DOES THE CHINESE TECH CRACK DOWN THREATEN ITS GROWTH TARGETS?

24.07.21  As the Chinese authorities crack down on Big Tech intensifies does it threaten China’s own economic growth targets?

China’s Tech sector has proved to be a crucial source of economic growth and dynamism in recent years. Indeed, it has taken over from the old economy heavy industries as the main economic growth driver. The digital economy (defined as electronics manufacturing, telecommunications, internet and software services) now makes up around 40% of China’s GDP.

However, the Chinese state is now in the process of implementing regulations to restrain monopolies that certain tech companies have created, to enhance oversight and regulation of FinTech firms and to provide much great data privacy for private citizens.

The motivation behind the crackdown is partly political because Big Tech had accumulated considerable power over media, data and communication. So, in one sense it had become a threat to the dominance of the Chinese Communist Party itself. It is also based on a desire to promote financial stability. This is because Chinese Tech companies had used their dominant positions in the e payments market to expand into lending money. Almost from nowhere, one of the large Chinese Tech groups, emerged as the biggest lender in the country with a loan book that had swelled to RMB 1.5tn (USD 250bn).

However, a third motivation, and perhaps the most interesting, seems to be a strong desire to stop the big Chinese Tech platforms using their dominant market positions, combined with exclusive access to user data, to limit competition and minimise innovation.  This is because the Chinese state sees data itself as a key economic driver for the 21st century. It has a vision of a creating an exchange for the national trading of data which it hopes will spark economic growth and innovation. How practical this is remains to be seen.

So, whilst the Chinese crack down on Big Tech has a political consideration to it there is also a longer-term economic development agenda. So, if it did threaten the short-term economic growth goals of the Chinese Communist Party we would expect that more government spending or infrastructure investment would be authorised to plug the shortfall.

As discussed in our April 26th post China has some interesting and innovative technology companies. However, the problem for overseas investors is that corporate governance can sometimes be weak and the political risk, should a company fall foul of the Chinese Communist Party, is difficult to evaluate. The recent crack down on Big Tech merely reinforces this point.

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This post was written by Robin