Cold pervades Chinese tech companies even as the crackdown eases

HONG KONG (AP) — A harsh crackdown that has swept billions of dollars worth of Chinese tech companies is easing, but the once freewheeling industry is bracing itself for much slower growth.

Analysts say China’s easing of restrictions on companies like e-commerce giant Alibaba and online gaming company Tencent and talk of backing the private sector reflects Beijing’s decision to refocus on growth after that the economy has been devastated by the pandemic and the restrictions imposed to combat COVID-19 .

But internet content controls remain firmly in place. And the crackdown has left a “chilling” effect on the industry, potentially slowing innovation, while US restrictions on China’s computer chip industry are hampering progress in developing cutting-edge technologies in 5G and artificial intelligence .

In January, a senior Chinese central bank official said in an interview with state media that the crackdown on tech companies was “practically” over, adding that companies would be encouraged to drive economic growth and create more jobs. Work. This came just weeks after China dropped stringent entry restrictions and testing and quarantine requirements that were part of its “zero-COVID” strategy meant to crack down on the virus.

“With the end of the zero-COVID policy, China is once again prioritizing economic growth, and the technology sector is obviously a key driver of growth in China and a celebrated source of innovation,” said Gregory Allen, senior research scientist at the Strategic Technologies Program at the US research organization Center for Strategic and International Studies.

Companies like Alibaba and Tencent control everyday apps and services that are used by large swathes of the population everywhere, including online payments, messaging, food delivery, and e-commerce.

Such companies flourished for two decades with little regulation before Beijing rolled out a barrage of anti-monopoly, data security and other restrictions since late 2020, seeking to curb e-commerce, social media and other companies it considered too big and independent.

Signaling a slack, Didi Global – which was ordered to stop signing up new users in 2021 following allegations that it violated data security rules – was recently allowed to resume taking on new users.

Regulators said e-commerce giant Alibaba’s financial affiliate Ant Group can go ahead with plans to raise $1.5 billion for its consumer lending unit, a major step after it the government canceled a planned IPO two years ago and ordered the company to restructure.

After criticizing online games as “spiritual opium” and imposing strict controls on viewing time for minors, regulators started approving new games last April after an eight-month hiatus, with the first foreign titles approved in December.

Shares of tech companies including Alibaba, Tencent and others like food delivery company Meituan and AI and search engine company Baidu have seen their share prices nearly double since they bottomed at the end of October. Market valuations of these companies, however, are still far from their 2019 peak.

The chilling effects of the crackdown on investors and entrepreneurs will remain, Allen said, as authorities have shown they are willing and able to forego growth to impose controls on the sector at any time.

Over the past two years, several founders of tech companies have stepped down as CEOs or presidents of their respective companies, including Alibaba’s Jack Ma,’s Richard Liu, Bytedance’s Zhang Yiming, and Pinduoduo’s Colin Huang.

In January, Alibaba’s financial affiliate Ant Group said Ma, once China’s richest man, would relinquish control of the company following a restructuring and that no single shareholder would have control. But it has rarely been seen in public since regulators pulled the plug on Ant Group’s market debut in Hong Kong and Shanghai following its criticism of China’s financial sector in 2020. Since then, it has reportedly relocated to Tokyo.

“If you were a tech entrepreneur in China five years ago, most likely someone like Jack Ma was your hero, your idol, and he was exactly what you aspired to be and the kind of person you aspire to become,” Allen said. “And to see a man like that guy dejected, I think it sends a really strong message.”

He and other analysts say the crackdown could potentially stifle innovation as investors and entrepreneurs become more cautious about doing business in China.

“The crackdown has been deep and cut to the bone, probably more than the government expected,” said Shaun Rein, founder and managing director of the China Market Research Group in Shanghai. “Because what’s happened is that in the last couple of years, venture capitalists and entrepreneurs have been afraid to put capital out and start new companies.”

The value of venture capital deals in China plunged 44% to $62.1 billion in the first 10 months of 2022 compared to the same period in 2021, according to research firm Preqin.

Some entrepreneurs and venture capitalists are taking a wait-and-see attitude, “concerned over the long term that if they invest in a hot sector that the government goes against China’s agenda or doesn’t fit the government’s agenda for the private sector that they could be wiped out away,” Rein said.

Established internet companies still have an edge over other tech industries in China facing heightened uncertainty amid friction between Washington and Beijing over advanced tech and trade as the US seeks to block exports of high-end semiconductors and equipment for chip production and limit Western ties with companies such as Huawei Technologies, the world’s largest maker of telecommunications networking equipment.

The Biden administration stopped approving license renewals for some US companies that sold essential components to tech giant Chinse. This was stated by two people familiar with the matter who were not authorized to comment publicly on the delicate matter and spoke on condition of anonymity.

Washington has gradually tightened US export controls on Huawei but had allowed some companies like Intel and Qualcomm to sell it processors used in devices such as low-end laptops and smartphones. The United States justified these sanctions on national security grounds. Huawei denies the allegations.

Under such pressure, China has accelerated efforts to become more self-reliant in semiconductors and other advanced technologies, providing billions in subsidies and investments for the industry. But it lags years behind some of the most advanced semiconductor manufacturing processes, and a US ban on supporting IC development and production at some chip factories in China has deprived Chinese chip firms of the foreign talent they have long contributed to its national industry.

Another obstacle is the US ban on selling critical semiconductor manufacturing equipment to China.

“It’s one thing to get into areas like software and cloud services, where Chinese companies are already strong enough,” said Allen of CSIS.

“It’s a very different thing to take Chinese companies that are a decade or two behind in cutting-edge semiconductor manufacturing equipment and tell them to grow immediately by replicating some of the most advanced technologies the world has ever produced. “

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