Minxin Pei, Professor of Government, shares his views on how China is harming its tech sector by sudden and arbitrary regulatory action.
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CLAREMONT, CALIFORNIA – US politicians from both congressional parties are worried that China is overtaking America as the global leader in science and technology. In a rare display of bipartisanship, the normally gridlocked Senate passed a bill in early June to spend close to $250 billion in the next decade to promote cutting-edge research. But lawmakers may be fretting unnecessarily, because the Chinese government seems to be doing everything possible to lose its tech race with America.
The latest example of China’s penchant for self-harm is the sudden and arbitrary regulatory action taken by the Cyberspace Administration of China (CAC) against Didi Chuxing, a ride-hailing company that recently raised $4.4 billion in an IPO on the New York Stock Exchange. On July 2, just two days after Didi’s successful offering, which valued the firm at more than $70 billion, the CAC, a department of the ruling Communist Party of China (CPC) masquerading as a state agency, announced a data-security review of the company. Two days later, the CAC abruptly ordered the removal of Didi from app stores, a move that wiped out nearly a quarter of the firm’s market value.
The CPC’s crackdown against Didi under the pretext of data security seems to be just the beginning of a wider campaign to assert control over China’s thriving tech sector. On July 9, the CAC further shocked tech entrepreneurs and their Western investors with an official announcement that all companies with data from more than one million users must pass its security review before listing on overseas stock exchanges. Once fully implemented, this new policy could choke off Chinese tech firms’ access to foreign capital.
Ironically, US China hawks have long dreamed of accomplishing just that. In December last year, Congress passed a law authorizing the delisting of Chinese companies from US stock exchanges if they fail to meet US auditing standards. Now, it seems that Congress need not have bothered. Its nemesis, the CPC, will be doing the same job far more effectively and thoroughly from now on.
Any so-called data-security review conducted by a secretive party agency with little technical expertise, no legal accountability, and a responsibility only to its political masters will erect another unpredictable regulatory hurdle deterring most, if not all, foreign investors. Since foreign backers of Chinese tech start-ups usually plan to exit their investment through an overseas listing – preferably in New York – the prospect of a CPC agency wielding a veto over future listings may make them extremely reluctant to invest.
Foreign investors, usually well-established venture-capital firms, bring not only much-needed financing, but also valuable expertise and best governance practices that are vital to the success of tech start-ups. Almost all dominant Chinese tech giants, including Alibaba, Tencent, and Baidu, relied on foreign funding to grow into spectacularly thriving companies. Had the CPC required a similar data-security review two decades ago, none of them would have existed – and China’s tech landscape today would be desolate.
The CAC’s crackdown on China’s most successful tech firms is not driven by concerns about data security. China’s surveillance state offers citizens no data security or privacy to speak of. And given that China’s data-security law already requires all tech companies to store their data inside the country’s borders, the government’s worries about a potential data leak by a ride-sharing platform such as Didi hardly merit radical rule changes and arbitrary restrictions. Minor regulatory tweaks would be more than adequate to address policymakers’ legitimate national-security concerns.
But foreign investors hoping that Chinese leaders will realize their folly and reverse course should think again. Killing the proverbial golden goose seems to be a CPC specialty. In fact, neither Didi nor Alibaba – which in April received a record $2.8 billion antitrust fine from the Chinese government – even come close to being the biggest such creature China has slaughtered recently. That unwanted distinction belongs to Hong Kong, whose autonomy and prosperity are in grave peril following the government’s imposition of a draconian national-security law last year.
Paranoia, bullying instincts, and contempt for property rights are deeply embedded in the CPC’s collective psyche, predisposing the Chinese government to self-destructive policies, regardless of well-intentioned advice or even evidence of their harmful consequences. And over-centralization of power under strongman rule in China today has made self-correction nearly impossible.
For China’s tech entrepreneurs, Didi’s travails should serve as a rude awakening. Many may think that they can thrive under a dictatorship as long as they stay out of politics and focus on making money. But, to paraphrase Leon Trotsky, they may not be interested in the dictatorship, but the dictatorship is very interested in them.
A well-known Chinese proverb applies to the CPC. The party keeps “hurting loved ones and delighting the enemy” (qintong choukuai). China’s tech bosses are learning the hard way that they may well have more to fear from their own government than from America’s bipartisan Sinophobia.
Minxin Pei is Professor of Government at Claremont McKenna College and a non-resident senior fellow at the German Marshall Fund of the United States.
