HONG KONG – A grueling crackdown that eroded billions of dollars worth of Chinese tech companies is fading, but the once free-wheeling industry is bracing for much slower growth.
Analysts say China’s easing of Business Restrictions such as e-commerce giant Alibaba and online games company Tencent, and the discussion of private sector support reflect Beijing’s decision to refocus on growth after the economy struggled from the pandemic and restrictions imposed to combat COVID-19 was haunted.
but Internet Content Controls r stay firmly in place. And the crackdown has left a “chilling” effect on the industry, potentially slowing innovation, while US restrictions on China’s computer chip industry are hampering progress on the development of cutting-edge 5G and artificial intelligence technologies.
In January, a senior Chinese central bank official said in an interview with state media that the Action against technology companies was “basically” over, adding that companies would be encouraged to lead economic growth and create more jobs. This comes just weeks after China lifted strict entry restrictions and testing and quarantine requirements that were part of its “zero-COVID” strategy aimed at suppressing the virus.
“With the end of the zero-COVID policy, China is returning to prioritizing economic growth, and the technology sector is evidently a key growth driver in China and a celebrated source of innovation,” said Gregory Allen, senior fellow in the US research organization’s Strategic Technologies Program Center for Strategic and International Studies.
Companies like Alibaba and Tencent control everyday apps and services that are ubiquitously used by large segments of the population – including online payments, messaging, grocery delivery and e-commerce.
Such companies thrived with sparse regulation for two decades before Beijing launched an anti-monopoly lockdown. data security and other restrictions from late 2020 to curb e-commerce, social media and other businesses it deemed too large and independent.
Didi Global signaled easing – which was ordered to stop Registering new users in 2021 after allegations that it broke privacy rules – recently allowed to start accepting new users again.
Regulators said e-commerce giant Alibaba Financial subsidiary Ant Group may proceed with plans to raise $1.5 billion for its consumer finance unit, a major step forward after the government canceled a proposed IPO two years ago and asked the company to restructure.
After labeling online gaming “spiritual opium” and enforcing strict controls on underage screen time, regulators began last April Approval of New Games after an eight-month hiatus, with the first foreign titles getting the green light in December.
Shares in tech companies, including Alibaba, Tencent, as well as others like food delivery company Meituan and search engine and AI company Baidu, have nearly doubled in share price since bottoming out in late October. However, the market valuations of these companies are still a long way off their 2019 peak.
The chilling effects of the crackdown on investors and entrepreneurs will continue, Allen said, as authorities have shown they are willing and able to forego growth to impose controls on the industry at any time.
In the past two years, several tech company founders have resigned as CEOs or chairs of their respective firms, including Alibaba jack maRichard Liu from JD.com, Zhang Yiming from Bytedance and Colin Huang from Pinduoduo.
In January, Alibaba’s financial subsidiary Ant Group said Ma – once China’s richest man – would relinquish control of the company after a reorganization and that no single shareholder would have control. Ma has rarely been seen in public since regulators pulled the plug on Ant Group’s Hong Kong and Shanghai market debut after his criticism of China’s financial sector in 2020. He has reportedly since moved to Tokyo.
“If you were a tech entrepreneur in China five years ago, there’s a very good chance someone like Jack Ma was your hero, your idol, and exactly what you wanted to achieve and the kind of person you wanted to be,” Allen said. “And to see a man like that get taken down sends a really powerful message, I think.”
He and other analysts say the crackdown could potentially stifle innovation as investors and entrepreneurs become more cautious about doing business in China.
“The crackdown was deep and to the bone, probably more than the government anticipated,” said Shaun Rein, founder and chief executive of the China Market Research Group in Shanghai. “Because of what has happened in the last two years, venture capitalists and entrepreneurs have been afraid to put capital and start new businesses.”
According to research firm Preqin, the value of venture capital deals in China fell 44% to $62.1 billion in the first 10 months of 2022 compared to the same period in 2021.
Some entrepreneurs and venture capitalists are taking a wait-and-see attitude, “long-term concerned that if they invest in a hot sector, the government goes against China’s agenda or doesn’t fit the government’s private-sector agenda that they could be wiped out,” Rein said.
Established internet companies still have an advantage over other tech industries in China, which face added uncertainty from frictions between Washington and Beijing over advanced technology and trade as the US seeks to expand exports of high-end semiconductors and chip-making equipment block western business deals with companies like limit huawei Technologies, the world’s largest manufacturer of network equipment for telecommunications.
The Biden administration has stopped approving renewals of licenses for some US companies that have sold essential components to the Chinese tech giant. So say two people familiar with the matter who were not authorized to comment publicly on the sensitive matter and spoke on condition of anonymity.
Washington has gradually tightened controls over US exports to Huawei, but allowed some companies like Intel and Qualcomm to sell it processors used in devices like low-end laptops and smartphones. The US justified such sanctions on grounds of national security. Huawei denies the allegations.
Under this pressure, China has accelerated efforts to become more self-sufficient in semiconductors and other advanced technologies, allocating billions in subsidies and investments to the industry. But it’s years behind on some of the most advanced semiconductor manufacturing processes, and a US ban on supporting integrated circuit design and production at some chip factories in China has deprived Chinese chipmakers of the foreign talent that has long contributed to the domestic industry.
Another obstacle is the US ban on selling key semiconductor manufacturing assets to China.
“It’s one thing to get into areas like software and cloud services where Chinese companies are already pretty strong,” said Allen of CSIS.
“It’s quite another matter to take Chinese companies that are a decade or two behind in cutting-edge semiconductor manufacturing facilities and tell them to grow up immediately by replicating some of the most advanced technology the world has ever produced. ”
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