Let the bullets fly for a while

The intent and tipping point for Chinese tech regulation

Last month, while researching Didi, I stepped away for a few days. But this is a time when days feel like years, especially in Chinese tech. Mere days after Didi Global’s $4.4bn IPO on the Nasdaq, their apps were removed from online stores at the behest of the Cybersecurity Administration of China (CAC). The reason cited was violations of personal data collection

Rather than capital, I feel like Chinese regulators never sleep. Over the past nine months, Ant Group's IPO got pulled, Community Group Buying players were fined for price dumping, Alibaba was fined for anti-monopoly violations and Meituan was also fined for anti-monopoly violations. Just like Oprah dished out cars, every tech giant seems to be getting a summon.

So why are the regulators getting involved?

In my opinion, there is a global need to rebalance power between state, tech players and consumers; this calls for more regulatory intervention. For China specifically, being a developing country means it has more regulatory needs and approaches than others.

Tech platforms pose significant challenges to nation states’ legitimacy.1 They are becoming de facto institutions, not just providing crucial utilities that are central to the lives of citizens2 but setting the rules of the game in which society operates. Facebook sets the content moderation policy for one-third of the world. Twitter and others de-platformed the former president of the US, reducing him to a digital persona non grata. These are powerful private entities that are part monopoly and part public goods, but consumer welfare is not a core part of their agenda. There is gradually increasing awareness amongst lawmakers, which is why governments on three continents are reassessing the impact and reach tech giants have on their citizens. The techlash is global. 

Being a developing country with underdeveloped institutional frameworks, China has a few additional issues to contend with in its approach to tech regulations. If we were to use the US and Europe’s regulation systems as benchmarks, China lags in rudimentary law making and implementation. China’s anti-monopoly laws were first passed in 2007, almost a century after the US Sherman Act of 1890, the Clayton Act of 1914 and the Federal Trade Commission Act of 1914. It’s also worth noting that Alibaba was founded in 1999, Tencent in 1998 and Baidu in 2000 — all ahead of anti-monopoly laws. Laws themselves also aren’t enough, and the State Administration of Market Regulation (SAMR) was established in April 2018 with holistic coverage to enforce the legislation. 

There’s catching up to do for Chinese law and regulators to reach parity with established Western practices. This is why the details of each regulatory incident are quite mundane — be it CGB’s price dumping or Meituan and Alibaba’s ‘pick one platform out of two’ or national security concerns around sensitive data; these would mostly be open-and-shut cases in the West but are news in China. Partly because it hasn’t happened before, which is due to a lack of both political will and accompanying legal apparatus. I want to point out that regulation should be considered normal, and not limited to tech players. Kweichow Moutai (China's leading liquor maker), SF logistics and concrete companies have all come under scrutiny or have been fined. Consumer tech platforms have network effects which often means increased marginal returns but also a greater tendency to create monopolies. They play by a different set of economic rules relative to physical firms. 

But what if China wasn't using the US and Europe as the default benchmarks for regulation. As I’ve written previously in “What I talk about when I talk about Chinese tech”:

A key theme that runs through Chinese tech is that as a developing country with under-developed institutions, technology isn't augmenting existing institutions, but creating them. 

There’s a symbiotic relationship between old public institutions and rising new digital institutions in China. Didi cleaned up the grey market for black cabs, Meituan and Ele.ma act as de facto restaurant inspectors. Every content platform carries out content moderation on behalf of the party. The government is pragmatic. In the fragmented authoritarian governance structure of China, the agents that can introduce and maintain legibility stay. 

With these hybrid governance structures experiencing hypergrowth, it is not obvious what should be regulated and how. Despite the absence of a blueprint, there is a regulator cadence that I term “let the bullets fly for a while”.

Let the bullets fly for a while

To fully grok China, one needs to watch the brilliantly dark film called Let the Bullets Fly. Since its release in 2010, the tale about a robber-turned-pretend governor in the feudalist Goosetown has become a Chinese cyberspace meme staple. Ladened with things said and unsaid about the rules and boundaries of power, money and lawfulness in China, it is a cultural touchstone.

In the midst of pivotal scenes —bewildering battles where nothing is clear — subordinates ask the robber-governor what to do. Inevitably, he responds with the infamous line "Let the bullets fly for a while." Meaning, let the chaos run; who knows what issues resolve themselves without intervention, or when the tide will turn. Inaction is an asset during uncertainty. Calling things too soon shuts down possibilities.

My love of Chinese Internet memes aside, this turn of phrase has resonance amongst regulators and economists. It’s been a favourite catchphrase in conversations when they are asked to describe the Chinese regulatory approach. This is also borne out by macroeconomic theory3, when markets experience high future uncertainty (as is the case in new emerging markets) where regulators have inadequate regulatory tools, bias towards inaction is a dominant strategy.

Deng's slogan of "crossing the river by feeling the stones" captures the subtle pragmatism needed to navigate brave new worlds. Partly due to imperfect information and partly due to the lack of consensus on the regulatory approaches to take, Chinese regulators have historically taken an-observe-then-act approach. 

There's a delicate balance of allowing growth and innovation to take shape while safeguarding societal and consumer interest. The regulators don't always get it right; during the mobile telecom price wars of the early 2000s, they were too soft. During the P2P lending period in the 2015s, they acted too late. During the era of sharing economy, people lost their deposits with Ofo before regulations were drawn up. Each time they learn from prior experiences, increase their oversight capabilities and improve on the next round. Each time it's been a pattern of innovation preceding regulation, with the tipping point being worsening consumer welfare4. The result is that the companies make it out alive but changed — Lufax, one of the prominent P2P lenders also shelved their IPO plans in 2018 due to regulatory concerns. They successfully rebranded themselves as an enterprise lender and listed on the Nasdaq in November 2020. Ant Group is getting restructured but allowed to continue. 

So I think the actual question here isn’t why tech companies are facing regulation, as Chinese tech history has shown that will always happen. The question should be: why now? It can be split into a few reasons:

  • Tech platforms have shifted towards value extraction rather than innovation for growth- With diminishing growth in overall Chinese internet users and most of the big markets already digitalised, tech giants have to focus on increasing spend from existing users to grow. COVID-19 has solidified platforms’ positions in people’s lives but users are feeling the pinch. There is discontent with price discrimination practices (Didi and other platforms will charge older customers higher prices for the same products), with the stringent conditions facing workers and with the platform tax merchants have to pay to get traffic and attention to their wares. When the size of the pie becomes fixed, every player switches to extraction mode and the consumers suffer. 

  • Rebalancing towards a more innovative ecosystem - Technology targets in the 14th Five-Year Plan are ambitious. AI, quantum computing, semiconductors and genetic research — the future technological growth drivers won't be e-commerce but deep tech. Dan Wang’s observation that the Chinese future is focused on manufacturing, economic growth and the real economy is on point. I wouldn’t say that the existing tech giants stifle innovation, but I’m not sure how much they help. A lot of air and capital gets taken up by the shadow wars between Alibaba and Tencent. Data is sectioned off in closed gardens. The number of new Chinese startups has been falling each year. When big tech does not innovate but instead copy or acquire competitors, the ecosystem suffers. 

  • Additional political clout behind regulators - Chinese regulators are not a monolith. The narratives around Chinese tech often gets distilled down to personalities, whereas in China it’s actually a narrative of systems and the accompanying competing factions within those systems. It’s clear that a power shift has happened and there’s determination behind the reforms. Was it Jack’s speech or did the regulators felt like their Douyin and Taobao links in WeChat needed views? Either way, the regulators have the support of the Chinese masses if comments around Didi’s data probe are anything to go by.

What does this mean for China tech's future?

I’m positive about the long term but cautious in the short term. The intent with regulation is not to kill innovation but to redraw the boundaries within which private companies can operate to maximise their profits. What use is a dead company to anyone? Especially when it is handling something as crucial as modern-day utilities. That being said there’s a long backlog of regulatory enforcements to get through. Chinese tech companies have to address their tech debt and charging practices now that they know the CAC and SAMR are actually watching. The bullets have stopped flying and the action has begun. 

I’ve actually got more materials from my research on the topic (including the breakdowns of SAMR, CAC and others in terms of remit, the potential impact on future overseas listings) and will be happy to share and have a Q&A thread for premium subscribers in the Chinese Characteristics Circle Community. While you’re there, also vote for the product walkthrough this month! The current winner is Kuaishou, but it’s only got a narrow lead.

I’ve finally finished the Community Group Buying deep-dive! Will send it out tomorrow. <3


This is a complex topic, and this newsletter won't go into all the details at this point


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