Xi's third term leaves the tech industry cold

Executives at Chinese internet companies who went into the 20th party congress hoping for some good news are left sorely disappointed. Xi Jinping secured a third term as the nation's leader, as expected, and stacked his leadership ranks with loyalists, but did little to provide clarity on where the country's technology sector is headed.

Of the seven members of the Politburo's Standing Committee, none could be considered tech cheerleaders. Perhaps closest to the industry is Li Qiang, the Shanghai party chief who is ranked second behind Xi and is set to become premier. While he's best known for leading harsh Covid-19 lockdowns in China's commercial hub, Li also oversaw the establishment of the Star Market — a Nasdaq-like bourse — and the rapid construction of a Tesla Inc. factory in the city. But his loyalty is to Xi, not the industry.

The same could be said for Wang Huning, ranked fourth, an influential thinker who wears his socialist ideology on his sleeve. He even penned a book in 1991 outlining the US's core failures (democracy, individualism). More recently he has been instrumental in building the Communist Party's role and influence within universities, and tightening internet governance. It's hard to imagine executives at China's tech companies being too excited about his rising power.

Those firms have faced plenty of turmoil over the past three years. Strict enforcement of antitrust and other regulations impacted businesses that include e-commerce, transport, education and fintech. Collectively, these have been dubbed a crackdown and resulted in great upheaval, uncertainty and a rush for the exits.

Founders of major companies have exited their leadership roles including those at Alibaba Group Holding Ltd., TikTok parent ByteDance Ltd., e-commerce giant JD.com Inc., and group buying platform Pinduoduo Inc., a potent symbol that the limelight is not the safest place to be under Xi. Making matters worse, China's GDP numbers, published Monday after a week's delay during the congress, brought a growth rate that was better than expected: 3.9% versus the 3.3% median of estimates. But that was driven by industrial production and fixed-asset investment. Retail sales climbed just 2.5%, less than the 3% expected.

Nothing to Celebrate
China's internet companies were left disappointed by the 20th party congress

So now we have a kind of unspoken standoff amid continued economic malaise. On one side is a group of men — and it is mostly men — who lead companies they may not have founded and who must navigate policies that will be written and imposed by another group of men — and they are all men — whose chief priority will be the implementation of Xi Jinping Thought. Common Prosperity — "to increase the size of middle-income groups" — is an established thread of that ideology, yet popping up last week was a pledge to "regulate the wealth accumulation mechanism." 1 To get rich is no longer glorious, it seems.

The one thing that the industry needed most heading into the weeklong congress was clarity. If Xi decided that payments platforms must be separated from wealth management and insurance, then so be it. Should he decree that all online games include specific markers of party ideology, then publishers wouldn't cheer, but they'd accept it and adapt. Such edicts weren't issued, and no one truly expected line-item regulations to come from this twice-a-decade event.

Yet Xi's clean sweep of the Politburo and installation of loyalists in the six positions closest to him sent a signal that whatever rules come down, the government will not allow China's internet industry to revert back to the old days when innovation and risk-taking were tolerated. Equally unsettling is the idea that loyalty trumps ability when choosing leaders, which means that technocrats down the line will be incentivized to adhere to what Xi and his men want, rather than attempt to chart a path that may be more technically or economically savvy. They will remember that the man who oversaw a harsh and financially ruinous city lockdown was rewarded with the nation's second-most powerful role.

Seen in that light, it's no wonder that technology stocks plunged on Monday in Hong Kong. Alibaba, Meituan and Tencent Holdings Ltd. all turned sharply south as soon as trading commenced. China's tech executives had nothing to cheer from the 20th party congress and neither did investors.

Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. Previously, he was a technology reporter for Bloomberg News.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.