China’s recent crackdown on its tech giants, private education sector, and gaming industry has sent shockwaves across the global markets. The Chinese government claims that it is pursuing a ‘de-risking’ strategy to prevent systemic risks and protect the interests of consumers, workers, and national security. However, this strategy also brings its own business risks for both domestic and foreign companies operating in China.
The impact of China’s regulatory tightening
The Chinese government has imposed a series of regulatory measures on various sectors of its economy in the past year. Some of the most notable ones include:
- Banning ride-hailing giant Didi Chuxing from app stores and launching a cybersecurity probe into its data practices shortly after its US IPO.
- Ordering online education platforms to stop offering for-profit tutoring services and banning foreign investment in the sector.
- Limiting the amount of time minors can spend on online games to three hours per week and restricting their access to in-game purchases.
- Suspending new approvals for video games and imposing stricter content rules on the industry.
- Launching antitrust investigations and imposing fines on tech giants such as Alibaba, Tencent, and Meituan for abusing their market dominance and violating consumer rights.
- Introducing new data security and personal information protection laws that require companies to obtain government approval before transferring data overseas.
These regulatory actions have caused significant losses for the affected companies and their investors. For example, Alibaba’s market value has dropped by more than $300 billion since its record antitrust fine in April. Tencent’s market value has also plunged by more than $200 billion since July, when China’s state media branded online games as ‘spiritual opium’. The share prices of many Chinese companies listed in the US have also plummeted amid fears of delisting and regulatory uncertainty.
The rationale behind China’s ‘de-risking’ strategy
The Chinese government has justified its ‘de-risking’ strategy as a necessary step to address the social and economic problems caused by the rapid development of its digital economy. Some of the main reasons behind this strategy are:
- To curb the excessive power and influence of tech giants, which have been accused of stifling innovation, exploiting workers, violating consumer rights, evading taxes, and posing national security risks.
- To reduce the financial and social pressures on families, especially in the context of China’s declining birth rate and aging population. The government hopes that by regulating the education and gaming sectors, it can lower the cost of education, improve the quality of teaching, and promote healthier lifestyles for children.
- To protect China’s data sovereignty and cybersecurity, which are seen as vital for its national security and technological development. The government wants to ensure that the data collected by Chinese companies is stored and used within its borders and does not fall into the hands of foreign adversaries or competitors.
The challenges for global businesses in China
While China’s ‘de-risking’ strategy may have some positive effects on its long-term social and economic stability, it also poses new challenges for global businesses that operate in or rely on China. Some of these challenges are:
- Adapting to the changing regulatory environment, which is often unpredictable, inconsistent, and opaque. Global businesses need to constantly monitor the policy changes and comply with the new rules, which may require significant investments in legal, compliance, and technical capabilities.
- Balancing between the opportunities and risks in the Chinese market, which is still one of the largest and fastest-growing markets in the world. Global businesses need to weigh the potential rewards of tapping into China’s huge consumer base, talent pool, and innovation ecosystem against the potential costs of facing regulatory scrutiny, political interference, and reputational damage.
- Diversifying their supply chains and markets, which may become more urgent and difficult amid the rising tensions between China and other major economies. Global businesses need to consider the implications of shifting their production, sourcing, or distribution networks away from China or reducing their exposure to Chinese assets or customers.
China’s ‘de-risking’ strategy is likely to continue as part of its broader vision of building a ‘socialist modernization’ under the leadership of President Xi Jinping. This means that global businesses will have to face more uncertainty and complexity in dealing with China in the foreseeable future.
