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China edtech

China edtech

After several years of strong growth, the Chinese technology sector is facing its biggest challenge: the Chinese government. Recently, the government pulled Didi from mobile apps and asked the company not to add any new customers till the end of a cybersecurity enquiry. Didi had a stellar debut on Wall Street recently with an IPO of $4.4 billion. The reason given for the enquiry is that Didi may have collected and used the personal data of Chinese citizens. But Didi is not alone. The Chinese government has cracked down on several Big Tech companies. It began when China took on e-commerce giant Alibaba. The government canceled Alibaba affiliate Ant Financial’s nearly $40-billion IPO in November last year. Alibaba lost $70 billion in value and founder Jack Ma all but disappeared from public sight. In April, the government hit Alibaba with a $2.8 billion fine for anti-trust violations. Recently, the government cracked down on edtech companies. It said private education had been “hijacked by capital” and ordered tutoring companies to become non-profits. The move triggered a massive selloff that erased $1.5 trillion from Chinese stocks.

What's the conflict?

Beijing recently brought in a new data-privacy law for Chinese consumers. This law asks tech firms to secure user consent before collecting information and allow users to withdraw that consent at will. The law also says companies should get an official nod before sending Chinese citizens’ data to foreign territories. The government asked DiDi to hold off its US IPO pending the enquiry. The company still went ahead with its IPO and is now facing the music.

The context

The Chinese government’s crackdown on Big Tech has a consumer, economic policy as well as a political angle, said Asheesh Chanda, Founder and CEO, Kristal.AI. The Chinese economy has seen a multi-decade boom after it opened to private capital. This allowed the country to pull millions out of poverty and made the country a global economic powerhouse. But there are signs that the boom has also widened the inequality gap. The country today has more billionaires than even the US. In 1978, the top 1% owned 6% of the national income. This went up 14% in 2015 and may be higher now. At the same time, President Xi has consolidated his grip on the Chinese political system. In 2018, he abolished the President term limit that would have required him to leave office in 2023. Chanda said it is therefore important for the government to exercise more control on businesses, especially the technology industry, which has rapidly gathered clout over the past decade.

What the crackdown means for investors and the ecosystem

Chinese tech shares listed on the Shanghai as well as US exchanges have fallen sharply. “Markets do not like uncertainty,” Thomas Meichl, Head of Advisory at Kristal.AI, said in a recent investor call. “As a result, we have seen correction in several Chinese tech names.” Meichl added that as of now, investing in Chinese tech shares could be akin to catching a falling knife. “But when the government clampdown is over – it is difficult to say when – there will be a buying opportunity,” he said. Kristal.AI’s investment committee is of the view that in the near term, the Chinese crackdown is as much about optics as it is about bringing about real change. “It is not going to be easy for governments to tame technology companies,” said Himanshu Gupta, COO at Kristal.AI. “We saw this in the aftermath of the 2008 crisis as well. Some of the too-big-to-fail regulation ended up creating up more barriers to entry. This further entrenched the position of the existing banks.”

Centralised planning makes a comeback

The past 50 years have seen open-market economies outperform socialist or communist economies where centralized planning simply did not have the bandwidth to drive positive change and innovation. China, too, benefited immensely as it opened its economy and its markets to the West. But as an article by the historian Yuval Noah Harari indicates, the rise of technology could help bring back the central planning model. “Given 20th-century technology, it was inefficient to concentrate too much information and power in one place. Nobody had the ability to process all available information fast enough and make the right decisions. This is one reason the Soviet Union made far worse decisions than the United States,” he writes. However, artificial intelligence allows centralized systems to process vast amounts of information. “In fact, it might make centralized systems far more efficient than diffuse systems, because machine learning works better when the machine has more information to analyze,” Harai adds. Late last year, Xi declared that 2021 would mark the beginning of a “new development phase”. One that would focus on "national security" and "common prosperity.” As a Wall Street Journal article summarized: President Xi wants control of big data and artificial intelligence. He will use this to correct the planning errors of the past and micromanage the Chinese economy. How successful he will be remains to be seen.

By

Kristal Advisors

August 18, 2021

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