Overview

In our March Digest, we highlighted the impact that China’s strict regulatory environment was having on its domestic tech sector. Since then, key figures in the Chinese government have made a sustained effort to reassure tech CEOs and investors that the regulatory environment will be more business friendly in the near term. As China faces major economic headwinds and weakened growth expectations, these reassurances should be taken seriously, given the important role that large tech companies play in the economy.

Background

China’s largest technology companies have struggled this year, with notable firms like Alibaba failing to maintain the high rate of growth that defined their business until now (see table below). Weakened performance throughout the sector came after the Chinese government implemented a number of major regulatory reforms in 2021. Key decision makers within the Chinese government have softened their regulatory stance in recent months, suggesting the government recognizes a role it can play in stimulating business activity. China’s technology sector makes up approximately 30 percent of its domestic GDP, which some project could grow at a slower rate than the US this year—something that has not happened since 1976.

An important indicator of change has been cited as the end of the government’s probe of ride-hailing platform Didi. The yearlong cybersecurity inquiry, which very publicly coincided with the company’s initial public offering on the New York Stock Exchange in June 2021, signals a move towards a more moderate policy stance.

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In 2021, sweeping reforms related to China’s technology sector sent waves throughout the global economy. New legislation and retaliatory fines under the guise of data protection, financial stability, and antitrust redefined the regulatory environment within the country—which until then had been keenly centered around stimulating economic growth. The softened stance by government officials in recent months is not expected to result into a complete policy U-turn, rather a gradual lifting of restrictions in order to spur business activity and investment.

What Happens Next?

As reported recently by Bloomberg, Chinese officials have begun initial talks on the revival of Ant Group Co.’s initial public offering. If accurate, this would certainly affirm top officials' promises to provide greater support to the tech sector going forward.