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The nuances of China’s 'tech crackdowns'

Protocol China

Greetings, it’s Shen Lu here. You will see a lot more of me and my colleague Zeyi Yang in our future newsletters.

In this week’s Protocol China: what China’s tech crackdown is and isn’t about, the future of China’s live commerce, and China’s uphill battle in advanced chip manufacturing.

Digital economy isn’t out of Beijing’s favor

Chinese regulators spent 2021 cracking down on major internet platforms like Alibaba, Tencent, DiDi and Meituan over antitrust and cybersecurity concerns, and the entire online learning sector is now pretty much gone. But these regulatory blows didn’t paint the full picture of Beijing’s attitude toward tech, and aren’t going to define the trajectory of China’s tech industry.

Despite a year of crackdowns, Chinese tech startups managed stellar growth.

  • Together in 2021, they received a record $131.6 billion in VC funding, about 50% higher than the 2020 figure.
  • Particularly, they focused on key tech sectors such as chips, robotics and enterprise software, and steered clear of the consumer internet.

Another sign of Chinese tech’s healthy growth: Shenzhen hit record power use in 2021.

  • The tech hub is home to tech giants: the U.S.-sanctioned telecom company Huawei and gaming and social media heavyweight Tencent.
  • The South China Morning Post reported that companies making computers, communication and other electronic equipment consumed nearly 17% more electricity in 2021 than in 2020.

Beijing is actively supporting and encouraging innovation in so-called “hard tech” (硬科技).

  • That is, sectors such as high-end manufacturing, AI, biotech, advanced semiconductor chips and climate tech.
  • China seeks to build its homegrown technology might and to reduce its reliance on foreign tech.

And “little giants” can shape the future of China’s digital economy.

  • On Monday, the Chinese Communist Party mouthpiece People’s Daily ran a commentary discussing the big innovation potential of “little giants”: small and medium-sized tech companies that can help digitize traditional industries like manufacturing.

Beijing is not disfavoring the digital economy by regulating big internet platforms.

  • Quite the contrary: It wants it to grow, diversify and transform traditional sectors.
  • Prominent economic policy adviser Liu Shijin echoed the People’s Daily commentary in a Monday op-ed, outlining a plan to grow the tech-empowered real economy.

Make no mistake: The consumer internet is here to stay.

  • This sector will continue to drive domestic consumption.
  • Take Tencent-owned super app WeChat, for example: It enjoyed stunning growth in services in 2021 despite a harsh antitrust crackdown.

The core of the core of the core

The “Two Establishments” — that Xi Jinping and Xi Jinping Thought are the core of the Party — have been firmly established at the Cyberspace Administration of China, the country’s powerful cyberspace watchdog. Protocol’s own AJ Caughey reviewed almost 1,600 official releases from CAC, from its founding in 2014 through late 2021, and found that while the total number of notices published each month held steady, monthly mentions of Xi began increasing shortly after Xi Jinping Thought was enshrined in the constitution in 2018. Mentions really skyrocketed from early 2019, shortly after the Two Sessions and just before the 30th anniversary of Tiananmen Square.

On Protocol China

What’s going on in China’s live commerce? A few days before Christmas, Viya, China’s livestreaming sales queen, was fined $210 million for tax evasion, and her online presence was completely erased. Her fall from stardom has caused a chilling effect in the live commerce industry; many other influencers are rushing to repay taxes. What’s the implication of such severe punishment on the face of the country’s booming social commerce? Shen Lu decodes China’s ecommerce policy priorities through the rise and fall of Viya.

Ecommerce is kaput in the locked-down Xi’an. A large COVID-19 outbreak in the ancient Chinese city has prompted the city's government to order an extreme lockdown that confines armies of delivery workers to their homes. As such, the government is making grocery deliveries to 13 million residents. The result? Many locals are complaining they have experienced food shortages. Shen Lu tells the story of these disrupted lives amid COVID-19 in a city where administrative power overshadows everything else.


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Big Brother Beijing

An industry to be eliminated. On Monday, China’s top macroeconomics regulator officially added cryptocurrency mining to a list of industries that China seeks to eliminate. The list consists of technologies that are usually highly polluting, dangerous or non-energy efficient. The inclusion of crypto mining on the list doesn’t come with a specific year or date when crypto mining needs to be eliminated, but it gives provincial regulators another tool to crack down on existing activities. Back in 2019, the National Development and Reform Commission was pondering the same and even included crypto mining in the draft list, but it was eventually taken out of the final version.

The acute pain of Beijing’s ed-tech crackdown. In a personal essay published on WeChat, Yu Minhong, founder and CEO of New Oriental Education & Technology Group, disclosed that last year’s clampdown on the private tutoring industry cost the company $3.1 billion. The major Chinese tutoring company’s market value plunged 90% and its revenue dipped 80%, according to The South China Morning Post, and Yu laid off 60,000 workers. Yu doesn’t seem optimistic about the future, which is still full of regulatory uncertainties.

eCNY has to rely on competitors for expansion. WeChat started allowing users to use China’s digital currency on its app on Jan. 6, just a couple days after China’s central bank launched an app for eCNY. WeChat’s digital wallet is one of the two most ubiquitous e-payment services in China. The People’s Bank of China clearly needs to rely on its commercial competitors to get more people to use digital money. Shortly after, nearly 50 other apps, including JD.com and Meituan, also integrated the eCNY payment feature into their respective ecosystems.

China goes global

JD.com opens robotic shops in Europe. Chinese ecommerce juggernaut JD.com recently launched two brick-and-mortar stores in the Netherlands that will rely on robots to handle and deliver packages, according to CNBC, with two more planned soon. JD.com’s attempt to expand overseas is a challenge to Amazon, which forayed into the European market last year with its first cashier-less retail store in the U.K.

Becoming Asia’s richest person. Bloomberg recently profiled Changpeng Zhao, the Chinese-born founder of Binance, which is the world’s largest crypto exchange by transaction volume. Zhao is now estimated to be Asia’s richest person. One thing that makes Zhao different from many crypto bros: He welcomes regulation. “I’m not an anarchist,” he said in November. However, that may be the result of Binance seeking to appease outside investors as the company has grown too big to ignore in nations around the world.

Nio’s possible entry to the U.S. market. Chinese electric vehicle maker Nio started posting U.S.-based jobs at the end of December, trade publication InsideEVs reported. Previously, the young but mighty EV company has mostly been targeting Europe, especially countries with high EV adoption rates such as Norway, where Nio opened its first overseas showroom in September. In December, the company said it planned to expand to 25 countries by 2025, but didn’t specify which ones.

Straight from China's web

Chinese lab announces a breakthrough in 6G. A government-backed institute called Purple Mountain Laboratories announced last week that its research team was able to acquire 6G-level wireless transmission up to a speed of 206.25 gigabits per second for the first time in the lab, according to the South China Morning Post. The company claimed in a statement on its website that this speed set a world record for real-time wireless transmission within the terahertz frequency band (300GHz~3THz), the foundation for future 6G mobile communications.

WeChat tests privacy data-collection disclosures. For the first time, WeChat users can check what personal data is being collected by the Chinese super app in its most recent Android beta version. Screenshots posted by Chinese media show that the beta version discloses a list of raw data (admittedly hard to understand) that the app tracks, as well as a list of third-party entities that WeChat shares the data with. The move is likely a response to China’s new privacy law.

Tencent bought a smartphone company, but wants it to make headsets. Tencent is about to close a deal to acquire Black Shark, a Chinese company that makes smartphones specially engineered for gaming, Bloomberg reported Monday. But the twist is, instead of continuing to make smartphones, Tencent wants the company to pivot to making VR hardware for potential metaverse ambitions. One Chinese finance publication reported the valuation to be around $423 million. The move also deviates from Tencent’s 2015 strategy to stay away from hardware manufacturing.

On our radar

China faces an uphill battle in advanced chip manufacturing, despite Beijing’s hard push to up the game. The Wall Street Journal reported Monday that over the past three years, more than six new chip-making startups went under after burning at least $2.3 billion in aggregate. Quoting industry experts, the WSJ found that Chinese tech companies still struggle with “some aspects of chip making, including designing chips.” Some firms failed because they were not able to acquire sufficient know-how, talent or capital.

Coming soon from Protocol

Calls for increased tech regulation — from lawmakers, regulators, small businesses and even consumers — have become deafening. But tech companies want a hand in shaping what regulation looks like. And while lawmakers argue, tech companies can change their behaviors and business models to prepare for what's coming.

Join us on Jan. 26 to look at what lawmakers really hope to achieve, how tech companies are already responding to the threat and what a realistic version of tech regulation might actually look like a few years from now. Sign up here.


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One more thing

So long, “996” perks. As Chinese Big Tech ditched “996,” overtime benefits like late-night taxi stipends have also come to an end. In December, Alibaba switched from time-bound stipends to general commuter benefits to encourage employees to leave work early, and the results are showing. On workplace gossiping app Maimai, an unnamed Alibaba employee posted a screenshot of the traffic situation in Beijing late at night: There was a clear contrast between heavy congestion around the headquarters of Meituan and none at all near Alibaba.

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