EEven by its own standards, the technology industry has had an extraordinary year. The tech sector's share in the S&P 500 has risen to an unprecedented 30%, thanks to soaring valuations of companies like Nvidia, Meta, and Amazon. Amid this boom, it's all too easy to overlook the challenges facing tech giants in other regions, particularly China.
China's biggest technology companies, particularly Alibaba and Tencent, have seen their market capitalizations plummet by up to 75% from their peaks three years ago. A key factor was a sweeping regulatory crackdown launched by the Chinese government at the end of 2020 that lasted an unprecedented 18 months. It wasn't until March 2022, when Chinese stocks suffered a major selloff, that policymakers reversed course and loosened regulations.
During this tumultuous period, Chinese authorities rapidly introduced a series of strict antitrust, data and labor regulations, as well as levying astronomical fines on companies such as Alibaba and Meituan that engaged in monopolistic behavior. At the same time, Big Tech companies such as Tencent, Alibaba, and Ant Group were forced to exit non-core businesses and undergo major restructuring to reduce their influence in the high-tech sector.
Chinese authorities have argued that these hectic measures are aimed at correcting myriad regulatory problems caused by years of unchecked growth and unregulated competition among local tech giants. But the hectic enforcement action has created confusion and raised concerns about the vagaries of China's regulatory policies.
From 2021 to 2022, total investment capital in China's internet industry plummeted by an astonishing 80%, from $49 billion to just $10 billion. At the same time, the market capitalization of Chinese internet companies has shrunk from its peak of $2.5 trillion in 2020 to $1.4 trillion in 2022. As investors exit China's consumer technology business, new entrants into the sector are declining.
This crackdown places a disproportionate burden on small and medium-sized businesses, which do not have the extensive internal resources at their disposal that larger companies have to deal with the costs of increased regulatory compliance. This inadvertently gave big technology companies a competitive edge and further solidified their dominance in the market.
Foreign tech companies ostensibly not targeted by the crackdown are also feeling the pain. In 2021, both LinkedIn and Yahoo announced their withdrawal from China, citing rising compliance costs and a difficult business environment.
A major consequence of the retreat of private investors was to pave the way for the state. In the past few years, the state-owned company has aggressively invested in “golden stocks” in certain subsidiaries of Chinese social media companies such as ByteDance (TikTok's parent company), Alibaba and Tencent. These shares, typically representing a nominal 1% to 2% stake, give the government the power to appoint board representation and veto power over major company decisions. Although the plan only affects these social media companies, investors are wary of the Chinese government's control over tech companies.
This increased state control has also raised further suspicion among foreign policymakers about social media apps owned by China's Big Tech. The recent US bill forcing TikTok to divest from its Chinese parent company ByteDance exemplifies such a trend.
Although the crackdown has eased since early 2022, it is clear that it has left an indelible mark on China's technology regulations and undermined trust in state-business relations. Investors have endured unexpected crackdowns and are now extremely sensitive to even small regulatory changes. A clear example of this was last December, when China's gaming regulator released draft rules to curb excessive gaming. The announcement caused panic among investors and wiped out $80 billion of the Chinese gaming giant's market capitalization. In a dramatic turn of events, the gaming regulator scrapped the proposed regulation and fired its chief.
Today, the technology industry is still characterized by stricter laws and stronger regulators than before the crackdown. And when the next crisis requires strong state intervention, regulatory overreach will become even more likely. Without strong institutional oversight, there is a risk of over-enforcement and administrative abuse. Worse, this repression could lead to institutional changes that could create an even more unstable cycle in the years to come.
The impact of all this extends far beyond the economic and financial implications. The country had been counting on high-tech companies to help it achieve technological self-sufficiency to catch up with the United States, but the crackdown has crippled its most competitive high-tech giants and undermined its goal of achieving technological superiority. became even less achievable.
