When it comes to China it often pays to listen out for changes in the political mood music and right now, as the ruling party gets ready for its five-yearly national congress this autumn, there are subtle hints that something new is in the air: criticism of China's private technology companies.
Although Communist China never fully embraced political glasnost, the country has undoubtedly been open for business for several decades and seen private enterprise flourish as a result, lifting hundreds of millions of Chinese out of poverty.
But the trappings of the state-planned economy – the five-year plans, grand geopolitical projects, hidden power struggles, opaque networks linking business and politics – remain, as do the authoritarian instincts of the ruling class. Beijing's latest barbs at Chinese Big Tech partially reflect that.
Tencent, the Chinese technology giant behind red-hot mobile game King of Glory, was condemned by state media People’s Daily in July for spreading negative values in society and creating addictive content that was hurting teenager minds.
The public statement caused Tencent's share price to plunge more than 4% on the day of publication, wiping $14 billion off its market value. The shares have since rallied strongly, in line with stronger Asian markets, but the quasi-official grumblings against the country's biggest tech names have since continued.
Early this month, the central bank issued a statement slamming Ant Financial’s aggressive advertising during its annual “cashless week” campaign, claiming that some of the promotion themes had interfered with the normal flow of renminbi.
And then last week Beijing launched an investigation into not just Tencent, but fellow internet giants Sina and Baidu too, for alleged violation of China’s cybersecurity laws. The government criticised the trio for allowing falsified market rumours to spread on their social media platforms.
Policy-driven
China is often dubbed a policy-driven market by stock market investors and traders because frequent changes in official direction can quickly turn sentiment.
One typical example occurred in January last year when China’s securities regulator abruptly suspended the circuit-breaker mechanism it had introduced only four days earlier, wiping a fifth off the total value of Chinese stocks within a month and spurring a massive collapse in global stock markets that lasted months.
Another example occurred in early 2014 when the Beijing municipal government surprised the market by tightening restrictions on new car registrations to help fight congestion and pollution. Another 11 cities shortly followed suit, causing massive selloffs in the entire auto manufacturing value chain – from car makers and dealers to petrochemical and steel makers.
But unlike the recent spate of public criticisms, these actions were not targeted at individual companies but rather the broader market or a particular sector. They weren't targeted at state-owned enterprises either. So it is not hard to understand why the recent criticisms might be more worrying for owners of private businesses.
Beijing’s concern
There are some similarities to these companies – they are all big, they are all internet companies, and they all run businesses that affect millions of people every day.
That perhaps explains some of Beijing’s worries – that digital innovation has created private sector giants capable of disrupting the way things work conventionally. And in that respect the conversation in China echoes what is being heard in the West as the likes of Facebook, Google, Amazon et al increasingly influence political outcomes, undermine mainstream values, alter the news and propaganda landscape, and erode the power of the state.
Given its authoritarian instincts the Chinese government is clamping down on the social media platforms run by Tencent, Sina, and Baidu because they give rise to open discussions on sensitive matters, change the way Beijing wants information to be distributed, and reduce the influence of state-controlled media outlets.
In the case of Ant Financial – the Alibaba affiliate behind China’s biggest electronic payment system, Alipay – the People's Bank of China is worried that the promotion of cashless transactions could reduce the circulation of the currency, potentially making it harder for China as it strives to internationalise the renminbi.
Beijing's seemingly tougher stance could mean bumpy roads ahead for Jack Ma and his plans, outlined in March, to turn China into a cashless society in five years time.
State media criticisms of Tencent, which also owns China's leading mobile messaging service WeChat, have so far centred on the social problems associated with its blockbuster mobile game King of Glory.
That includes addiction but also the perceived undermining of traditional Chinese values and historical distortions; for instance, legendary Chinese physician Bian Que is presented as a cruel master of poison, while Li Bai, arguably China's most famous poet, is reinvented as an assassin.
Tencent's first half results show that mobile gaming revenue accounts for over 25% of the group's total income. As such, it is not hard to predict the business impact on the internet giant if the authority ordered a suspension of the game – something that cannot be completely ruled out given Beijing's tough stance of late.
Innovation vs control
Beijing’s growing public criticism of private companies is a sign that some of these businesses are getting so powerful that they are gnawing away at the power of the Party, which ultimately still sits at the apex of China's communist-capitalist hybrid economy, lest these tech giant upstarts forget.
It also serves as a warning to anyone investing in Chinese securities that they are exposed to extra sources of volatility and risk compared with other, more open markets because when industry trends hit against Chinese state goals, Chinese state goals will still likely prevail.
As People’s Daily summarised on its clamdown on Tencent's King of Glory, “from the government’s perspective, we need innovation, but we have greater needs for monitoring".
That is not ideal from a business perspective; being named and shamed by a government is rarely good for a company's reputation and can, in the more authoritarian Chinese context, also have ominous implications if a company continues to ruffle political feathers.
Still, it is hard to imagine how the tensions between big tech and political power are likely to be resolved anytime soon given the relentless pace at which private companies are introducing new products and services that drastically change people's lives.
As in the West, the relationship between new tech, private enterprise, and political control is set to be one of the defining dynamics of the 21st century. How that plays out in China is something investors cannot afford to ignore.
