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China is relentlessly cracking down on tech giants ranging from ride-sharing firm Didi (DIDI) to internet giant Tencent and Alibaba (BABA) affiliate Ant Financial Group. Along the way, billions of dollars have been washed away, as Chinese stocks tank amid concerns that what were once easy growth opportunities are now high-risk bets.
The swift crackdown follows the meteoric growth of China’s biggest tech companies and leaders who don’t always tow the party line, like Alibaba’s Jack Ma.
The move to rein in Chinese tech giants also comes after the U.S. passed a law that bars foreign companies from trading on U.S. exchanges unless they surrender to audits. That law, the “Holding Foreign Companies Accountable Act,” could stoke the Chinese government’s fears that data on its citizens could end up in the hands of its biggest political rival.
“Even though [President Xi Jinping] has said that he aspires to [have] globally successful companies operating abroad, I think that there are real challenges for regime security,” explained Jessica Brandt, a fellow with the Brookings Institution.
And that means the party is likely over for Alibaba, Tencent, Didi, the shopping platform Meituan, and any other tech companies that threaten the Communist Party’s authority.
How China’s Big Tech became a liability
China’s Communist Party is dedicated to control, whether that’s through state media, the Great Firewall that blocks out huge swaths of the internet, or restrictions on free speech. China’s big tech companies have to abide by the same set of rules, but as they’ve grown in size and wealth, they’ve created new challenges to the government’s authority.
Chinese companies collect massive amounts of data on their users, eclipsing the capabilities of even their Western cohorts. Didi, for instance, collects GPS, trip, traffic personal user information, facial-recognition data, and even recordings of passengers’ in-car audio.
“When you think about...foreign intelligence risks, that's like a lot of sensitive data there. So I think that's a piece of what's driving this,” Brandt explained.
To ensure that sensitive data doesn’t end up in the hands of foreign officials, China wants its companies to go public on domestic exchanges. China also wants tech giants to avoid foreign influence by being funded domestically.
“While foreign investors used to play an outsized role in funding the first generation of Chinese tech firms such as Alibaba, Baidu and Tencent, they are now locked in fierce competition with home-grown funds, state-sponsored incubators, as well as Chinese internet giants to fund China’s booming tech sector,” Angela Zhang, a professor at Hong Kong University wrote in a new paper published on Wednesday.
Inequality caused by Big Tech is an issue in China and the U.S.
In both the U.S. and China, tech giants have been blamed for growing wealth inequality. Tech firms in both countries provide top executives and engineers with generous pay and bonuses, while their contract and gig economy workers make minimum wage.
Tech giants in both countries have also been accused of exploiting consumers. While China is trying to protect the state by regulating big tech, it’s also simultaneously clamping down on actual anticompetitive practices and price gouging.
“By leveraging the vast amount of data collected from their consumers, Chinese e-commerce platforms employ smart algorithms in order to price discriminate and extract more surplus from Chinese consumers,” Zhang explains in her piece.
That kind of predatory pricing can further exacerbate inequality in China, which is already one of the most unequal countries in the world, according to a 2018 IMF working paper.
“I think a great concern is what rising inequality in China is going to do for the popularity of the regime, and I think Chinese big tech can be a target for some of those frustrations,” Brandt said.
Investors need to know the risks
So what does all of this mean for investors hungry for their own stake in Chinese companies looking at the potential for stratospheric growth? According to Chester Spatt, professor of finance at Carnegie Mellon University's Tepper School of Business, it’s all part of the risk of investing in China.
“if you're investing in companies with a footprint in China. I think I would think you understand you're going to be subject to these kinds of risks. And maybe the import of these risks has become a little clearer,” Spatt told Yahoo Finance.
“I think people need to understand that the rule of law is interpreted differently in different parts of the world, but that's a longstanding theme. That's not a new theme.”
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