When Interests Clash

When Interests Clash


The relationship between the Communist Party and China's big tech and Internet companies has always seemed like an example of flexibility from Those in Command. The Internet is obviously both a crucial part of the economy and a key element in maintaining the system, but they appeared to have taken the view that equity ownership was not required, as it has been heretofore in all other key sectors - finance, transport, energy, telecoms infrastructure, media etc., where the SOEs are either dominate or have a complete monopoly. The enlightened view seemed to be that the Internet/tech space is so dynamic that it is best to leave the hand of the party-state off of it, with content control and overriding influence being sufficient. But a fascinating story this week in the Financial Times (the clear leader in China coverage these days) discusses growing tensions. On one hand, the tech giants led by Tencent and Alibaba, it suggests, are getting too powerful for Those in Command, and on the other the tech giants are chafing under the control requirements of Those in Command. It is a fascinating disconnect of interests with all sorts of implications.

Because they are not SOEs, the tech giants are also to some extent (this is China) beholden to their shareholders and users. And upgraded controls imposed by Those in Command can impact on revenues and expansion prospects both in China and internationally. In July, it was suddenly announced that Weibo could no longer carry video material and Sohu's share price plummeted. Sohu's management and shareholders were unsurprisingly not delighted at the opportunity to make such a contribution to China's national security. Also in July, it was suddenly decreed that one of the Tencent's online games, "Honor of Kings," was too addictive and usage must be restricted. Huge share value was shed.

Last year, the companies were all required to give a board seat and some shares to the authorities. Jack Ma, the poster boy of China tech, may be increasingly visible around the world, making speeches, helping to boost the Alibaba share price with his visibility and charisma, but for sure he knows who controls the ring round his finger. There is only one reason Alibaba managed to gain such a commanding position in the Chinese economy, and those who give can also take back.

Maybe control is not enough. Perhaps equity ownership is required to ensure total tech enmeshment with the supreme goals. The China Unicom deal last month is perhaps an indicator of where this is going. Alibaba's investment of $15 billion in the SOE telecoms company may be less a privatization of Unicom and more a reverse entry of SOE-dom into a tech giant.

The atmospheric sense of China today is that the great debate over the SOE sector - to shrink it or not - has been concluded. The answer - to be confirmed at the Glorious 19th next month - is not only not shrink, but to expand.

And then there's AI. Never a dull moment in China!

Have a good weekend.