Chinese Crackdown on Tech and Cryptocurrencies
By Ethan Sa and Eshan Gupta
Chinese tech stocks such as Alibaba have crashed in the past few months due to new regulations which have scared investors. The Hang Seng Index, which represents the 30 largest tech companies listed in Hong Kong, has tumbled nearly 50% from February 2021 to 2022.
So why is China cracking down and imposing sweeping regulations on tech companies? As the privatization of companies increases in China, the simple answer is that the communist government wants more control over privately-owned corporations. By introducing regulations and enforcing laws, the Chinese government is attempting to fulfill its main goal of providing the people with affordable services and prosperity. The main goal of a business is to generate profits, so the views of private companies and the government often do not align, resulting in regulations enforced by the government. China is cracking down on privately-owned companies to protect the people and the government’s interest by primarily enforcing anti-business laws and data security.
As user-collected data becomes more important in the age of digitalization and machine learning, the Chinese government is enforcing regulations to help protect the data of Chinese citizens. With more tech companies collecting data on their users, the government wants to keep that data locked down in China so adversaries such as the U.S. cannot take advantage of the data collected from Chinese citizens. Another focus of China is to increase the prosperity and productivity of its citizens. The government recently introduced a gaming limit for kids as its citizens complain about the gaming addiction which has become a growing problem in recent years. Since September 1, 2021, people under 18 have been allowed to play for only one hour on Fridays, Saturdays, and Sundays. To comply with the new law, gaming companies such as Tencent have rolled out features such as facial recognition to prevent minors from playing past their limits and cheating the anti-addiction system.
Another area China has heavily cracked down on is the education technology sector. An example of this is the regulations implemented on Beijing Yuanli Education Technology Co., Ltd. Yuanfudao’s tutoring app that checks over students’ math problems. They have been hit with new regulations because the government believed that the company was overcharging their tutoring services and focusing on profits which strained many families with lower incomes. China is also targeting other big tech companies such as online merchant marketplace Alibaba, who was fined a record $2.8 billion for breaking antitrust and anti-monopoly laws. The Chinese government determined that Alibaba hurt customers' interests by only allowing merchants to exclusively sell their goods on Alibaba instead of other platforms.
All of these regulations have hurt investor confidence which was reflected in the falling stock prices of Chinese tech companies. The stock price of a company is primarily determined by supply and demand, and if investors feel less confident that a company is a relatively safe investment, then they will sell their shares. This causes the share price to drop as there is less demand for the stock. Furthermore, it’s clear that China is trying to limit capitalist expansion using methods such as blocking IPOs. An initial public offering is when a private company transitions to a public one by publicly offering shares of their stock. An example of Chinese regulators blocking an IPO to limit capital expansion is the cancellation of the IPO of Ant Group. Ant Group, a subsidiary of Alibaba, owns China's largest digital payment system AliPay. The Shanghai Stock Exchange claimed that Ant Group had failed to meet the requirements to become a public company and thus, its IPO was canceled.
Not only is China cracking down on tech companies but the country is also outlawing the use and mining of cryptocurrencies because of power usage, illegal trading, and extreme volatility. A cryptocurrency is mined by using computers that do many calculations in order to verify crypto transactions on a decentralized network. A reward is given to miners in exchange for their contributions to transaction verification and power consumption. Mining cryptocurrencies with powerful computers uses a significant amount of energy which slows down China’s push for transitioning to renewable energy. Furthermore, from the government’s standpoint, mining is a waste of energy as it doesn’t benefit the economy or the government.
Another downside of cryptocurrencies is that they can easily be used for illegal trading and activities. Cryptocurrencies are often seen as the currency for the future, as they are decentralized- meaning that the government has basically no means to intervene with the distribution and management of currency. While this is normally good, some people take advantage of this by laundering money and doing other illegal activities. Finally, their high volatility is seen as a threat to the Chinese economy because it can introduce economic instability seen in other assets such as bonds and stocks. A high volatility means that the price of a cryptocurrency fluctuates a lot and is very unpredictable. The reason why cryptocurrencies have high volatility is that there is usually a limited supply of coins and there is no central bank to regulate the currency. With their decentralization and power consumption, cryptocurrencies are seen as harming the economy and the energy targets by the Chinese government. The Chinese government is taking advantage of its immense power and control by keeping non-state owned companies in check with new regulations and enforcement of antitrust laws. As investors are fearing more regulations are to come, further restricting growth potential and future revenue, the stocks of these companies have fallen due to decreased confidence in the sector. However, although investing in this sector is risky, it may be a good time to invest in Chinese tech stocks as they are at a great discount currently and are bound to grow even as tensions between China and the U.S. rise.
