China’s Tech Companies Get a Reprieve, Not a Pardon

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It’s starting to look like President Xi Jinping has dusted off a 30-year-old phrase to exhort his government into pump-priming the economy and easing harsh off regulatory measures. That’s good news for the tech sector, but it may not last.

“It’s the economy, stupid,” was one of US presidential candidate Bill Clinton’s most famous quips in 1992. Now Xi is asking his government to heed the same call, though in more polite terms than the man who went on to become POTUS 42.

Over the past few years, political definition focused on redistributing wealth and driving China toward a grand vision of technology and resource independence has taken precedence over almost everything else. The country’s battle against the pandemic, including adherence to a strict Covid-19 policy, has complicated this task and seen economics take a back seat to the government’s desire to stop the spread at all costs.

Technology companies such as Alibaba Group Holding Ltd., Tencent Holdings Ltd., DiDi Global Inc. and Meituan have been caught up as a disparate group of regulators imposed new rules, more forcefully applied old ones, and decreed that social stability mattered more than corporate profits. And the companies have complied.

Alibaba and Tencent, once bitter rivals, are exploring more ways of working together, including sharing access to each others’ platforms, while Tencent has continued to tighten usage of its games by minors. Alibaba, and its fintech affiliate Ant Group Co., have renovated their business models to leverage client data less while giving back more money to consumers and merchants. Education providers had to throw out their old playbooks and start afresh following new rules that severely curtailed what classes they could offer.

These various measures, generally lumped together under the term “crackdown,” hit shares hard. Alibaba’s US depositary receipts fell more than 50% over the past year and Tencent’s Hong Kong shares are off more than 35%.

They got a boost last week when the Politburo, the central decision making body of the Chinese Communist Party, pledged to deliver on economic targets while also supporting the healthy growth of technology companies. Among the measures is a raft of infrastructure spending, a classic move used by governments around the world to stimulate growth by pumping money into the economy. But it was the comments about platform operators — those offering multiple services in one app, such as payments, shopping and deliveries — that gave investors reason for optimism.

“Rectifications for the platform economy will be completed, regular supervision will be initiated and specific measures to support its standardized and sound growth will be unveiled,” officials said in a statement cited by local media.

There’s a lot to unpack in that one sentence. The big takeaway is that Beijing is likely to offer more clarity over what is, and is not, forbidden — for example which data can be collected and used — while encouraging them to prosper.

It wouldn’t be fair to say that Beijing has been un-transparent in its rules and actions over the past few years, but executives have had to do a lot of tea-leaf reading across multiple agencies to discern exactly which regulations apply and how . One example: Last year’s record $2.8 billion fine handed out by the State Administration for Market Regulation against Alibaba was for using its dominance to force merchants to choose them over rivals. Yet that practice had been in place for at least six years. Meituan copped a $530 million penalty by the same agency for similar conduct.

Coming from the Politburo, these missives about letting platform operators grow are seen as a tacit acknowledgment that the crackdown is over. But that doesn’t mean companies are off the hook.

Xi’s broader goal of redistributing wealth and more equally sharing the spoils of economic growth, encapsulated by the term “common prosperity,” means that every new product or initiative internet companies offer must be developed with Beijing’s chief aim in mind.

Greater transparency is good, but it also eliminates the gray areas — the gaps in the rules within which entrepreneurs innovated and drove the entire sector through a decade of growth. Using an app to pay for groceries, gathering car owners to offer taxi services, and turning electronic wallets into the gateway for loans and wealth-management products wasn’t expressly allowed, but neither were these practices clearly forbidden.

Going forward, executives of established companies, as well as founders of the next wave of startups, will have no choice but to ensure they are color well within the lines. That’s likely to lead to less uncertainty and fewer fines, yet the wings of China’s innovative internet sector have been clipped. We shouldn’t expect them to soar too high again.

More From Bloomberg Opinion:

• This Stimulus Is the Last Thing China Needs: David Fickling

• Technology Companies Have Found a Road Out of China: Tim Culpan

• China’s Xi May Soon Learn You Can’t Eat Statistics: Shuli Ren

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a technology columnist for Bloomberg Opinion. Based in Taipei, he writes about Asian and global businesses and trends. He previously covered the beat at Bloomberg News.

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