Tech giants just the first to get aligned in China

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SvD Näringsliv

This column was first published in SvD Näringsliv, in Swedish, on August 20th, 2021.

Contribute to the state’s goals – or suffer the consequences. This is the message that the Chinese state has recently sent to the country’s tech companies. Fears are now being raised that the same harsh stance will spread to more sectors.

50 billion yuan – about 7,75 billion dollars – will be invested to revive the countryside and raise wages for Chinese low-wage workers. The major investment, announced this week, was an addition to an earlier reform of another 50 billion yuan aimed at supporting “sustainable social values”.

As a political reform, this may not sound too controversial. But the money is not coming from the Chinese state – it is a donation from the Chinese internet giant Tencent.

The company called its move a “proactive response to the national venture” and stressed that the company “constantly thinks about how we can use our technology and our digital skills to help society develop, and give back to society.”

However, there are many indications that the donation was anything but proactive. Rather, a reactive response to the ever-increasing pressure that the Chinese state put, and continues to put, on its domestic tech companies.

The latest tightening, which came on Friday, is about new legislation regarding data management and which will be introduced from November. Chinese tech stocks fell sharply on the news, including Alibaba, which has also seen its share price pushed down sharply these past months. In total, Nasdaq’s Golden Dragon index, which lists the largest Chinese stocks traded on the US stock markets, has plummeted nearly 53 percent since its peak in February, according to the Financial Times.

The uncertainty in the market, on the other hand, is not so much about an individual new law, but more about how the Chinese state acts. Admittedly, it may almost be a matter of symbolic politics, since in practice the state could still have gotten its will through. But by using legislation, they now get better control tools for curbing the unwanted behavior of the tech companies.

We have seen several examples of the state having the power and mandate to act. When the financial group Ant Group was to be listed on the stock exchange last year, China quickly changed the law on capital requirements just 48 hours before the introduction. The listing had to be canceled with immediate notice. The Chinese transport company Didi has lost almost half of its market capitalization after the Chinese state set new, higher requirements regarding data security.

The Chinese state’s ambitions to get tech companies to contribute to their long-term, strategic goals for the country are about both power and economy. They want companies such as Tencent, Alibaba and Bytedance to act as good citizens by contributing to the goals that have been set for the country as a whole. These goals include dealing with a rapidly aging population, and maintaining China’s strong position in the manufacturing industry. But the ambition to contribute applies to more than just the tech companies. Xi Jinping himself said in a meeting that he wanted to “encourage high-income earners and companies to give back more to society”. Both increased income and wealth tax for private individuals are now expected.

Concerns are now spreading that the tougher pressure will also affect other sectors. Kweichow Moutai, the world’s largest alcohol producer, fell five percent on the stock market just after rumors that China would introduce new legislation to reduce alcohol consumption in the country. Several pharmaceutical companies have also been turbulent since online sales of prescription drugs were criticized in the state-friendly newspaper People’s Daily.

The question now is how far Chinese companies need to go to satisfy Xi Jinping. When Tencent’s CEO, Martin Lau, spoke to investors this week, he touched on the new reality they are in. He said that “we should expect more legislation in the near future”, but also that “we want to establish us as completely accommodating towards it ”. Tencent’s donation of 15 billion dollars can be assumed to be a good step in that direction.

This column was first published in SvD Näringsliv, in Swedish, on August 20th, 2021.

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