A key stumbling block in trade negotiations between China and the U.S. has been Beijing's extensive support for its technology firms. But if President Donald Trump's administration thinks that will change any time soon, it hasn't been paying attention: Far from reducing support for the tech sector, China is on the verge of nationalizing it.
And it's not just startups. China's established tech firms--notably Baidu, Alibaba and Tencent, or the BATs--are experiencing enormous growth as well. Investors may worry about Chinese debt, but they're giddy about Chinese tech.
At first glance this rapid growth would seem to dovetail with the government's efforts to prove its market bona fides. China regularly pushes for recognition as a market economy at the World Trade Organization, while touting the benefits of "supply-side reform" at home. In a speech at the most recent Communist Party Congress, President Xi Jinping pledged to "support the growth of private businesses."
Look beyond such rhetoric, though, and a very different picture emerges.
Communist Party committees have been installed at many tech firms, reviewing everything from operations to compliance with national goals. Regulators have been discussing taking a 1 percent stake in some giants, including Alibaba and Tencent, along with a board seat. Tech companies have been widely encouraged to invest in state-owned firms, in the hopes of making them more productive. The common denominator of all these efforts is that the government wants more control.
An executive at a Chinese search engine recently summed up the new dynamic:
"We're entering an era in which we'll be fused together. It might be that there will be a request to establish a Party committee within your company, or that you should let state investors take a stake, you know, as a form of mixed ownership. If you think clearly about this, you really can resonate together with the state. You can receive massive support. But if it's your nature to want to go your own way, to think that your interests differ from what the state is advocating, then you'll probably find that things are painful, more painful than in the past."
Perhaps a bigger worry for China, though, is that this creeping nationalization could harm its most dynamic companies. More bureaucracy could mean less efficiency and growth. Firms may start currying government favor rather than taking risks and innovating. Tech could become the new coal.
And that wouldn't be in anyone's interest.
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Christopher Balding is an associate professor of business and economics at the HSBC Business School in Shenzhen, China.
Editorial on 04/14/2018