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Alibaba, Didi, Tencent, Baidu and other Chinese tech giants under rising scrutiny of CCP.                                    

The recent government crackdown on China’s tutoring educational sector in China caused selloff on China tech stocks.

Xi Jinping’s policy to put an end to the unlimited growth of tech platforms

The Chinese government has tightened the rules on the Chinese after-school education industry lately, requiring the Chinese tutoring education companies to become nonprofits, while also placing other restrictions on them. This measure is seen as an attempt to tackle rising educational costs in China that deter many families from having more children. As a result of this drastic measure the stock price of the educational companies plunged both on NYSE (American market) as well as on the Chinese markets. 

The latest state assault on the Chinese education sector shall not be considered as something unexpected. It follows a series of actions by state institutions to regulate some parts of the Chinese technological sector which have developed rapidly in recent years. The unprecedented growth of some tech companies has resulted in accumulation of big wealth meaning that their possible bankruptcy shall have very bad consequences for the whole Chinese financial system. Let’s imagine that only one Ant Group (the sister company of Alibaba Group) planned to raise about 35bn USD during the IPO. Jack Ma has by surprise not learned the unwritten rule of how big business works in China: “Once you become too big, you should be ready to step down anytime and share your success with people, but never try to bypass the rules.” Therefore the state measures aimed at stricter regulation of the tech sector have broad implications on companies like Alibaba Group, Tencent, Baidu or ride-hailing giant Didi Global Inc. The latter has become a particular subject of scrutiny by the state Cyberspace Administration of China (cybersecurity watchdog) for possible misuse of large amounts of sensitive user data.

At the same time, as the FT (Financial Times) points out, the market turmoil suggests that developed world investors have underestimated the importance the Chinese Communist party attaches to control and social stability. Beijing is ready to put more scrutiny on the tech sector and is immensely active when the sensitive data of the Chinese citizens may be used or even traded on the market. We may observe a very clear pattern (often misunderstood by the Western market economies) in the measures that are limiting the growth of tech giants in China. The Western investors as well as politicians criticize Chinese Communist Party (CCP) for the direct intervention into private companies, neglecting absolutely the fact that the unprecedented growth of tech companies in China poses new risks to the Chinese social system. Chinese tech giants have already transformed into great unregulated institutions which may use and trade the sensitive data of people, follow their behavioral patterns and hobbies and even influence their shopping choices. This is something which already happened in the Western society with Facebook which has an imminent role in voting campaigns including the USA presidential vote. The Chinese regulator has carefully monitored the development of tech giants in the Western countries and has understood that tech giants may overlap with some government functions.

Then came the issue with Chinese after-school education companies. The shares of three NYSE listed Chinese tutoring companies (Gaotu Techedu, New Oriental Education&Tech Group and Tal Education) crashed after the Chinese regulator came with a new reform that mandates tutoring companies to become non-profit and that they could no longer raise money from foreign investors. But as the situation inside China reveals tutoring companies have nurtured a very unhealthy and unfair education system where children from rich families could afford to pay for very expensive after-school tutoring costs and hence to get more advantages when entering Chinese top universities. Especially parents of children from Tier 2 and Tier 3 cities in China are more than happy with this government regulation on the tutoring companies, because they consider the system very unfair for children from poor families.

It seems that the process of stricter regulation in the tech sector of China will continue. The Chinese State Administration for Market Regulation has come to public attention with its draft rules on August 17th that banned unfair competition among internet companies and platforms. The release of these rules has hardly hit the Chinese stocks which are traded in the USA (including Alibaba, Baidu, Tencent). The following selloff was more than expected, but in the long run these companies will grow. Sometimes we cannot understand the narratives of development in Asian countries (this logic may be used in respect to the latest development in  Afghanistan), because we are trying to analyse everything through the lens and behavioral models we are used to in our countries. Therefore we cannot fully acknowledge the processes going on in China, and this could be especially demonstrated on the example of the latest measures of CCP to regulate the Chinese tech sector.