Chinese efforts to regulate its tech giants

Written by: Zuo Yuning (21-A1)

Designed by: Katelyn Joshy (21-U1)

China is known for its regulations on the Internet, especially with the ‘Great Firewall of China’ enforcing strict prohibition of foreign Internet service providers such as Google, Twitter and Facebook.

Relatively, it is much more lenient with its domestic counterparts, allowing them relative freedom in operation.

Recently, however, the Chinese government has hosted a meeting with heads of Chinese tech giants, including Alibaba, Tencent and Bytedance, the owner of Tik-tok.

This came after a speech by Jack Ma, founder of Alibaba, in which he criticised China’s strict financial regulations for creating a counterproductive business environment.

Coincidentally, Chinese moves mirror those carried out by the European Union and the United States, in their efforts to regulate tech giants. 

The governments do seem to share the same motive: to curtail monopolistic behaviours by dominant corporations to ensure fair competition in the market.

Nevertheless, the purity of the Chinese government’s intention should and have been questioned. Some are worried that it is a continuation of a worrying trend in China where all private firms are facing increasing government scrutiny and regulations, while others see this event as an effort to ensure that it has firm control over its citizens’ online activities and data.

China’s Tech Companies: How Have They Become?

Before we get into the debate, though, let us understand the brief but turbulent history of China’s tech industry and the Chinese internet.

China was behind the world in terms of information technology, since its borders were sealed to foreign ideas and foreign products. Most Chinese didn’t know about computers until the mid-1990s, and most did not own them until the mid-2000s. Mobile phones came even later, which means the giant technological companies that everybody knows about nowadays have really only flourished roughly for a decade.

Much like in Western countries, the rise of the gigantic digital industry has been drastic. In China, the journey of Jack Ma’s Alibaba is very similar to many other companies in the industry – in terms of their rise, but also in terms of their troubles with the central government.

Mr Ma started small. On 28 June 1999, he founded Alibaba.com with 17 friends in his Hangzhou apartment (Alibaba Group, 2020). His business didn’t take off immediately, for it was three years later that Alibaba.com finally made a profit (Business Insider, 2017). He was lucky, as the founding of his company coincided with the Internet boom in China in early 2000s (Yang, 2018).

At that time, it seemed like the Internet would integrate China into the global flow of information, but China soon decided that ‘enough is enough’. Regulations on digital firms started with control over data flow (Qiu, 2000), and then the project called ‘the Great Firewall of China’ was initiated in 1998 (Shen, 2020). By 2012, most major foreign digital services have been banned on China’s internet (Xu & Albert, 2017).

Censorship has certainly been horrible for Western firms and for free speech in China, but it proved to be a tremendous fortune for China’s domestic digital corporations such as Alibaba. With their foreign rivals banned or restricted they faced much less competition, they gained a very large market share and hence their profits rose (Desjardins, 2019). 

Nevertheless, the digital industry, just like other private firms, has always faced strict regulations from entry barriers to financial regulations (Livingston, 2020), and some of them are getting even stricter in recent years (Wei, 2020).

That is part of what Mr Ma talked about in his speech, and apparently the government was somewhat upset with that.

But that antagonism between the state and technology firms is actually very new and unexpected.

In October last year, columnists were making predictions like ‘just as the US starts looking to rein in, or even break up, big technology firms’, referring to the Congress hearings on that issue in July that year (Romm, 2020), ‘China is going in the opposite direction [as] we should expect to see more money, more policy favouritism, and more attention from party cadres aimed at ensuring the establishment of big successful chip and software firms’ (Culpan, 2020).

Well, the truth is the government has indeed been very favourable towards its tech firms, for the latter are often providers of key technologies, services, innovation and lots of jobs in China as much as in other parts of the world (Cavallo, 2016).

However, that attitude seems to have changed, as China has begun tightening regulations on those exact companies (Wei, 2021).

There are many views on why this happened, and on whether it is justified. Let’s go through them.

Regulations and Monopoly: The Economic Analysis

One argument coincides with the official narrative: China cannot let its tech companies become too-big-to-fail.

This understanding chiefly comes from the past experiences of Western nations, when they suffered the impact of having an entire industry dominated by a few big firms.

Monopoly isn’t a modern problem; the problem has plagued nations since the birth of capitalism.

In the history of the United States, famous examples of monopoly firms include Andrew Carnegie’s Steel Company, John D. Rockefeller’s Standard Oil Company and the American Tobacco Company (The Investopedia Team, 2021).

There’s a less extreme case, though. A market may not be dominated by one firm, but by a few firms. Nonetheless, the economic problems they cause are very similar: over-pricing and underproduction of goods and services (Thoma, 2014), and disincentive to innovate (Marcos, 2018).

As a case study, let us look at the US healthcare market. Undoubtedly that system has delivered too little for too much, for even though it spends the most portion of its GDP on healthcare among all Western industrialised nations (Kamal et al., 2021), it has one of the worst health outcomes, shown especially by how it has the lowest life expectancy in that same group of countries (The Commonwealth Fund, 2020).

The reason is probably market dominance. You see, more and more profit hospitals are applying tactics such as horizontal consolidation, where hospitals choose to merge up, and vertical consolidation, where they hire more physicians than before, to increase their market share (Kocher, 2021).

The insurance industry also suffers a similar problem. In 2019, the top five US health insurance companies own a whopping 45.6% of total market share (Statista Research Department, 2020). In some states and local areas, firms can enjoy monopoly or near-monopoly, and this situation is getting worse in recent years (Dafny et al., 2012).

Market dominance is prevalent in the pharmaceutical industry as well. With government regulations on drug prices virtually non-existent, big drug firms have tremendous power to fix prices to maximise their profits (Hawley, 2021).

All those factors combined, and you have a country where citizens pay the most amounts for a healthcare system that doesn’t exactly work out the best.

Allowing too few firms to dominate the market is to blame. No government should ever trust the firms so much that it allows them to stifle competition and reap profits for themselves.

Some may say that healthcare and the Internet are two systems that cannot be compared to one another, that while the healthcare market may need to be regulated because it is a service crucial to public well-being, the digital, high-tech industry should not be disturbed by the government’s heavy hand.

I disagree with them. I think market dominance is an issue common to many markets, and since it frequently produces undesirable results for the people and for the government, it should be avoided as much as possible. 

Besides, to say that government intervention is necessary in some instances is not to deny all the good work the market has done. We just need to look around us to understand the fortunes of capitalism. 

However, we must not forget that competition is the most important principle that keeps the free market working. If actions by the government can encourage competition, they should be welcomed.

Some may also argue that the so-called ‘undesirable market outcome’ that market dominance can produce may not be significant enough in every instance. The Chinese high-tech industry, for instance, has provided fairly efficient and affordable services (China Academy of Information and Communication Technology, 2020).

To that point, I may need to concede that currently market dominance does not seem to have affected the market outcome, although I think that adverse effects are still very possible in the future. 

However, there is another factor we have yet to consider. When a few firms become too powerful, whatever that happens to them can have tremendous influence over government behaviour because the economic fortunes of individual big firms simply matter too much to the economic performance of a modern nation (Cooch, 2012). That is, dominant firms can become too big to fail. 

Again, let us take a look at the United States. The 2008 financial crisis is the perfect example. After the dot.com bubble burst caused a recession in the late 1990s, the Federal Reserve decreased the federal funds rate in an attempt to boost the economy by encouraging spending and investment (Seabury, 2021).

This prompted many Americans to take huge loans to purchase houses, and many of them even borrow way beyond their ability to repay, in what is termed ‘subprime lending’ (McArthur & Edelman, 2017). Wall Street hedge funds engaged in lots of that, disregarding the significant risk of low-credit loans (Denning, 2011).

In early 2000s, however, the fed interest rates began to rise, hitting many with payments they cannot repay (Amadeo, 2020). What’s worse, as supply started to keep up with demand, housing prices began to fall in 2006 (Barker, 2009). This wiped the wealth of many and forced them into debts, as they struggled to pay back the mortgages.

That prompted a banking crisis in 2007, and then, when Lehman Brothers filed for bankruptcy in 2008, the entire global economy was sent down the spiral of recession.

Seeing that the financial system was on the brink of collapse, the newly elected President Obama offered a massive bailout of 700 billion dollars to Wall Street firms (Congressional Research Service, 2020). 

Initially that act was credited with ‘stablising the economy’ and ‘preventing another Great Depression’ (Clark, 2010), referring to the catastrophic global recession from 1929 to early 1930s. Retrospectively, though, more commentators start to say that the bailout was a ‘flawed design’ (National Public Radio, 2008), ‘unnecessary for economic recovery’ (Baker, 2018), and ‘benefited the rich’ (Eisinger, 2020).

The problem doesn’t end there. Wall Street firms are responsible for causing the crisis with their reckless lending behaviour, yet they are the first ones to get massive help from the government. There seems to be a mismatch, right?

Then, why did that even happen, given that bailouts might not have worked and are morally unsound? Answer: law-makers were scared. They were scared that the failure of the few Wall Street firms would bring down the entire economy, since they are simply too powerful and too entrenched in the working of the financial system (Mukunda, 2019). 

Therefore, even when bailouts are not the best economically and morally, law-makers will rush to the aid of firms that are too big to fail.

Market dominance is to blame. If there were more companies in the financial market and the leading companies had a smaller market share, bailouts that the economy didn’t need might not have been issued because in that case, the failure of a few firms would not have been such a horror to law-makers (Barr, 2017).

If a government doesn’t want its economy to be too dependent on the fortunes of a few companies, it needs to prevent market dominance.

China’s digital industry has typically been led by a few big firms (Belton, 2019). Looks familiar?

Thus, the Chinese government should go ahead and rein in on its tech giants, if the purpose is to curb the rise of dominating firms.

At least, as long as it is indeed doing what it says.

Privacy and Transparency: The Social and Political Consideration

The trouble with this move by the Chinese government, however, is precisely that people don’t know whether its aim is really just to curb dominating firms.

Many like to compare this to the US congress hearing – and indeed I have also made that comparison at the start of this article, just so that you will see the relevance of this issue – but the two are actually slightly different. While the US hearings are aired publicly and held by elected officials, the Chinese meetings were secretive and done by government officials whom we know little about.

That slight difference matters a lot to how the message should be perceived. It is much easier to trust a hearing that can be seen by everybody than to believe what a government spokesperson says it’s about.

Well, this issue about trust is a question few residents of mainland China will ask, for the overwhelming majority of those I know are loyal and very trustful of the government.

But that doesn’t mean we shouldn’t doubt and question China’s intent; we can never trust a government with a record of human rights violation and abuses (Edwards, 2020).

The possession of data has been a contentious issue in the Western world especially since the Snowden incident in 2013, and similarly it should be a concern for the Chinese people.

The Chinese government already has extensive access to the data owned by many private firms (Wang, 2017), and the fear is that by imposing even more regulations on tech giants, infringement on data and privacy rights will go from bad to worse.

This isn’t an empty fear, The Chinese government did take several actions to gain tighter control over tech giants’ databases (Leise, 2021).

Also, for a country that famously bans numerous foreign websites, it seems plausible that China is regulating the providers of digital services only because it has grown wary of allowing private firms to run the Internet. After all, it can get a lot harder to censor information regarding the Tiananmen Square incident of 1989 or the mass internment of Xinjiang Uyghers if private firms, rather than the government, power the search engines. 

Although the government already controls all the internet access routes (Herold, 2012), it has recently targeted Virtual Private Network (VPN) tools to circumvent the ‘Great Firewall’ and access foreign websites (Reuters, 2018). That indeed reveals deep anxiety about losing its control over the Internet.

If it cannot tolerate individuals surfing Google and Youtube, it certainly cannot tolerate a powerful industry whose service provision it isn’t fully confident that it can control.

Nevertheless, some may say to me that ‘hey Yuning, don’t be so pessimistic. Although there is a lot we don’t know about the Chinese government, we do know it has lots of laws that protect its citizens’ data and privacy, right?’

Well, you know what, they are right. The country does have laws and even clauses of the Constitution that protect those rights, with some of them coming out very recently (National Law Review, 2021). 

However, that works out better on paper than in reality. I just wish to point out that with such an opaque government that China has, nobody can truly be sure that the laws have been followed by law enforcement and state organs. If a liberal democracy like the United States, with all its watchdog organisations and institutional checks and balances, can have problem handling citizens’ private data like Mr. Snowden revealed, we should put even less trust in a one-party dictatorship.

I’m not making random assertions that China isn’t trustworthy; some of its actions in recent years seem to suggest that it really doesn’t want the public to know too much about what’s happening within its borders.

In February this year, for instance, the BBC reported that when the WHO went to China to investigate the origins of the coronavirus, it ‘requested raw patient data from early data’, which was ‘standard practice’, but only ‘received a summary’ from the Chinese government (BBC, 2021). 

If someone lies to you, will you trust him any longer?

Further back in time, the imposition of the National Security law is strong evidence of the unreliability of the Chinese government. When the United Kingdom handed Hong Kong back to China, the Chinese government promised to govern the land under a ‘One Country, Two Systems’ principle, which says that China will allow Hong Kong to remain a democracy with all its rights and rights unaffected, for another fifty years (Constitutional and Mainland Affairs Bureau, 2007).

However, in June last year, after a whole year of protests, China imposed a new National Security Law which targets a wide range of vaguely defined crimes, such as secession, subversion, terrorism and collusion with foreign entities (Tsoi & Lam, 2020). To most observers in the West, this has broken the ‘One Country, Two Systems’, for now China is directly interfering with Hong Kong’s judicial system (Rogers, 2020).

If someone breaks a promise he made with you, will you take what he says as truth anymore?

Although those incidents are different from the event we are discussing here, they do show that as we evaluate the action of the Chinese government now, we must not forget its horrible record at telling us what really is happening.

Conclusion: A Mess

As much as I hope to provide a definitive judgement on whether China is justified in doing what it’s doing, I cannot, unfortunately. Curbing the rise of dominating firms is a need, but as long as we have a government that lacks all the transparency needed for credibility, we can never take what it says as the truth.

China is shooting itself in its own foot by being so opaque about everything. It’s not just the regulations on tech giants that has caused global concern. Hong Kong, the origins of Covid-19 and the events in Xinjiang are just some of the things that have made relations between Beijing and the outside world tense, to say the least.

If China really wishes to earn the trust of the world on all those issues, it must reform its political structure. Democratisation is not necessary – though it will likely not wish to lose its grip on the state – but at least it should make its governance more accessible to outside scrutiny. That won’t solve all the problems, but at least that will help.

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Author: The Origin*

With great power comes great responsibility.

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