than india which is growing at that pace but is also that scale right so i think that’s where those factors really combine to uh give a fairly good advantage to indian companies and to the ecosystem in general and that view is somewhat mirrored by mark matthews the managing director of julius baer but it isn’t going to be as easy as a snap of the fingers i imagine that the first step for people who are selling china will be just to go into something safe like cash because they’ve just been scared by a quite unexpected and unprecedented event and they don’t quite know what to do they’re a bit shocked so they’ll move their money into cash but then i think they’ll look to redeploy it and i think they’ll look to redeploy it in other countries outside of the united states that have new economy stories and so i think india falls into that category the size of course is totally different um india’s new economy uh is is is tiny in terms of the offering compared to china but there’s a healthy ipo pipeline and so actually i think it’ll end up being a net benefit to countries like india rather than a net negative whereas in china the economy’s become quite developed already there’s so much more room for growth in china sorry in india in in that sort of real economy kind of sector like the kinds uh that you mentioned and there you have it that’s the current scenario and what could potentially happen but it isn’t as simple as that think of it like this there’s been huge disruption and the dust is swirling once the dust settles there could well be a new world order or at least a very different picture thanks so much for watching this is eating now [Music]
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ET NOW Spotlight | Deepening Crackdown On Big Tech In China Could Signal Policy Shift

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