China’s Big Tech Crackdown Could Chill Innovation  

China is clearly trying to hobble its leading global superstars. This is happening even though it has some skin in the game, so to speak, in taking some of the profits, as the government takes stakes in those same firms.

But will the current strategy prove to be short-sighted — sabotaging tech innovation, and consumers who benefit from that innovation, in the process?

The conundrum — how much power to allow, in terms of crafting and taking advantage of new eCommerce, social media and other markets — applies to companies homegrown in China, as well as U.S. firms that might be dissuaded from wanting to enter those markets in the first place.

Tencent’s comments on its recent earnings call point toward the expectation that more regulations will be in the offing. Said Martin Lau, president: “I think that the point we want to make is that number one… regulation on the internet is a global trend, and it’s not just limited to China. It’s actually happening in the U.S., in Europe. But China, it’s a bit ahead in terms of the execution of a more structural regulation framework … we should expect, in the future, in the near future, [that] more regulations should be coming.”

The latest salvo has been one where China’s State Administration for Market Regulation (SAMR) this week handed down that anticipated framework. As part of SAMR’s rules, online platforms “must not implement or assist in the implementation of unfair competition on the Internet, disrupt the order of market competition, affect fair transactions in the market.” Those same firms cannot leverage their data or their algorithms to re-route traffic or influence buying decisions, according to the reports.

Read also: Chinese Watchdogs Tighten Tech Grip With New SAMR Rules 

The continuing crackdown has led to beefy fines levied against big tech firms, canceled mergers and halted public offerings. In April, for instance, Alibaba was hit with a $2.8 billion antitrust penalty. Food delivery platform Meituan is under investigation for alleged anticompetitive behavior. Tencent’s merger with Huya and DouYu was stopped, and Ant Group’s initial public offering was blocked.

Equity Stakes, Too

Elsewhere, the government has taken 1 percent equity stakes in firms like ByteDance and Weibo. Now, 1 percent stakes are hardly controlling, in terms of nationalizing these companies. But we contend that though the actions may be based largely on optics, they signal that the government can — and might — take more of an active role in expanding those holdings, which in turn could impact those firms’ autonomy (and strategies).

The actions by Beijing may have ripple effects, steering would-be CEOs and founders away from innovating “too” much or starting companies in the first place, should they become successful enough to warrant more scrutiny. The same might be said for U.S. firms eyeing the Chinese markets for new entry points. The crackdowns continue, and the impacts are thus far unknown. And where the rules have yet to be fully hammered out, uncertainty reigns.