What tech does Xi want? Chinese capitalism.

 
"The contours of the Communist Party's masterplan for its technology industry are emerging.
THE VISION is becoming clear. In a decade or so China will, if the Communist Party has its way, become a techno-utopia with Chinese characteristics, replete with "deep tech" such as cloud-computing, artificial intelligence (AI), self-driving cars and home-made cutting-edge chips. Incumbent technology giants such as Alibaba in e-commerce or Tencent in payments and entertainment will be around but less overweening--and less lucrative. Policies to curb their market power will redistribute some of their profits to smaller merchants and app developers, and to their workers. Second-tier cities will boast their own tech industries with localised services, competing with the less-mighty titans. Data will pulse through the system, available to firms of all sizes, under the watchful eye of the government in Beijing. China's internet will strengthen its authoritarian design.
Clearer, too, is the way in which President Xi Jinping wants to make this vision a reality. Besides talking up deep tech, this involves taking the shallower sort down a peg. In the past nine months China's regulators have cracked down on the country's effervescent tech scene, which, though it has generated world-beating innovations and astounding shareholder value, is no longer seen as fit for purpose. On August 11th the authorities indicated that regulations over all manner of tech businesses will be strengthened in the next five years. As a consequence of all this, the country's hottest tech groups have lost at least $1trn in combined market capitalisation since February (see chart 1 on next page).
Foreign investors who have backed Chinese online firms are retreating. Domestic Chinese investors are anxious. Indices tracking Chinese tech stocks in Hong Kong and Chinese groups more broadly in New York are down by 40-45% since mid-February. No matter. Indeed, it may be part of the plan. Consumer-internet companies make up at least 40% of big Chinese stocks in the MSCI China Index. Like their American peers--Apple, Alphabet, Amazon, Facebook, Netflix--these firms have made tonnes of money for their shareholders. But, the party seems to think, at the expense of abusing their market power, exploiting workers and polluting minds.
The list of casualties is a Who's Who of Chinese tech: Ant Group, an Alibaba affiliate whose $37bn initial public offering (IPO) was suspended with days to go; Didi Global, whose ride-hailing app was expelled from Chinese app stores days after its own $4.4bn IPO in New York; Tencent, fined by regulators for sexually explicit content and unfair practices, and told to end exclusive music-licensing deals; the online-tutoring industry, largely barred last month from making a profit.
And the list is getting longer. Trustbusters are reportedly getting ready to slap a $1bn fine on Meituan, a super-app that delivers meals. On August 9th the Financial Times reported that NetEase, an online-entertainment group, decided to shelve the planned IPO in Hong Kong of its music-streaming business owing to investors' worries about the regulatory crackdown.
The ranks of potential winners are less well-defined. As a guiding principle, the vice-premier, Liu He, recently stated that China is moving into a new phase of development that prioritises social fairness and national security, not the growth-at-all-costs mentality of the past 30 years. The government will guide the "orderly development of capital", he noted, the better to suit the "construction of a new development pattern". Barry Naughton of the University of California, San Diego, calls this the "grand steerage". Dexter Roberts of the Atlantic Council, a think-tank in Washington, DC, discerns an echo of Mao Zedong's "politics-in-command" economy. Either way, it is a break with the old pro-growth model and the beginning of "real state capitalism", as one investment banker puts it.
Start with data. Europe and some American states, such as California, have devised laws that seek to protect consumers from the misuse of their personal information by large companies. China has put similar rules in place; in some cases they are more severe than in the West. But Chinese regulators are going further. In a largely ignored, jargon-filled policy paper from the State Council, China's cabinet, in April last year, data were named as a "factor of production" alongside capital, labour, land and technology. This hinted at the importance assigned to information by the Chinese state, notes Kendra Schaefer of Trivium, a consultancy.
China's new data policy remains a work in progress. The Data Security Law will come into force on September 1st and the Personal Information Protection Law is due to be adopted by China's rubber-stamp parliament soon. It is unclear how they will be enforced, though data specialists intuit that many types of data currently held by internet giants could eventually be traded on government-backed and private exchanges. Ant, for example, is already being prodded by authorities to open up its vast stores of personal financial data to state-owned companies and smaller tech rivals. No specific rules for financial-technology firms have been issued but everyone is waiting for them, says Deng Zhisong of Dentons, a law firm.
Another prong of the state's strategy is to redistribute the wealth and power large tech platforms have accrued over the past decade. E-commerce groups such as Alibaba, JD.com and Pinduoduo have been targeted by the State Administration for Market Regulation (SAMR), China's newish antitrust regulator, which accuses them of monopolistic behaviour. Merchants on these platforms often indeed pay high fees and must choose between selling on one or the other. Payment systems run by Tencent and Alibaba have prevented exchange of information between them, which led to a bifurcation of the market.
The giants are now being forced to shift to more open models where payments and shopping activity are no longer exclusive to one platform, allowing merchants to regain some control over the prices of their wares. Analysts believe that the changes will lead to higher margins for sellers and lower prices for consumers but slower growth for the tech titans. Alibaba warned investors in early August that long-running tax benefits could soon come to an end, adding billions of dollars in costs.
Workers will benefit from the wealth transfer, too. Companies like Didi and Meituan, which use armies of low-paid drivers and warehouse staff, are on the hook. The authorities are already going after Meituan for not providing adequate care to such employees. It will be forced to raise wages and give drivers better insurance. Meituan's market value has fallen by a fifth, or $42bn, since the measures were announced in late July.
The final facet of China's campaign is a transfer of resources from internet companies to firms that can create tangible advances in technologies that the party deems less frivolous. This would represent a striking shift in Chinese economic governance, which since the 1990s has put rapid development and attracting foreign direct investment over all else. Under-regulated internet firms have been the prime example. Local officials lowered taxes and gave away land in order to attract the online giants to their cities and provinces.
Now the government wants to use such carrots, as well as its anti-tech sticks, to create a less unruly and more hardware-focused technology sector to help it surpass America and the rest of the West in economic might, writes Rush Doshi, an adviser to President Joe Biden, in "The Long Game: China's Grand Strategy to Displace American Order". Mr Xi has referred to "great changes unseen in a century" in areas such as AI and quantum computing (which would harness the weirdness of subatomic physics to drastically speed up certain types of calculations). These, he has suggested, will usher in a new global economic order that revolves around China. Senior officials believe that if China can get a first-mover advantage on the cutting edge of technology, it will become not just an economic superpower but a geopolitical and military one, too, writes Mr Roberts of the Atlantic Council.
Many politicians in America and Europe would love to fashion their tech industry into something like Mr Xi's vision: less social media and other "spiritual opium", as Chinese state news outlets recently dubbed video-gaming; more strategic development of the techno-infrastructure of the 21st century. This includes computer chips, clean energy and much besides, partly to counteract an effort by America and its allies to restrict exports to China of semiconductors and other critical technologies. When launching a new business, entrepreneurs and investors must therefore ask, "How does this solve China's problems?" sums up Liu Jing of Cheung Kong Graduate School of Business in Beijing.
It is true that some smaller firms view the tech giants as bullies that have strong-armed rivals and snuffed out competition. China's most innovative startups have had the choice of selling out to big tech or facing a quick and brutal demise, says Mr Liu. The recent dismantling of online monopolies has been a godsend for many promising young executives who have long struggled under the thumb of big tech, he observes. And entrepreneurs have flocked to the approved deep-tech fields: last year alone Chinese founded 22,000 chip firms, 35,000 cloud-computing companies and 172,000 AI startups.
A prominent private-equity financier fully agrees with the goals of the regulation campaign. If carried out correctly, it could reduce inequality while becoming a global model for regulating big tech.” [1]

In Lithuania, fintechs and their regulators have completely lost their conscience. If the EU does not follow them, following China's example, there will be a lot of trouble for us. 

1.    "What tech does Xi want? Chinese capitalism." The Economist, 14 Aug. 2021, p. 50(US).