Why is China targeting its own internet companies?

For months, the Chinese government has been putting pressure on big tech companies. It penalized the recently public ride-hailing company Didi for how it collected user data. It blocked two major video game streaming platforms from combining, shut down online tutoring sites, hit e-commerce giant Alibaba with a nearly $3 billion antitrust fine, and this week, a state-run newspaper called online games “spiritual opium.”

But the crackdown hasn’t been targeting all tech companies equally.

Greg Ip is the chief economics commentator for The Wall Street Journal. He writes that the Chinese government views the tech industry in two distinct ways: the nice-to-haves and the need-to-haves. The following is an edited transcript of our conversation.

Greg Ip: Consumer internet companies are nice-to-have technology. They make life better, but they’re not necessary for China’s economic development. By contrast, the way President Xi Jinping sees it, there are certain technologies that you need to have. You have to have state-of-the-art semiconductors. You need to have the best technology for making electric cars and their batteries, if you want to remain, as China already is, the largest manufacturer in the world. Xi Jinping has redoubled his emphasis on becoming self-sufficient in all these things. So what you see going on is that even as they have unleashed this multifront regulatory assault on consumer internet companies, they continue to lavish all sorts of favors and support on these other vital manufacturing companies. And all of that reflects the differential priorities that Xi Jinping and the ruling Communist Party have for consumer internet technology versus [hardware] technology. 

Meghan McCarty Carino: And some of these companies are really big, successful software companies. I mean, Alibaba is the Chinese answer to Amazon. Why is the government bringing so much scrutiny to these consumer internet companies?

Ip: These companies aren’t just big and successful by Chinese standards. They’re big and successful by global standards. And I think what it comes back to is that, first of all, the Chinese authorities do not want to put these companies out of business. They do like to have them and they do believe that they’re part of China’s development. What they do not want them becoming is large enough and independent enough that they become, in some sense, a separate power center that actually threatens the Communist Party’s own management of the economy. And they also don’t want some of the negative collateral damage that those companies are seen to create. 

McCarty Carino: And you point out, we do see some sort of strain of this happening in politics in the U.S. How would you describe how it’s similar or different?

Ip: The fact that the Chinese think manufacturing is really important is not unique to the Chinese. There’s a lot of people in the United States who feel the same way. A lot of people in Germany who feel that way about German manufacturing. A lot of people in Japan who feel that about Japanese manufacturing. And so in many countries, including the United States, you’ll see a lot of political pressure to offer various subsidies and protections to core manufacturing industries. I think what separates China from all these other countries is that in a market-based democracy like the United States, the government can nudge, it can incentivize, it can suggest, but ultimately, how capital gets allocated to businesses that live and the businesses that die will in the end be determined by the private sector, by the private market. It’s not that way in China. It’s really the opposite, [it’s] that notwithstanding all the progress China has made towards being a market-based economy, it’s still state-run capitalism. The state decides what industries ought to be the priority, and the state takes a very active role in deciding what companies banks will lend to, what companies get equity and other types of investment from big investment funds. 

McCarty Carino: Because we certainly do see in the United States right now kind of [a] government impulse to step in and regulate Big Tech, social media. How’s that different? 

Ip: Well, I think, let me give you one example. So the Federal Trade Commission had brought a case against Facebook for monopolistic behavior. They had been working on that case for a long time, actually, during the [Donald] Trump administration. And a judge threw that case out. They said, you don’t have enough evidence here to show that Facebook is a monopoly. So the U.S. government basically has to go back to square one. It can take years and years and years for a successful prosecution of an American company by the government for any of these problems. That doesn’t happen in China. In essence, the Communist Party is prosecutor, judge and jury. Once they’ve decided that a company has stepped over the line, they have multiple ways of going after it. They can say you must adhere to new antitrust requirements with respect to competition, you must pay your workers more, etc., etc. China just does not have those checks and balances that establish a bright line between what the state can do and what the private market can do.

McCarty Carino: Do you think this sort of aversion to this sector, to disruptive companies, is going to be the new normal in China? 

Ip: I think that companies in China will be nervous about becoming too large, will be quicker to identify and address anything that could be perceived as socially harmful in their business models. At the margin, it might mean that China will be a slightly less innovative society, but I say at the margin because there is just so much ferment going on among smaller companies in China that I do not see this as being a lasting setback. 

McCarty Carino: And what happens to these companies: Tencent, Didi, Alibaba? 

Ip: Well, that’s the, in some sense, the $500 billion question, isn’t it? I think that they will continue to have a business model. Many of them will have to restructure. We have seen companies like Ant [Group], for example, have to change itself into a company that is more conducive to being regulated. Those sorts of things will happen. They will not be as profitable, I suppose. But keep an eye on what’s going on on the other side of this bright line that I described between nice-to-have and need-to-have. I think what really matters, not just to the Chinese but to the United States, is the progress that President Xi Jinping makes trying to build up some of these state-of-the-art companies. We all know that for example, the U.S. government is very worried that Huawei [Technologies] is now the world’s largest supplier of telecommunications equipment. It’s the leader in fifth-generation telecom networks. Well, keep your eye on SMIC or Tsinghua semiconductor. Those are the companies that China hopes will be up there with Huawei in five to 10 years’ time, challenging companies like Intel and Samsung and Taiwan Semiconductor for leadership in the chip sector. Keep your eye on Comac. That’s the company that they hope will one day challenge the duopoly of Airbus and Boeing. So, while all this action is taking place on the consumer internet side, don’t lose sight of what the Communist Party is trying to build up on the other side. And to a certain extent, that’s where a lot of the important contests between the Chinese model and the American model are going to be fought.

Related links: More insight from Meghan McCarty Carino

Of course we’ve got a link to Grep Ip’s full piece, where he breaks down just how much more valuable internet service companies can be compared to hardware manufacturers. For instance, Alibaba — before the recent sell-off — was worth 20 times as much as a heavily subsidized Chinese microchip manufacturer.

That editorial in a state-run newspaper calling video games spiritual opium spooked investors enough to drag the value of Tencent down more than 10%.

Reuters columnist Pete Sweeney writes that such crackdowns seem to have a unifying concern: a perceived breakdown of family values. Rising living standards have brought longer working hours, increased pressure on kids and escapes into virtual worlds. He writes that’s why the government is trying to give people back some time it hopes won’t be wasted playing video games.