Xi’s Heavy-Handed Reforms of China’s Tech Sector by David Ignatius

Political Crossfire Xi’s Heavy-Handed Reforms of China’s Tech Sector Could Have an Upside for the U.S.

By David Ignatius

Napoleon is said to have advised his commanders: Never interrupt your adversary when he is making a mistake. Some American experts on China would offer a similar admonition as they watch President Xi Jinping’s heavy-handed regulation of China’s tech sector.

Over the past year, Xi has conducted a mini-purge against Internet entrepreneurs whose companies had been the darlings of the tech world. The question puzzling U.S. analysts is whether Xi’s leftward turn is doing any permanent damage to China’s tech sector, or whether the Chinese economy is so strong and dynamic that it can absorb Xi’s mistakes and keep rolling.

China’s economic strength or weakness will loom in the background next week as President Joe Biden talks with Xi during a virtual summit. Clearly, China’s growth is slowing, and Foreign Affairs posted an article last month with the provocative title, “The End of China’s Rise.” But past experience suggests it would be a mistake to bet on China’s inability to solve problems.

Kevin Rudd, a former Australian prime minister who is also a China expert, says of Xi’s recent crackdown on Chinese tycoons: “I don’t think it will kill the goose. But it’s going to slow the goose.” A senior U.S. official offers a similar view: “Xi is taking incredible risks” in his recent economic purge. “But he has enormous margin for error. Like the U.S. in its heyday, China can absorb failure.”

China’s Internet bubble certainly has deflated. Jack Ma, founder of Alibaba, was silenced a year ago after he dared to criticize Chinese authorities; regulators halted the initial public offering planned for his Ant Group last November. Advance orders for the stock had reached $3 trillion before Beijing pulled the plug. China’s antitrust regulator subsequently levied a $2.8 billion fine against Alibaba.

Investors have suffered from Xi’s tech putsch. Shares in Alibaba Holding, the flagship of Ma’s empire, have declined nearly 41% over the past year. Didi Global, a Chinese ride-hailing company, has fallen 47% since July. Tencent Holdings, another Internet powerhouse, has dropped about 40% from its peak in February.

Caution is now the watchword in a sector that was once as freewheeling and risk-tolerant as Silicon Valley. As Alibaba was being fined in April, antitrust regulators summoned 34 Internet companies and demanded self-criticism and compliance. A dozen companies duly issued statements promising reform. These encounters raised worries that Xi was returning to the struggle sessions of the Cultural Revolution.

But dunce caps aside, the irony is that Xi’s critique of Big Tech is similar to recent debates in the United States. He argues that the Internet boom, by creating new billionaires, is worsening inequality. Instead, he wants “common prosperity.” And he complains that social media companies have fostered gaming and other trivial pursuits, rather than a genuine technological revolution. Hard to disagree with any of that.

What makes Xi’s reform campaign dangerous for the Chinese economy is that he’s imposing change with the iron fist of a police state. In place of independent tech giants such as Alibaba and Tencent, he prefers stateowned enterprises, or “little giants,” that accept Communist Party authority. Docile, compliant tech executives may satisfy Xi’s commissars, but they may be less likely to produce the breakthrough ideas that can power Xi’s “China Dream.”

“People are watching,” says Christopher M. Schroeder, a global investor who talks frequently with young Chinese tech innovators. “Many entrepreneurs I’ve spoken to understand government concerns that Ant, as an example, may have had legitimate issues that needed to be addressed before going public,” he says, and he doubts there will be a “slowing of the astounding rise of tech start-ups in China.” But it’s a wary moment.

Christopher Johnson, a former CIA analyst who now runs a consulting firm called China Strategies Group, notes Xi’s comments last month to a Politburo “study session on the digital economy.” Xi stressed that to “seize the commanding heights” of global technology, he wants to make China self-reliant in core technologies, such as semiconductors, “as soon as possible.” That means less emphasis on social media platforms and digital commerce, where China’s tech giants had been so successful.

Xi’s message, says Johnson: “Elites and tech moguls need to quit their complaining and get on board, or they will be left to the dustbin of history.”

For the United States, here’s the potential benefit of Xi’s diktats on tech: Imagine a brilliant young Chinese computer scientist studying at Stanford, say, or working for Google. Returning home to China may look a bit less attractive – and certainly less lucrative – than it did a year ago. In Shanghai or Silicon Valley, brainpower doesn’t follow orders from politicians.