Hello, and welcome to another episode of CNBC beyond the valley, I'm Arjun Kharpal,
here in Guangzhou, China. And today's episode is going to be focusing on the technology regulatory
crackdown here in China, why it's happening now, what's really going on, what happens next. And
really what it means for Chinese tech companies' ambitions, particularly as they look to go global.
And as China and the US battle it out for tech supremacy on the global stage, all that will be
revealed in my in depth conversation with a very special guest, who is an internet entrepreneur
as well as a former legislator in Hong Kong. But before we get to that conversation, I want to set
the context here because it's a story that's moved extremely quickly. If you've not been following
it closely. We've seen a raft of regulation for the technology and internet sector here in China,
as well as other parts of the private sector as well. And it all appeared to
start in November 2020 when Ant Group, the financial technology or FinTech company,
founded by billionaire jack Ma, was going to go public in Hong Kong and Shanghai and what would
have been the world's largest IPO. Just a couple days before that was scheduled to be listed,
the IPO was pulled. And the company cited changes in the financial technology regulatory environment
for a reason that regulators end up pulling this IPO. Now, I remember flying to Shanghai a couple
of days before this IPO. We were set to cover it, put my bags down in the hotel one night and boom,
this story just blew up at this point. And we were covering it furiously writing an article.
The next day I was on the streets of Shanghai reporting live on CNBC TV to discuss the story
and what had taken place at this point. But the speed of what what happened really just
underscores I think the speed of change happening in what is a new normal now for the tech sector
here in China. Now at the time, there was a lot to talk about whether Jack Ma's comments a few
days previously, which were perceived as negative towards the regulators had a factor in that there
was certainly more behind it at that point. But it did kickstart a number of other regulatory actions
and movements as well. There were new rules that came out in terms of antitrust specifically
for the platform economy, which refers to these technology companies operating platforms such as
e commerce sites, or food delivery or social media as well. There were new rules on unfair
competition on the internet, Alibaba was hit with a $2.8 billion fine in an antitrust probe.
Meituan the food delivery giant is currently under investigation as well in an anti monopoly probe,
as well. And the government's introduced new rules around data privacy and data protection. And now
the other high profile incident to highlight here is Didi, the ride hailing giant, which went public
over in the US. Days later, the regulators open the cyber security probe into the company.
And we'll certainly get into more of that and why that happened. But the question really is
why now, why this regulatory movement now and what next? What is the endgame? And to discuss
that with me today? I've got Charles Mok, an internet entrepreneur as well as a former Hong
Kong legislator. He is the founder of Tech for Good Asia, an advocacy group promoting the fair,
open and safe use of technology, Charles, good to see you. Thanks so much for joining the podcast.
Good to see you.
So let's kick off this conversation because,
you know, there's various regulators who are involved right now in the, the tech regulation
here in China. You know, what's changed at the moment in terms of the thinking from
Beijing? Why now? Are we seeing this big regulation of the country's tech sector?
Yeah, I guess it all started. For most people looking at what's been happening, most people
would probably think that the the crackdown started when, you know, when the Ant Financial
tried to IPO in Hong Kong last November. Now, looking back, I think by now, I mean, hindsight
is always perfect. So looking back, I would say that, we are able to see that actually, a
lot of the trends that the Chinese government had been planning for this sort of actions to happen,
actually have been happening for quite a few years, in particular, some of the legal changes
that they have put in place, including the last couple of years, strengthening some of the anti
trust laws inside of China. And more recently, of course, the data security and the cyber security
laws. These are actually I would say, looking back in hindsight, things that the government has
been preparing for this wave of action. Now, of course, the recent escalation of the effort or the
ferocity of these kinds of actions, may really take most of the people in the market by
surprise, to a great extent. And I think part of the reason is also because when we think about
investors, or even many of those people, or groups that are actually investing directly in these
companies that are involved, you know, companies that are trying to get IPOs, and financials,
Didi and other spinoff from Tencent and so on. You look at those people that are in the market,
they actually probably within the last couple of years, were thinking that things are going to get
tougher, and they wanted to get on the last train. So they were trying to rush themselves in the door
or out the door, which whichever way you look at it, they want to get the last chance to let's say,
do a huge IPO before the crackdown happens. And probably that's also what made the authorities
more agitated. What made them more on edge. And, and probably because of that the
sort of action, the level of action that has been taken recently had been more escalated.
Has there been any kind of shift in terms of the mentality in terms of
the thinking of the Chinese Communist Party and the broader government agencies towards
the tech sector Do you think? Or the private sector for that matter, as well?
Yeah, I think it's actually not just the tech sector sector is also the private sector, as a
whole, particularly those sectors that are prone to be controlled by a smaller number of players
that are becoming very affluent, very wealthy, has a lot of power.
Either within those companies, or actually, even between companies, you know, they work together
in certain ways. So the government is probably concerned about those power be invested
increasingly in the private sector. We've been hearing or talking in the last several years
of the central government and the party thinking that they want to move a bit back
away from the proliferation of the private sector toward more control by state owned either either
directly or, you know, not necessarily the same kind of state owned enterprises have decades ago,
but more involvement and control by the central authorities. That's certainly a trend. So in
a sense, I believe they are definitely trying to instill and develop a new economic order In China,
that is very much reversing the kind of liberalisation
and economic reform sort of almost free for all for the private sector to flourish.
That kind of opening up, I do believe that this is, it's clear that the whole thinking is changed.
And when you say new economic order, I mean,
what would you think? Or what can you discern that are some of the features of that?
Well, if you look at it from the regulatory aspect, first of all, is pretty clear that
the government is looking at number one, sectors that has to do a lot with you know, as I said,
you know, sectors that are easily controlled by a small number of players to trade practices
across sector within the sector, that that allowed them to, to develop the sort of anti
monopoly or monopolistic type of trade practices, they are very concerned about that. And of course,
they will say that the reason is because they want to protect consumer interests. And there is a good
degree of truth in that as well, not to make a course also the government wants more control.
The second very important trend is obviously the concern about data.
And that, why we seem to see a lot of the focus being put on tech companies, because they are
the companies whether they are in, okay, apps or online games, or transportations like Didi
or financial services, we are talking about these companies putting all these
services more and more online, and then they collect a lot of data.
Now, that means that well, of course, when we look at Didi for example,
well, it's clear that the government was the Chinese government was concerned if the Didi go
IPO in the foreign country, and then they might be successful susceptible to those foreign countries,
especially the United States, trying to get these data from these companies,
because they get listed on in the US. But actually, even within the country domestically,
the government is probably also concerned about the power of these company collecting and having
a monopoly on all these data. And then finally, of course, also about capital, the government's
in the past, I think they weren't as concerned about these companies trying to
get IPO and get capital investment from foreign entities and investors and so on. In the past,
I believe even the government believed that it was a good thing, because you know, every government
should want more foreign direct investment, or even foreign IPOs. But I think that mentality
has changed. Right now, the government is more concerned about what they call disorderly capital
expansion, which has to do with these companies either, you know, going to getting foreign
investment, and, and then the central government may be worried that this might be this might allow
foreign interest of or even governments to have to have too much control within what's
going on within China. And that's becoming more and more sensitive for the government.
So Charles there's a lot to unpack, he had some of the comments you've made in the past few minutes.
So I do want to just take it back a little bit. And we'll delve more into that data point. And
a few of these other points. Firstly, you know, the power of the tech companies is something you
mentioned. And one of the interesting things was, of course, before the pulling of the ant group IPO
in November, you know, jack Ma, did make that that notorious speech now, in which he was perceived
to be pretty negative towards the regulators in China. And there was a lot of talk about
whether that was the catalyst for the regulatory action, but more broadly, whether the action
against ant group and subsequent actions against Alibaba in terms of that huge antitrust, fine,
we're really about making an example of some of these tech entrepreneurs who have potentially
created alternative power centers to the CCP, and, you know, are posing a potential challenge to the
power there. I mean, how much do you buy into that narrative? You know, how true is that narrative?
I think there's some truth to that. It probably you mentioned about Jack Ma's speech late last
year, I believe that probably was the, pretty much the last straw on the camel's back,
that really forced, prompted the government into,
you know, finally taking very drastic or serious action or stopping the IPO and so on.
But, as I said, I don't believe that it was the only reason. The government over the last several
years probably had been very concerned about the power that is developed within
some of these individuals, like you mentioned Jack Ma, and others, but I don't think it's just
a few, you know, figures like Jack Ma, or pony Ma, or people like that is actually the whole,
interconnected circle of interest among these people, I think when we look back at some of the
reports coming out of the that IPO, and some of the pre IPO activities that was reported, later
on, the kind of allocation of pre IPO, stocks, and so on, to different individuals, or groups,
and so on, you could see that there was a huge amount of these kind of relationships in China,
you know, it's not just, you know, Ant Financial, when they went, if they did go IPO,
it doesn't mean that there was only a few person that are expected in the companies and
Mr. Ma himself, making a lot of money. It's actually a whole group of people as well.
And I think that's the kind of thing that the Chinese government is concerned about,
not just any particular individual, but the sort of sphere of influences that are being developed
among these rich individuals and companies that actually also, in many cases,
have relationships with investors outside of the country, as well. So they are concerned.
Yeah, and I guess that fits into this narrative from the Chinese government around creating a
common prosperity, right. And at the same time, you've got a lot of these sort of,
you know, rich tech entrepreneurs, making a lot of money. But at the same time,
there's a lot of disenchantment with, for example, the working culture in the technology, sector,
996, etc. So I guess some of this action also tries to fit into that narrative of,
to some extent, the Chinese government looking like it's looking after the people.
So actually, I think there were a lot of good reasons why the government had to do what it did.
Because there were indeed, a lot of very seriously deficient or unhealthy culture, among these
companies that are developed in the kind of work ethics that they miss demanded from their
employees, long work hours, and so on. People actually working themselves to death in a
couple of instances. Very recently, of course, the last couple of weeks, some of these sexual
harassment cases that came out, which actually revealed also that there's huge amount of sexual
harassment types of issues, or culture within these big companies that they have in the past
been trying to overlook. So it probably fell right into the, the conveniently fell into
the hands of the authorities to actually, you know, paint the picture of these big companies
being out of control, being less sensitive to not just the consumers, but also their
workers and so on being unfair. The, you know, the bosses make a lot of money and so on, but
working the employees to death and all that, I think it fell into that really conveniently in the
hands of the authorities to paint that narrative increasingly, but to be fair, those are real
problem within these companies, so the government at this stage, use it to their advantage.
And just moving on to another issue you brought up and that is data, of course, credibly important
tech companies collecting a lot of it. And in the example of Didi, as you mentioned,
it appeared the Chinese government was concerned about the amount of data Didi was collecting at
the amount of sensitive data Didi was collecting and the ability for that,
potentially to fall into foreign hands as well. But more broadly, I mean, why is data
and the amount of data tech companies are collecting so of such concern to the Chinese
government is because to some extent, you feel that they're, you're moving in a way where,
where the Chinese government feels that data is somewhat of a state asset.
Well, to be, to be fair to everybody, in a way, I guess the Americans also feel the
same way. Because the United States were also concerned about let’s say TikTok collecting
data of their of the Americans and then turning it over to China and so on. So I think China
thinks the same way and particularly, because for many of these companies that are getting listed,
let's say, in the past even, you know, companies like Alibaba and so on, that were getting listed
in the US, many of them collect a lot of the data from, from from domestic Chinese sources and
citizens or if or companies. Now, also, I think the Chinese government is becoming more concerned,
because within the last couple of years, there were also legal developments in the US,
mandating companies that are listed in the EU in the US that the US regulators,
securities and other regulators would be allowed to get information and data from these companies.
So it was also a development that I believe China was sort of following in a reciprocal way right
now. So I think there's, these are the reasons that they believe that some of these data that has
to do with any particular sector, you just don't know what it will, what it would mean, you know,
just like when Americans were looking at Tick tock, and they said, well, who knows, you know,
maybe there was something that some very sensitive individuals or military personnel happened to be
saying, or posting on tik tok, and then their identity or their particular information might
be reviewed to a foreign government. And they would be concerned, I think, at the very least
a Chinese also concerned the same way. And also, don't forget that in the last several years, we've
always been saying that China's AI development has been quite successful, very successful, actually,
even in comparison to the Americans, because of the fact that they have huge amount of data
that is available, that they have been, they have collected from all these domestic abs
and companies and so on. Now, imagine that they would feel that some of these data might be
somehow captured or shares shared with other entities or the foreign governments especially,
I think they would have a good reason to be worried about that. Not to mention that I think
is again, it's not just data, at the same time is also about the control. Because once these
companies get, let's say, in the case of DD, if they got, what they did get IPOs right now, they
even talking about whether or not they have to reverse the IPO. But anyway. But whatever happens,
I think the government is right now, a Chinese government is concerned that what if there is
some sort of directive from the Americans to try to tell these companies what to do,
and then these company will be in a very difficult position in the sense that they will be forced to
listen or obey a foreign government in the views of the Chinese authorities.
Is this partly about trying to redirect resources of companies like Alibaba, Tencent, etc,
into some of the strategic priorities of the Chinese government around technology,
whether that be semiconductors, Ai, etc, particularly as you think about
the geopolitics here, the broader battle with the US over technology? You know,
and does China at this point, see regulation as a way to build long term competitiveness?
Well, I'm not so sure whether they are trying to redirect private companies such as Alibaba,
and Tencent and others into developing chips, right, because that's not what they do. So
that might be a bit difficult. But by refocusing the supported industry,
you know, in China, I think in a centralized economy with with centralized planning,
they have more used to let's say, we want to focus the educational academic research efforts in let's
say, particular areas, such as let's say, like electronics, or maybe quantum computing and so on,
right. So if they do that, that would mean that actually, they the importance, the relative
importance of companies such as Alibaba, or, and others, the current internet economy type
of big tech, will be will be delimited will be diminished. And gradually, hopefully, through new
startups, or new state supported enterprises like Huawei or others may take over their importance.
How do you see the regulatory landscape at the moment as it plays out
impacting the business models or some of these technology giants?
Well, I think they are going to be very concerned right now,
because of the unpredictable unpredictability of the of the regulatory regime. When you talk
about illegal or anti monopolistic types of or monopolistic types of trade practices.
You know, it's easy to say that, Oh, this is wrong, but then, you know,
you don't know when you get into it, it's very difficult. Because in China, I think, unlike
where some of us are more familiar with some of these jurisdictions like common laws and so on,
you rely on a lot of previous cases to say that, okay, this might be, this might be a problem,
this might be okay. But in China, I think you just can't rely on that there's not much to rely on.
And it's very much up to the will, or the decision of the government and the regulator to say, Okay,
this is not allowed now, not anymore, when used to be very common, probably. So I think that is a
going to be very difficult for these company to, to adjust to these types of regulatory
actions in the time to come. And the other thing that I would worry is that, you know, it's easy
to start a campaign like this. But it is not necessarily that easy to find a way to stop
when it should be stopped when Enough is enough. How, who decides that. And right now,
what I worry is that we see a lot of actions by different regulatory bodies, different ministries,
different departments, it's almost like every time every, but every one of them
is trying to do better than the other by, you know, trying to nail a couple of a couple more
companies and fine them a little bit more than the other and so on. If that kind of competition
is developing. I just worried that they don't know when to stop.
And there certainly does seem to be this lack of coordination between a lot of the regulators
and some of the regulators even seem to have been caught off by surprise, when, you know,
you saw this huge sell off on some of these major Chinese tech stocks and the indexes that tracked
them as well. You know, so much so that the securities regulator had to step in and, you know,
speak to the investment bank. So there does seem to be this uncoordinated action at this point.
Yeah, you're right. They are not very coordinated. And they don't usually think about
the consequences ahead of time. Part of it is also well, it's because the lack of good part
of it is because of the lack of coordination part of it is also the lack of experience
in, in regulation in in regulatory actions, because everything is new, because even the
rules are new, so they don't have a lot to go by when they start to do this. In a sense,
as I said, I think they are everybody is trying to best the other to better do more than the
other. And, and because they, they perceive that it's like doing a good job. Because in China,
different ministries or different government departments do have a tendency to try to do
things in order to let the people above see that I'm doing a good job, I'm doing a lot.
So they continue to do that, without regard to the kind of consequences that would bring to
the industry, you know, the stock market crash is something that's easy to see happens almost right
away very quickly. But the impact on longer term issues, factors such as developmental manpower,
where do the talent go, because the market is sending a certain message
Now, with that affects the kind of, you know, the talent selection of the academic pursuit,
in universities and so on, which will in turn in a few years time affect the supply of talents in
the market for particular sectors? Are they sending a wrong message? are they sending a
message that would not make their manpower supply as sustainable as it as it should be? These are
actually real worries, and I don't believe they have the experience, or even in some ways right
now, the the thought of having to even think about these issues beforehand, and that can be worrying.
Yeah. And I think that brings me on to my next question, which is, you know,
how big is the risk here that some of these regulatory actions
actually harm the long-term competitiveness of certain companies in China's tech industry,
particularly as many of them have ambitions to go global?
Yeah, I think going go global right now is going to be more and more
of a difficult option for these companies. Because of the fact that, you know, if you go global,
you will be regulated by a foreign for foreign governments, right? Some of these companies
actually had been very successful in the last several years, like it or not, you know,
like, TikTok, and so on. And now, you know, they surpassed even Facebook in terms of getting apps
download, right? So hugely successful. Now, on the one hand, Chinese government and in the past
couple of us may be concerned, these companies becoming sort of a pawn between the US and China
competition and being forced from both sides being put in a very difficult position.
But increasingly, these companies by virtue of going abroad, even including Didi,
you know, one of the reasons why they went public in New York, other than trying to,
to raise a lot of money is also because they are indeed, engaged in international business.
They are quite big in some of these global markets, including South America and so on.
So it's not like ah, completely domestic, business trying to IPO in the US domestic
Chinese business trying to do IPO in the US, they are actually somewhat, or at least they are
somewhat International, or at least they are even trying to do more in the international market.
Now, right now, I think it will be more difficult for these companies to do that. And also in terms
of getting foreign investment, you know, you do see that some of these investors, for example,
SoftBank within the last couple of weeks, or last month, they have been saying that, you know,
they re-evaluating their strategy, because it's becoming increasingly unpredictable and risky.
And they were a huge investors previously in many of these tech companies, new startups and so on in
China. Now, what would that mean in terms of the continued sustained competitiveness of the Chinese
tech industry, or even other industries, if foreign capitals are becoming more and more aware
of the risks, that will be involved, and then they are pulling back now, that will also at least,
you know, I would think that that is an issue of concern in the in the long term.
And on the IPO front, I mean, effectively, are Chinese tech IPOs overseas off the table?
I don't know who which big companies right now going to be courageous or bold enough to go IPO
internationally, of course, they can come to Hong Kong. And Hong Kong, I think, you know, they are
outright coming out and say that, you know, come to the Hong Kong Stock Market and do an IPO over
here, and it's still part of China, it is part of China. And so no worry about the issue about,
you know, regulation by foreign governments, and so on. So I think that is probably going to be
in a way benefiting Hong Kong. But then again, you do see that even recently, some
of these companies like Tencent Music, they were supposed to be or trying to be IPO in Hong Kong
this year, but even they are pulling back, not even Hong Kong, because the problem is not just,
you know, us or Hong Kong, it's actually also the fact that they are raising capital, that is
raising a red flag in the eyes of the authorities. So I think, oh, not to mention that. Also, even
after, in after the Didi affair, what happened with Didi. In fact, the US, regulators, Congress,
and so on, everybody is yelling and shouting about needing to regulate these Chinese companies trying
to come to the US to list as well. So on both end, the US government might squeeze them more,
the China government back might also be squeezing them more if they want to come to IPO go to IPO in
in, let's say in New York. To Hong Kong, yeah, the problem might be lesser. But still, I think in
the short term, at least in the short term, many of these companies may still be quite hesitant.
And Charles, I mean, what next? How do you see this regulatory sort of rollout happening
over the coming months? I mean, you said it's a long game, it's gonna take a long time.
And I guess, the multi billion dollar question here,
that many people are asking, oh, well, you know, what industries could be next?
Like I said, I can't see an end. And, and multiple reasons, right, because the government said it
from the highest level, the State Council said that they are continuing this effort.
So obviously, I don't think anybody can, can expect that there will be a quick resolution or
end to this type of actions. And also, because of the unpredictability of it, you know, people will
still be worried, even if, let's say, somebody comes out and say that we're going to, you know,
try to taper off these pressure and so on. I don't think people would totally believe that anyway.
So I think it will, the current situation will continue for quite some time. Now.
Having said that, what will be Yeah, I think that the biggest question is, is what are the
sectors will be affected? I, like I said, I don't believe it is just tech. Increasingly,
well, just last, the last couple of months, we saw about the education, the tutoring industry and so
on, remembering that even though sometimes we look at it as online education, actually a lot of it is
actually offline, a lot of it is actually humans, you know, big classes, right. So, so, these
industries are also getting affected. Online games, and entertainment business,
you know, you see a lot of actions against either individual entertainers or companies.
And the common commonality between these industries are, they are somewhat related
to ideology, or, you know, education, you know, how, what kind of values you will
instill in your next generation, you know, even entertainment, and you're going to follow those,
the way that the idols would look and act and so on. Right? And just becoming totally engrossed in
following the, chasing the idols, that may not be something that the party would like to see.
Things of that nature. But then again, I think the other types of industry that will be very
much at risk, quote, quote, unquote, in the, in the coming times, would be those sectors that
are more prone to be controlled, easily controlled by a small number of big players.
And that would be, for example, obviously, financial services, even though that the
situation might not be as serious as some of the others, because of the fact that still is
very much controlled by some of the state owned companies. But then again, in some sectors like
insurance is becoming to be more diversified with more private companies, and also property,
you do see some actions or talks about some action being taken on some of these large property
developers like Soho, China, and so on. And so I think, very likely they will be another targets,
and some of these other very large companies that are, you know, probably in a sense, over
expanding, you know, some of these companies that are expanding from property into making electric
vehicles, and all that, that are probably in a way, the central authority may consider that to be
making a lot of overly risky investment at the expense of investors and so on. So I think these
are some of the possible, you know, unfortunately candidates that might be future targets.
Well, Charles, thanks so much for joining me on beyond the valley. That
was an excellent conversation. great insight, and it was great to see you.
Good to see you, too. Well, hope we can do it again. Thank you.
Now this of course, is an evolving story. By the time you get around to listening to this
episode of beyond the valley, a lot more may have happened. But I hope it's given you some
sort of insight into the motivations behind what's happening here in China on the regulatory front,
as it relates to the tech sector, as well as what might come next. I'd love to hear
your thoughts. You can get in touch directly with me on Twitter, I'm on
@ArjunKharpal. You can also comment on YouTube and Facebook and you can also subscribe
if you have the chance to CNBC International's YouTube channel as well. Well that's it for
another episode of CNBC’s Beyond the Valley. I'm Arjun Kharpal. I'll catch you next time .