Killing Several Birds With One Stone: China’s New Digital Policies

Author

Special Advisor and Resident Senior Fellow - U.S. and Asia

In retrospect, September 10, 2019 was the end of the untamed expansion of China’s digital age. That was the day when Jack Ma, China’s richest and world-famous entrepreneur, stepped down from his executive role at Alibaba. Only days later, the People’s Daily attacked the notion of a "Jack Ma era", initiating a rollback that is today called "the end of the barbaric stage" in China’s digital sector. This well-chosen designation echoes the criticism of the "Wild West era" from America’s own critics. Jack Ma delivered an uncharacteristic criticism of the country’s regulators and its banking system on October 24, 2020. He hasn’t been seen since, but only sighted in unattributable videos. Perhaps because Ma was not made to wear an orange jumpsuit, most Western investors did not get what someone versed in CCP politics would have caught on: Ma’s humiliation and disappearance was a message to the entire high-flying community of digital billionaires, and the start of a complete shake-down of the sector. It is even possible that his October speech strengthened the will of China’s leaders to regulate the sector - doubling down is a habit with Xi Jinping.

The shake-down has now proceeded almost simultaneously in several directions such as anti-monopoly action. Mobile transactions now account for 66% of all monetary transactions in China, with 23% left for cash and only 7% for the credit card business. In late 2019, Alipay and WeChat Pay performed 94% of these mobile transactions. Although the duopoly pattern is less pronounced in China’s e-commerce, Alibaba and JD.com together held 72.6% of e-market distribution in May 2019. At the same time these giants, and lesser competitors, limit the access of other companies to their data troves and the use of data from other companies. This creates "data silos" and locks users inside the dominant data ecosystems. Against this situation, there are now decisions being issued on an almost daily basis limiting the extent of digital companies or literally shutting them out of business. For example, algorithms enabling platforms to raise prices for repeat viewers are now banned, a measure that can only be welcomed by China’s online clients. Then, there are larger developments: China’s huge digital tutoring sector for education, a 100 billion dollar business, is being made to register as a non-profit organization. In each case, these measures destroy much of the stock value of the companies concerned: a third within one month in 2020 for Alibaba, Ma’s company; 50% within three weeks for Didi Chuxing, China’s global competitor to Uber; an average of 50% within two days for China’s largest digital education companies.

Digital companies are being prevented from being listed abroad, through the former VIE scheme - a parent umbrella company registered offshore with control, but not full legal ownership of the domestic companies involved. This shows the intention to prevent the international side of these companies, and a possible alliance of their Chinese managers and foreign co-owners, from possibly one day controlling the company despite the Chinese government.

One official comment goes as far as saying that "through the VIE structure, almost all Internet companies in China have their rights and interests in foreign countries first". In the case of Didi Chuxing, the state clamped down on the company 48 hours after global investors sunk money into its IPO. This wiped off 22 billion dollars from the investor’s money over the two following days. It is important to note that the potential control of China’s digital giants by foreign owners or creditors is likely underestimated. On July 2, 2021, the very date of Didi Chuxing’s New York IPO, a well-informed financial newspaper disclosed how Jack Ma and his successor had pledged over the years more than half of the shares they owned in Alibaba against cash loans overseas, from the likes of UBS and Goldman Sachs. The example demonstrates the gullibility of international investors, who did not anticipate moves by the Party-State that can shrink the value of their guarantees. But it also shows that China’s billionaire class would just as well go entirely offshore if it could. Hong Kong - what the Soviet Union would have called "the nearest abroad" and now fully under PRC control - is the offshore market to which Chinese IPOs are being not so gently steered. Again killing several birds with one stone, this may serve to bolster Hong Kong’s financial status that China’s political clampdown has put at risk.

China’s leaders are assuming that the fragmentation of the digital sphere is unavoidable.

In general, the new regulatory moves and sanctions against multiple companies have two goals which cannot be separated from each other. One is to re-open competition for new entrants in the platform economy: SMEs are often described as "hidden champions" that are prevented from growing by the quasi-monopolies established by the first entrants.

This partly explains the move against indiscriminate data hoarding and usage by China’s internet giants - since data is what gives them power over customers. But another avenue chosen by the authorities deprives them of the financial resources to continue a strategy now based on mergers & acquisitions of potential competitors - or more horizontal expansion to new sectors where their vast resources will kill more recent and smaller competitors. These two goals are quite rational and in fact converge with many Western critics of internet giants who snap up other companies with their huge available cash. Anti-monopoly action is legitimate, as is taxation of windfall profits gained from market dominance.

However, choosing these goals implies that the international expansion of China’s platform companies comes second to control and to the domestic market. It is coherent with the overall preference for self-sufficient and indigenous developments inside China’s "dual circulation" economy. And it also flags that China’s leaders are assuming that the fragmentation of the digital sphere is unavoidable. After shielding their social media and digital sphere with the so-called "Great Firewall" - in effect limiting contact nodes with the global internet - they are now cutting the financial links that made China’s platforms somewhat dependent on international finance. Whether this could be a preemptive move in view of possible US measures against these platforms is debatable: the Biden administration so far has rescinded previous bans against Chinese platforms such as TikTok. A more likely explanation is that the leadership believes China is enough of a digital market on its own that it can generate the resources for further expansion, including in countries that will not follow the United States.

That is of course a politically motivated move, and indeed many recent measures overlap with a reinforcement of "national security". The national security goals are often coupled with personal data protection, and this leads to a new legislation that is two-faced. That includes the Data Security Law passed in June 2021, and the draft Personal Data Protection Law. One face incorporates language borrowed from the European Union’s GDPR. China wants to ensure continued cross-border data flow in the interest of its huge economy. It has realized the dangers that may come from new international standards and adequacy requirements from these.

There are enough rules or loopholes in the name of national security to ensure that the Party-State retains an absolute monopoly over the collected data and its possible usage.

The other face heavily tilts towards an ill-defined national security and the interests of the state. In fact, national security now includes cyber and data security over a range of sectors, including the economy, "social stability" and welfare. The new Data Security Law places a systematic and unspecified control over cross-border transfer of "critical" and "important" data, with heavy penalties to boot. The state wants complete control over the digital companies that collect and handle data. In the words of one Chinese commentator, "no internet giant should be allowed to be a super database of Chinese people's personal information that holds more detailed information than the state, let alone be given free access to that data". The CCP has always exercised its control over individuals through the information files it accumulates. China’s giant internet platforms, each of them gathering personal data simultaneously over many sectors, could one day have far better and faster access and control over people’s lives. China’s experts on the digital economy and social media are sophisticated and they understand the fragmentation and personalization of data markets underway very well. For marketing purposes, more knowledge is never enough, as Shoshana Zuboff’s The Age of Surveillance Capitalism so well demonstrates.

The taming of China’s internet companies, the measures limiting the collection and use of personal data by these companies, and the practical reinforcement of the state’s intervention into data in the name of national security are proceeding simultaneously and at full speed. Hundreds of apps are taken down for illegal data collection: among the most interesting targets is BOSS (Zhipin), one of the new job seeking apps that collects CVs and professional data. After known instances of Chinese cyberhacking into the personnel files of US civil servants, it is fair to assume that China has reason to fear reciprocity. Regulations are also appearing daily - on automotive data, on facial recognition, and on cybersecurity requirements for companies with more than one million users planning an IPO abroad.

The whole range of new rules and control over the digital sector in China deserves our full attention. They combine developments that critics of the digital age are seeking in democracies - anti-monopoly, measures for new entrants, consumer protection, and even rights that emulate some aspects of the EU’s GDPR. Yet they also signal the submersion of China’s digital entrepreneur class under the state. And there are enough rules or loopholes in the name of national security to ensure that the Party-State retains an absolute monopoly over the collected data and its possible usage: whatever limitation is put in place does not apply to the state.

Perhaps, most strikingly, many of the new measures amplify the financial and data separation of China’s entire digital platform industry from the rest of the world. What was allowed when not forbidden is now forbidden unless allowed.

It is not clear what the response from China’s public will be. At present, it seems quite muted. It is entirely possible that the Chinese are fatalistic about state control over their lives, and will merely balance the conveniency of using China’s pervasive platforms - as we do with GAFAs - with the desirability of some restraints against the commercial use of their personal data.

Copyright: Greg Baker / AFP

04/06/2021

Security Risks and Crisis Management in East Asia

Tetsuo Kotani

France

Europe and International

Topics

Killing Several Birds With One Stone: China’s New Digital Policies