Overview

Recent regulatory measures introduced by the Chinese government have started to impact the bottom-line of the country’s major tech companies leading to large-scale layoffs. Despite Chinese top policymakers' recent announcement that the sectors hurt by the regulatory crackdowns will be shown support, some companies are reported to be downsizing by 20 percent.

Background

Since the end of 2020, China’s government has taken concrete steps to move away from its “growth at any cost” philosophy to regulation. Its new approach has manifested in the form of sweeping new laws and billions in antitrust fines for companies like Alibaba, Tencent, and Meituan. The new rules have targeted some of the most profitable business areas, which alongside a weaker economic outlook have caused Chinese tech stocks to plummet.

One area of focus for the government has been data governance. In addition to introducing a comprehensive data protection law that gives Chinese consumers new rights, the government passed a law that requires Chinese firms to increase their data security systems and prohibits firms from sharing sensitive data with foreign entities. While these new rules impose compliance costs on companies on their own, regulators have also taken additional punitive steps. In July last year, the popular ride-hailing app Didi was banned from domestic app stores by the Chinese government after it listed on the New York Stock Exchange (NYSE). Reports at the time suggested the government were concerned that, as a public company, Didi could be forced to disclose the sensitive ride data it collects. Didi is currently preparing to delist from the NYSE, and largely due to the disruption caused last year is expected to lay off 15 percent of its workforce.

Why is this important?

China’s change in regulatory posture has ushered in an era of strict crackdowns on the technology sector. New rules regulating data, competition, and the use of algorithms, are having a significant impact on companies, consumers, and the global economy.

What happens next?

Technology firms in China will continue to adapt to market conditions, including the new rules imposed by the government. Recent statements by Vice Premier Liu (the fourth ranking Vice Premier) suggest that the government is trying to abate the fallout its new regulatory stance is having on the broader economy and the millions employed by the largest tech firms: "We will act quickly to improve regulatory rules for key industries, emerging sectors, and sectors with foreign involvement and introduce new measures to make regulation more targeted and more effective.”

Moving forward we will continue to monitor the situation in China, tracking new legislation, regulatory enforcement actions, and their impact on the tech sector and China’s economy.