Kang Yingyue, International Communications Officer, Taihe Institute; TI Youth Observer
A big part of China’s rise as an economic juggernaut is the amazing degree to which technology has now become a major part of its economy. Home to Alibaba, Tencent, and Huawei, China is clearly competing on the global market for its technological supremacy. With much attention being paid to the technology-enabled digital sector’s innovation and dynamism, the Chinese government’s tightened regulatory control over the sector has caught many off-guard and has invited speculations both at home and abroad.
The specific reasons behind remain unclear. However, situating the policy direction in the broader context of U.S.-China competition, where core technologies are at the center of bilateral relations, it may be argued that the spate of regulations is not a policy innovation of Beijing last year, but the product of the trade war launched by Donald Trump in 2018.
China’s political and economic-technological strategy going forward is well encapsulated in the so-called Dual-Circulation strategy. The term has frequently appeared on high-profile occasions such as the Sixth Plenary Session and the recently closed Two Sessions signaling China’s economic direction to the world.
The objective of the strategy is two-fold. First, to make the Chinese economy more resilient and more self-sufficient domestically and less dependent on the rest of the world. Second, to try to promote economic and trade exchanges between China and other countries in favor of globalization in whatever areas complementary to one another such as renewable technologies.
For a lot of China watchers or tech analysts, the pronounced regulatory tightening imposed on the tech sector that occurred during the summer of 2021 was the watershed moment marking the major shift towards self-sufficiency. Over the past 12 months, Ant Group’s IPO has been suspended, several home-grown big techs have been cut down to size, and new private for-profit tutoring services have been banned from registering. The costs of these policy actions have been huge. Businesses suffered under the new initiatives, which have fanned unemployment worries amid economic headwinds. They have also created an atmosphere of uncertainty for foreign investors, especially against the backdrop of tightening US rules against investment in Chinese firms.
Indeed, China’s self-sufficiency efforts have ramped up by an order of magnitude in the last five years as registered in the Made in China 2025 and the New Generation AI Development Plan for 2030.
However, it is important to note that the major driver of China’s self-sufficiency efforts has not so much to do with government policies being dictated by Beijing, which has oriented itself towards the same goal of self-sufficiency and technological greatness arguably since the promotion of the First Five-Year Plan in 1953. Rather, the key differentiator was the trade war that designated Chinese tech companies such as ZTE, ByteDance, Tencent, and Huawei to various blacklists maintained by the US Department of Commerce and other government agencies over the last few years.
The reason behind this argument is fairly self-evident. Weeks after ZTE, one of China’s most internationally successful technology suppliers that had about $17 billion in annual revenue, was banned from using components made in the U.S. in 2018, the company was reported by New York Times to be “facing a death sentence.”1
When the U.S. accelerated its efforts to limit Huawei’s business through a ban that kept it from getting key components like semiconductors and chips from US companies during the Trump administration, the company’s market share in cell phones collapsed and its global share plunged from a peak of 17% in March 2020 to just 2% in September 2021.2
In an interview in December 2021, Vice President of Huawei Glenn Schloss acknowledged that the company’s business has been “significantly disrupted” by US sanctions.3
These are perfect examples to illustrate how companies could bleed out due to a shortage of supply of what the U.S. controls and China does not. As the Biden administration continues to uphold his predecessor’s position on China’s tech companies, and as more Chinese leading tech firms are targeted by the United States as well as its allies, there is now a drive by the Chinese entrepreneurial firms to build up technological capabilities to strengthen their competitiveness.
In other words, what Washington has done is essentially to help align the interests of Beijing with those of the companies: to advance self-sufficiency as well as technological greatness. Both are very intent on building up technology capabilities in items including semiconductors, aviation, and biotech, which are proving to be unreliable in terms of supply.
For instance, to sustain its business in the aftermath of the trade war, Huawei was pushed to cultivate the domestic ecosystem, going after Chinese firms for collaboration. Furthermore, prior to the trade war, Chinese semiconductor companies had little business incentive to devote their research budgets because they could always buy from the West. Now, with the U.S.-imposed prohibition, companies such as SMIC (Semiconductor Manufacturing International Corporation) will strive to develop better chips for a domestic market that is suddenly vibrant. Quliang Electronics, a chip packaging and testing supplier based in Fujian Province, is reported to be rapidly expanding its production capacity in Quanzhou to help Huawei to shore up its defense in the face of ongoing US restrictions.4
Within this context, what has been happening in the Chinese tech sector can be approached as a side story relative to the major goal that China now has towards self-sufficiency, which has always been there but lacked momentum and was greatly motivated by the trade war in 2018. From here, the regulatory control over businesses like Tencent and Alibaba can be roughly interpreted in the following ways. On the one hand, as China hopes to enhance its economy’s resilience, tech giants and their commercial behaviors have to be properly regulated as they are hurting small and medium-sized enterprises as well as the ranks of the talents of the startups. On the other hand, Beijing has reoriented its priorities toward science-based technologies such as semiconductors, aviation, and biotech, and has stepped up efforts of promoting science and technology curricula in universities to cultivate technical labor force. Consumer Internet is not necessarily the most critical element for the country to win the trade war with the U.S., although consumers very much enjoy the services offered by entertainment or food delivery platforms.
In short, China and the U.S. are in a major time of discontinuity. Understanding the context and recognizing the trend will be of vital significance for companies to succeed in China in the upcoming years.
1. Raymond Zhong, “Chinese Tech Giant on Brink of Collapse in New U.S. Cold War,” The New York Times (The New York Times, May 9, 2018), https://www.nytimes.com/2018/05/09/technology/zte-china-us-trade-war.html.
3. Ina Fried, “Huawei Sanctions Snarled Chip Supply Chains,” Axios, December 3, 2021, https://www.axios.com/2021/12/03/huawei-sanctions-chips-supply-chains.
4. Anne Morris, “Huawei Shores up Chip Expertise to Counter US Curbs,” Mobile World Live, January 12, 2022, https://www.mobileworldlive.com/featured-content/top-three/huawei-shores-up-chip-expertise-to-counter-us-curbs.