Is China's Tech Bubble Bursting?

No. The government is asserting more control because it wants resources re-allocated to the digital transformation of traditional businesses rather than continuing the 'selfish,' consumer-oriented trend of the past few years. 

This may somewhat diminish the growth of Alibaba, Tencent and a few others, but in the long run, it may strengthen the Chinese economy. JL

Rui Ma reports in Rest of World:

Officials have rained regulation over China’s powerful tech giants, triggering a trillion-dollar drop in their stock market value; it intensified again last week, with a law that restricts how they collect and share data. You can ascribe the regulatory assault to its fear of being overthrown by dissatisfied citizens, or to a pathological need for control, but you’ll reach the same pragmatic conclusion — the country is going to tilt its resources towards upgrading its real economy, and companies are invited to participate. Digital transformation of traditional industries, together with the power of digital platforms, could increase output by 1%–10% via efficiency gains.

If you want to see where the political wind is blowing for Chinese tech companies, listen to Huang Qifan. As mayor of Chongqing province, he granted Ant Group and its rivals microlending licences that birthed the entire industry. Now, as vice chair of the Financial and Economic Affairs Committee of the National People’s Congress and adviser to the China Finance 40 Forum, he shapes policy.

In a speech last month, Huang launched a scathing attack on the consumer internet: criticizing monopolies (something Alibaba is accused of), apps that use “weaknesses in human nature” to acquire traffic (Weibo, allegedly), discriminatory pricing (Didi, for one), and data collection that infringes on privacy (all of them).

It’s a concise summary of the central government’s thinking. Starting a month ago, officials have rained regulation over China’s powerful tech giants, triggering a more-than trillion-dollar drop in their stock market value; it intensified again just last week, with a law that heavily restricts how they collect and share private data.

But far from degrading the whole internet sector’s investability, actually, the regulatory deluge is part of a well-signaled plan designed to shore up its future. Besides, there is far more to Chinese tech than just platforms like Alibaba and Tencent.

First: Beijing isn’t looking to break up its tech giants. The government has openly credited them with making people’s lives easier, and it’s been very clear about wanting to export this same tech overseas.

​​The government’s priorities, rather, are leaning toward manufacturing over financialization. Sure, China knows that finance can create greater wealth, more quickly. But it thinks of that as being of a lower quality, and so it’s decided not to succumb to the easy market “value” accrued to the services sector.

A continued grasp on manufacturing also brings supply chain integrity. So it’s not just an economic objective, but a national security one too. (The urgency of that was emphasized first by the U.S.-China trade war, then more boldly by the pandemic.)

Xiaomi founder Lei Jun famously said: “Even a pig can fly if it stands at the center of a whirlwind.” Meaning: any company can do well if it rides the right trend at the right time.

And that might be exactly the case with Chinese internet companies now being reined in. Many of these grew opportunistically with lax regulation and the swell of the Chinese population coming online — and at the expense of consumers and merchants.

Even here, there are resilient spots. Digitally native brands will grow especially quickly — by revenue, they’re actually already crushing all but the most elite foreign competition. Cosmetics brand Perfect Diary was one of the earlier direct-to-consumer successes, but there are more — drinks brand Genki Forest, but also offline food and beverage chains like HeyTea and Manner Coffee.

“Xiaomi founder Lei Jun famously said: ‘Even a pig can fly if it stands at the center of a whirlwind.’ Meaning: any company can do well if it rides the right trend at the right time.”

But, more importantly, these brands have international aspirations. There are several opportunities, all of which align with the government’s explicit encouragement of cross-border e-commerce. We see it with platforms, because Amazon and Shopify are quite hostile to Chinese brands (often rightly, with Chinese sellers engaging in order brushing and other fraudulent activities).

So, this phenomenon—the deplatforming of Chinese brands and growth of cross-border business—could be a chance for entirely new cross-border plays, like Shopline, or a boost to the growing platformization of brands, like ultra-fast fashion player Shein. Software-as-a-service companies, like expensing software maker Huilianyi, are also finding that monetization is better overseas.

I am also bullish on data-rich tech firms. Not merely in the sense of companies housing consumer data, which I think is a very restrictive definition. Data-rich environments are where enterprise software thrives best, and it’s pretty evident that industrial internet and enterprise digitization will drive the next phase of economic development in China, as returns from building out infrastructure—physical or digital—are edged out by improvements in efficiency. Digitalization is also what the government wants.

Going public in the U.S. would likely be discouraged for all these companies, especially for those with data from state-owned businesses. However, it also seems that Hong Kong listings are kosher, and that any valuation discounts have been narrowing. Short-video giant ByteDance is rumored to be reviving its Hong Kong Stock Exchange listing plans, for one, though it’s denied the chatter.

Don’t forget AI, robotics, and semiconductor companies, like SenseTime and Horizon Robotics. These have clear regulatory tailwinds, and developments like autonomous driving will help productivity while lowering the need for labor — something that is front-of-mind as China tackles its demographic crisis.

Third: Some fears have been overblown. Just because everyone is flustered about the squeeze on after-school tutoring doesn’t mean you should despair that gaming, for example, will be regulated in the same way.

According to Tencent, its latest quarterly results showed 16-year-olds accounting for 2.6% of gross gaming revenue, and under-12-year-olds making up 0.3% within that. So, financially, the impact from game-obsessed minors doesn’t seem like a big deal. If you want to feel even better, you can read news such as this piece from December 2019, featuring the head of the propaganda department, who declares that gaming is part of the “beautiful life.”

In a July speech, Huang Qifan launched a scathing attack on the consumer internet. Lintao Zhang/Getty Images

So, you can ascribe the reasoning behind the regulatory assault to a benevolent government, or to its fear of being overthrown by dissatisfied citizens, or to a pathological need for control, but no matter what, you’ll reach the same pragmatic conclusion — the country is going to tilt its resources towards upgrading its real economy, and companies are invited to participate.

Huang isn’t entirely pessimistic. In his speech, he promised that digital transformation of traditional industries, together with the power of digital platforms, could increase output by 1%–10% via efficiency gains. Playing that out, a 5% average increase could lead to $2 trillion (12.5 trillion yuan) total in gains: $770 million (5 trillion yuan) on $15 trillion (100 trillion yuan) industrial output, and $1.2 trillion (7.5 trillion yuan) on $23 trillion (150 trillion yuan) service industry output. It is hard to ignore that kind of carrot.

Huang rounded off his own speech with an adapted take on Lei Jun. “Winds that lift pigs are not winds, but tornadoes. Be careful that you don’t fall to your death,” he said. What a way to describe a bubble popping! Pigs falling from the sky, bloodied on impact with the uncompromising pavement. The warning couldn’t be clearer — for those companies classed as pigs, at least.