Over the past year, Beijing clipped the wings of its once high-flying technology giants in a dramatic clash between public and private power. Casualties included some of China’s top tech companies, including internet conglomerates Tencent and Alibaba, food delivery app Meituan, ride-hailing app Didi, as well as companies in online gaming, private tutoring and cryptocurrency. Despite the chilling effects on innovation and economic growth, regulators appear poised to continue enforcement actions in 2022, furthering Xi Jinping’s bid for “common prosperity.”
Prior to this year, China’s anti-monopoly and technology regulators were regarded as relatively toothless in reining in China’s powerful tech titans. The shifting fortunes of Jack Ma, Alibaba’s rags-to-riches founder, demonstrates how much of that narrative has changed. In 2015, Ma pressured a regulator to publicly recant a critical report against Alibaba. In late 2020, after Ma spoke out in a conference against China’s state-owned banks, regulators hauled Ma in for questioning, halted the initial public offering of Alibaba subsidiary Ant Group and left his public reputation in tatters.
Bringing Ma to heel turned out to be the opening salvo in a year marked by high-profile actions against major tech companies. In the antitrust arena, the newly empowered State Administration for Market Regulation (SAMR) took aggressive steps to rein in anticompetitive behavior, levying a record $2.8 billion fine on Alibaba and a $530 million fine on Meituan. China also made major legislative and administrative moves, proposing amendments to the Antitrust Law to increase penalties for antitrust violations, and launching a new anti-monopoly bureau under SAMR to enforce it.
Regulators also took major actions in the data privacy space. In the past year, the National People’s Congress passed the Data Security Law and the Personal Information Protection Law, regarded as China’s version of the EU’s General Data Protection Regulation. The Cyberspace Administration of China (CAC) cracked down on data privacy violations, disrupting Didi’s planned initial public offering (IPO) in New York for failing to comply with a cybersecurity review for sensitive data.
Commentators have both praised China’s push for privacy and noted its inherent contradictions. The Financial Times called China a “surprise leader in Asia on data privacy rules.” Others have pointed out that while these laws shield Chinese citizens from domestic commercial and foreign government surveillance, it does little regarding domestic government surveillance. As Kendra Schaefer of Trivium China noted: “We often think about the PIPL in terms of its applications to Alibaba or Tencent but we forget that China’s state agencies are the country’s largest data processors.”
Commentators have attributed various ideological and political motivations to the regulatory spree. Many of these crackdowns fall under the umbrella of “common prosperity,” Xi’s push to close the wealth gap in part by encouraging high-income individuals and businesses to “give back more to society.” Some point to the political calendar: With the 20th Party Congress scheduled for autumn 2022, these moves may be part of Xi’s efforts to consolidate his power ahead of his anticipated re-election.
Still others point to the regulatory competition angle. CAC’s enforcement actions against Didi could be explained not as a coordinated campaign from central authorities, but rather disjoint actions from independent regulatory agencies competing for primacy. As Kaiser Kuo described it: “Hey, we can’t let those guys at [the National Radio and Television Administration] get all the glory. We [Ministry of Culture] guys have to do something too, right?”
The crackdown has come with a significant economic burden, one that Xi seems willing to bear despite a lagging economy. China’s economy has slowed to lows not seen since the 1990s. The Economist estimates that the crackdown wiped more than $1 trillion off the collective market capitalization of China’s largest internet groups. China’s video-game license freeze alone has led to over 14,000 gaming-related firms shutting down.
Xi may find these losses bearable because the economic burden is borne primarily by the consumer technology sector rather than what he views as strategically critical sectors, like semiconductors and aeronautics. Companies in the “hard tech” sectors like Huawei and Semiconductor Manufacturing International Corporation have largely escaped regulatory scrutiny. As Jude Blanchette of the Center for Strategic and International Studies puts it, ”Xi doesn’t care whether people can have their meals delivered 14% faster or if it is 7% easier to hail a car.”
For all these reasons, regulators are likely to continue pursuing enforcement actions against Chinese technology companies into the foreseeable future. In August 2021, China’s State Council and Communist Party Central Committee passed a five-year plan promising to tackle monopolies, review regulations related to the digital economy and address “foreign-related rule of law.” The plan, in addition to statements from the SAMR’s agency head promising strengthened antitrust enforcement in 2022, points to another difficult year for China’s tech giants.
Biden’s China Policy, One Year In
During his presidency, Donald Trump fired the first shots of a trade war, placing tariffs on hundreds of billions of dollars of products from China, imposing sanctions on Chinese companies and barring investments in Chinese firms with military ties. One year into President Biden’s administration, his China policy is shaping up to look much like Trump’s policy—on trade and other dimensions.
Like many politicians in the 1990s and early 2000s, Biden once advocated for the integration of China into the global trading system as a means of incentivizing Beijing to play by international rules. In 2000, he voted in favor of normalizing trade relations with China, paving the way for its entry into the World Trade Organization. Two decades later, as China has emerged in the eyes of many Americans as a dangerous rival, Biden now calls for a more aggressive approach to China.
As the administration seeks to pivot U.S foreign policy to Asia, Biden and his advisers have grounded their China doctrine in the belief that China is “less interested in coexistence and more interested in dominance.” They are, however, careful to walk a more strategic line than Trump: Rather than sever ties completely by decoupling the U.S. and Chinese economies, Biden has expressed a willingness to work with China on issues of common interest such as climate change and the pandemic, while competing with China on technological leadership and confronting it on military expansionism, unfair trade practices and human rights violations. Though the Biden administration has toned down the harsh rhetoric of its predecessor, —U.S. Trade Representative Katherine Tai has even spoken of U.S.-China “recoupling”—much of what has been seen from the administration thus far has been confrontation and competition on familiar issues, and less cooperation on critical challenges such as climate change.
On the confrontation side, the Biden administration has given few signs of an intention to roll back the Department of Justice’s China Initiative, a program launched under the Trump administration that has come under fire for its overly broad targeting of Chinese academics and Chinese-Americans. Tensions over Taiwan have also heightened in the wake of China’s increasingly aggressive military exercises near the island and the U.S.’s continued engagement with high-level Taiwanese officials. In October 2021, Biden remarked during a CNN town hall event that the U.S. has a “commitment” to come to Taiwan’s defense if China attacks—a comment that the White House later clarified did not signal a policy change.
Further framing an ideological conflict between the U.S. and China, Biden invited Taiwan to its Summit for Democracy in December 2021 but notably excluded China and Russia from the list of participants. To close out the year, Biden announced a diplomatic boycott of the Winter Olympics in Beijing and signed into law the Uyghur Forced Labor Prevention Act on Dec. 23, 2021, which bans imports from China’s Xinjiang region over concerns about forced labor.
Biden has yet to articulate a coherent strategy when it comes to competition with China on technology and trade. The Biden administration has largely left Trump’s existing sanction designations against Chinese entities in place and further expanded the list. Tai also stated on Oct. 4, 2021, that Trump-era tariffs will remain in place and that the U.S. will build on them until China honors its commitments to increase purchases of U.S. goods under the Phase One trade deal signed in January 2020.
In a critical win for the Biden administration, Congress passed the Bipartisan Infrastructure Deal in November 2021, which Biden had sold as a means to counter China by fueling innovation and investment in American industries like quantum computing and artificial intelligence. Biden also made inroads in 2021 in engaging allies to increase leverage against China and hosted the first-ever in-person meeting of leaders of the “The Quad” in September 2021.
Contacts between senior U.S. and Chinese officials have been relatively sparse during Biden’s first year in office. Most recently, Presidents Biden and Xi met on Nov. 15, 2021, in a virtual summit that featured no breakthroughs in relations. In a three-and-a-half-hour conversation that the White House characterized as “respectful and straightforward and…open,” Biden communicated the need to establish “common-sense guardrail[s]” to ensure that competition between the U.S. and China does not veer into conflict. Biden raised concerns about China’s suppression of minorities in Xinjiang, unfair trade and economic practices and its recent aggression against Taiwan, while Xi warned that China would take “decisive measures” against any moves to support Taiwan’s independence from China.
Looking ahead to the future of U.S.-China relations in 2022, the U.S. is likely to add more Chinese companies to its Entity List and advance efforts to boost technological innovation, while China will continue its enforcement actions to address anticompetitive behavior at home while also continuing its campaign for technological self-reliance. It is possible that 2022 may bring less confrontation as both nations turn their attention to domestic politics. Beijing will be focused on two big national events: the February Winter Olympics and the 20th Communist Party Congress, where Xi expects to gain another five-year term as general secretary, and Washington will be distracted by midterm elections and managing the ongoing pandemic. The Biden administration may very well use the opportunity to bring its China policy into sharper focus.
Chinese Government Mining Western Social Media Sites for Data on Foreign Targets, U.S. News Outlets Reveal
According to a Washington Post review of hundreds of Chinese bidding documents, contracts and company filings published on Dec. 31, 2021, China is mobilizing its internal internet surveillance network to mine Western social media sites for data on foreign targets to be used by its military, police and other government agencies. A similar New York Times examination of government procurement records published the same day details the use of sophisticated investigative software by Chinese security forces to track and silence Chinese dissidents and minor critics living overseas.
The Chinese government collects vast volumes of data on its citizens across the many arms of its surveillance network, from video surveillance footage and WeChat accounts to e-commerce data, medical histories and more. The Chinese Community Party also outsources online content moderation and analysis to private companies that specialize in identifying “public opinion” to alert officials to politically sensitive information online. These advancements represent a key feature of Xi’s efforts to modernize China’s propaganda and censorship apparatuses.
China’s public opinion analysis software primarily targets its domestic internet users and media, but a Washington Post review of bidding documents and contracts for over 300 Chinese government projects since the beginning of 2020 reveals that China has begun to turn a major part of its data harvesting efforts outwards. Journalists identified orders for sophisticated software systems designed to collect on foreign targets from sources such as Twitter, Facebook and other Western social media outlets. The documents, publicly accessible through domestic government bidding platforms, show that state media, propaganda departments, police, military and cyber regulators are purchasing systems such as a $320,000 Chinese state media software program that mines Twitter and Facebook to create a database of foreign journalists and academics; a $216,000 Beijing police intelligence program that analyzes Western chatter on Hong Kong and Taiwan; and a cyber center in Xinjiang that catalogs the Uighur population’s language content abroad.
Policymakers around the world have grown increasingly aware of China’s mass surveillance regime, from its most repressive practices in Xinjiang to its exportation of AI surveillance platforms to over 60 countries. The Biden administration has expressed national security concerns about U.S. investments in Chinese tech companies with military or surveillance ties. In December, U.S. regulators extended their crackdown on Chinese entities alleged to support the biometric surveillance and tracking of ethnic and religious minorities in China.
China Imposes New Rules for Foreign IPOs
Starting Feb. 15, China will require large internet companies to undergo a network security review prior to carrying out an IPO abroad. The network security review process will be administered by the CAC, which first proposed the process last year. The review process will apply to companies that have data on over 1 million users and will empower regulators to halt initial public offerings of companies whose listing overseas could pose a threat to Chinese national security.
These new regulations from CAC come after China’s securities, commerce and economic planning agencies issued IPO regulations of their own. The National Development and Reform Commission and the Ministry of Commerce issued new restrictions on overseas investors seeking to invest in certain domestic Chinese industries, barring them from participating in management and capping their total ownership at 30 percent. Additionally, the China Securities Regulatory Commission proposed that all companies seeking to sell shares abroad would be required to file for local registration.
The rules follow a nearly six-month hiatus in Chinese listings abroad. In July, CAC pumped the brakes on Didi Chuxing’s listing on the New York Stock Exchange, which proceeded in part because the company received conflicting signals from different regulators and because it believed that it wasn’t required to undergo a cybersecurity review process. Since then, companies have put their planned foreign listings on hold until they receive more regulatory clarity from Beijing.
So far, it is unclear how these directives will interact with one another. Companies in China are subject to overlapping jurisdiction from multiple ministries, which can lead to conflicting regulations and policy signals. What is clear is that it appears that Beijing will continue to allow some companies to proceed with foreign IPOs, with heightened scrutiny for companies operating in sectors that may implicate national security.
Omicron Lockdown in China’s Xi’an Disrupts Chipmakers, Potentially Exacerbating Global Shortage
Samsung and Micron Technology, two of the world’s largest chip makers, are warning that the coronavirus outbreaks in Xi’an are hampering production, risking prolonging the global chip shortage. Micron produces DRAM memory chips, widely used in data centers. Samsung produces NAND flash memory chips at its Xi’an facility, which are used for data storage in data centers, smartphones and other tech gadgets. Samsung’s two production lines in Xi’an account for 42.5 percent of Samsung’s NAND production and 15.3 percent of worldwide NAND production.
The 13 million residents of Xi’an, one of China’s major industrial hubs, have been locked down since Dec. 22, 2021, as Chinese officials attempt to hold to a “zero Covid” strategy. The lockdown in Xi’an is China’s largest since the original lockdown in Wuhan. Residents of Xi’an have expressed frustration over the government’s draconian measures, which have left many without adequate groceries and access to medical services.
Samsung announced that it will cut output at its Xi’an facilities, while Micron announced that it will delay production. Neither company has been forced to fully stop production, as factory workers are housed in dormitories on-campus and have been designated as essential workers. Micron reported that it temporarily reduced workplace density in order to maximize physical distancing at the factory.
These slowdowns are likely to hamper China’s efforts in the short term to meet its chip production goals. China’s “Made in China 2025” plan aims to increase domestic production of “core materials” to over 70 percent by 2025. According to Seoul-based analysts, the delay in Samsung’s chip production is likely to primarily affect China’s domestic supply, as Samsung’s Xi’an plant mainly supplies Chinese server companies. The proportion of domestically made chips used in Chinese manufacturing remains at 16 percent, despite government efforts to boost production.
Former national security adviser Robert C. O’Brien in the Wall Street Journal warns that legislative efforts in the U.S. to break up Big Tech could harm the companies competing with China on AI and quantum computing.
Ainikii Riikonen at TechCrunch argues that the U.S. must move beyond confrontation with China to succeed in securing the future of the global digital economy.
Robert Williams and Moritz Rudolf of Yale Law School’s Paul Tsai China Center explore the possibility of an EU-led de-escalation initiative in the Indo-Pacific to reduce the likelihood of armed conflict between the U.S. and China. For Lawfare, Williams also argues for a rethinking of “rules of the road” intended to stabilize U.S.-China competition.
Bloomberg interviews Chinese citizens on how they believe the country will change in ten years under Xi’s common prosperity push.
Kai von Carnap and Valerie Tan for The Diplomat survey the sweeping changes brought by Beijing’s regulatory crackdown against tech companies over the last 12 months.
Ten scholars from the Brookings Institution debate the implications of China’s growing technological capabilities and steps the U.S. can take to strengthen its own competitiveness.
The Bloomberg Editorial Board suggests that blocking Chinese access to key technologies may be more effective than cutting off investment in avoiding a cold war over capital.
Robert Shinder assesses today’s U.S.-China dynamic through the lens of the prisoner’s dilemma in The Hill.
Bridgewater Founder Ray Dalio discusses China’s trajectory as an ascendant power through the lens of historical trends in an interview with Nikkei Asia.
Michael Spence dissects opportunities for and barriers to strategic cooperation with China on climate change, rising inequality, the pandemic and the digital revolution.
Andrew Sheng and Xiao Geng call on President Biden to seize the opportunity to reset U.S.-China relations and commit to multipolar order rather than bitter rivalry.