What the Chinese crackdown on tech giants mean for their economy

For more than a century, large corporations like General Motors, Ford had been synonymous with the US economy. And tech giants like Apple, Microsoft, Amazon or Facebook were the newest editions to this list of innovative US ventures. Similarly, in Japan, automobile giants like Toyota and Honda are often representative of the prosperity of their nation.

Since the 2000s, Alibaba seemed to have adopted a similar position in China and its founder Jack Ma had been the eye-ball of the Chinese populace for the past 20 years.

Yes, there were repeated complaints against all of these corporations often for their anti-competitive market practices or worker/consumer exploitation. But very few governments had the audacity to take action against them.

Rather in most cases, political parties, left or right, seemed to have nurtured them, turning a blind eye to their monopolistic practices, in their pursuit of economic growth and higher employment rate.

All of that changed in November 2020 when the Chinese government launched an investigation probe into Alibaba after cancelling the public-listing of the Ant Group, Alibaba's fintech hand.

What followed over the next 12 months was a vicious crackdown by Chinese regulatory authorities on tech giants like Alibaba, Meituan, Didi, Tencent, ByteDance etc.

Since the 2000s, these companies and their owners had received much adulation from the Chinese and the Chinese Communist Party (CCP) also facilitated their rather monopolistic expansion through investment-friendly economic policies.

Then what changed? How did these tech giants fall from the grace of the CCP? Most importantly, what are the implications of these policies for the Chinese as well as the global economy?

It all began on October 24 2020, at the Bund Summit in Shanghai, when Alibaba's founder Jack Ma stood in front of the podium. He slammed the Chinese old guard for twenty minutes straight in a not-so-subtle manner. In this speech, Ma claimed that the outdated financial regulations of Chinese authority were stifling innovation and compared its global banking rules to an 'old people's club'. He went a step further to thrash the Chinese banks for their so-called 'pawnshop mentality'.

This misstep would prove costly for Jack Ma as one week following his now infamous speech, the Chinese officials published a sweeping regulatory reform for online micro-credit companies that would halt the public-listing of Alibaba's fintech arm, Ant Group.

To make things worse, an antitrust probe was launched into Alibaba Group Holding. Jack Ma, a superstar to the Chinese people, was forced into hiding and many speculated that he had been detained by the CCP. Regulators later found Alibaba guilty of anti-competitive market practices and fined them for $2.8 billion.

Following the crackdown on Alibaba, the community group-buying food delivery service Meituan, e-commerce company Panduoduo, Alibaba's offspring Tencent, ride-hailing platform Didi and many other tech giants also faced $200,000 in fines for anti-competitive market practices.

One of the reasons behind the crackdown on Chinese tech giants may be the monopolisation of the tech industry in China and China's rising inequality as well as frustration among the working class regarding the ultra-billionaires.

These companies were also using the loopholes in the regulatory framework to enter the financial market through online micro-lending ventures. However, in doing so, they often used the consumer data collected from their platforms, i.e., consumer choices from Alibaba, address and other private information from

Didi or personal chat from WeChat to manipulate the consumers.

With the Chinese consumer becoming increasingly concerned with their privacy, the government had to step in and do something, right?

Well, probably. But probably not.

While looking out for the little guy seems like a great argument, that only scratches the surface of the issue. Here's why.

With the rise of online platforms and e-commerce, these Chinese tech tycoons had garnered much adulation from the people with their rags-to-riches story and their charismatic appearance. Thanks to the e-commerce and social media platforms, these companies have also gathered a gargantuan volume of data on the consumers.

On top of that, fintech ventures of established market monopolies (e.g., the Ant Group of Alibaba) were trifling with the Chinese regulations as they slowly crept their way into the financial lives of the Chinese populace. All of these factors granted them a kind of soft power, a sense of entitlement over the people as well as the CCP- a manifestation of which was Jack Ma's audacious rant in front of Chinese officials.

All of these developments must have made the CCP quite nervous as evidenced by the fact that Xi Jinping reportedly ensured that the Ant Group never received IPO certification from the Chinese regulatory authorities.

While these regulatory reforms were introduced to send a message to these companies to clean their books and sanitise their warehouses. It would also remind them that the Chinese Communist Party was still in charge.

Let's say we give CCP the benefit of the doubt that they are doing all of these out of sheer benevolence for the working class and smaller companies. Still, I would argue that they have taken it a notch too far and further crackdown may only be detrimental to the Chinese economy.

Just in the past week, Chinese regulatory authorities cracked down on Didi - China's leading ride-hailing platform – and halted the platform from signing new users and then removed it from app stores in a span of two days, citing privacy and cybersecurity issues. It was an even greater shock to Wall Street investors since the company was publicly listed just a few days ago.

While many proponents may argue that consumer privacy is not a matter of joke and Didi should have been punished for mishandling consumer data, there is another side to the story – one that involves the finances.

Firstly, CCP's erratic behaviour sends the message to investors that no matter how global these Chinese companies are, the Chinese government is still the main protagonist and a rather unpredictable one.

Investors find confidence in stable market conditions with as little government oversight as possible. Yes, lacklustre regulations can hurt consumers and exploit workers as well as drive smaller companies out of the market. But unpredictable, unstable market conditions driven by randomness and political squabbles can also force investors to lose confidence and they would not be wrong to think so.

For example, Hang Seng Tech Index is a popular proxy for market conditions in mainland China. According to this index, China's three most valuable companies – Alibaba Group, Tencent Holdings and Meituan- had lost $400 billion in the past four months.

Western pundits argue that such sweeping regulations, often driven by political motivations of the CCP can stifle the entrepreneurial spirit which has been vital for the economic growth of the country.

While questioning CCP's motivations, it is also important to remember that China's attempt to protect consumer privacy and protect smaller companies from large monopolies may not entirely have been a façade.

Just because the US government let its tech giants run rampant, does not necessarily mean China would have to do the same. But the country needs to hit a delicate balance between consumer privacy; workers' rights and maintaining investor confidence.

While ensuring that anti-competitive and monopolistic market practices dwindle as much as possible, they also need to make sure that these policies do not hurt the grassroots level workers or the sub-contractors of large companies they are trying to protect. If the CCP cares about the little guy, they should introduce more rigorous, well-thought-out legislation that leaves considerable room for transition and takes care of these problems in a sustainable manner.