A summer storm
Beijing’s goal is to channel entrepreneurial spirit towards useful goals. Profit cannot be the final standard of value, and the country’s best and brightest must work towards national salvation. I see that dynamic playing out in the regulatory campaigns this year.
The most important Politburo meeting of the year took place in April. The readout afterwards noted that the leadership identified a “window of opportunity” while growth was good to “concentrate on deepening structural reforms.”
When Beijing punished Ant Financial and DiDi, all of us were nervous that these companies were pawns in a game of elite politics whose rules aren’t revealed to anyone who isn’t a player. At this point, however, the punishment of these two firms looks rather small compared to everything that happened afterwards: the decapitation of online tutoring, new restrictions on video games, anti-monopoly actions against internet platforms, and passage of statutes governing data and privacy.
No small number of commentators have pointed out that any individual regulation passes muster on technocratic grounds. The US and Europe after all are debating rules with similar shapes—although they would never implement them with China’s speed and severity. I agree both with the commentators who see a sound technocratic foundation for these rules
as well as with commentators like Naughton who note that they add up to an unprecedented new program of political control on firms. Beijing expects companies to comply not only with formal regulations but also to a broader ideological agenda.While Beijing has restrained internet companies, it has done nothing to hurt more science-based industries like semiconductors and renewables. In fact, it has offered these industries tax breaks and other forms of political support. The 14th Five-Year Plan, for example, places far greater emphasis on science-based technologies than the internet. Thus one of the effects of Beijing’s squeeze has been prioritization of science-based technologies over the consumer internet industry. Far from being a generalized “tech” crackdown, the leadership continues to talk tirelessly about the value of science and technology.
In nearly all of my letters over the years, I’ve lamented the idea that consumer internet companies have taken over the idea of technological progress: “It’s entirely plausible that Facebook and Tencent might be net negative for technological developments. The apps they develop offer fun, productivity-dragging distractions; and the companies pull smart kids from R&D-intensive fields like materials science or semiconductor manufacturing, into ad optimization and game development.”
I don’t think that Beijing’s primary goal is to reshuffle technological priorities. Instead, it is mostly a mix of a technocratic belief that reducing the power of platforms would help smaller companies as well as a desire to impose political control on big firms.But there is also an ideological element that rejects consumer internet as the peak of technology. Beijing recognizes that internet platforms make not only a great deal of money, but also many social problems. Consider online tutoring. The Ministry of Education claims to have surveyed 700,000 parents before it declared that the sector can no longer make profit.
What was the industry profiting from? In the government’s view, education companies have become adept at monetizing the status anxieties of parents: the Zhang family keeps feeling outspent by the Li family, and vice versa. In a similar theme, the leadership considers the peer-to-peer lending industry as well as Ant Financial to be sources of financial risks; and video games to be a source of social harm. These companies may be profitable, but entrepreneurial dynamism here is not a good thing.Where does Beijing prefer dynamism? Science-based industries that serve strategic needs. Beijing, in other words, is trying to make semiconductors sexy again. One might reasonably question how dealing pain to users of chips (like consumer internet firms) might help the industry. I think that the focus should instead be on talent and capital allocation. If venture capitalists are mostly funding social networking companies, then they would be able to hire the best talent while denying them to chipmakers. That has arguably been the story in Silicon Valley over the last decade: Intel and Cisco were not quite able to compete for the best engineering talent with Facebook and Google. Beijing wants to change this calculation among domestic investors and students at Peking and Tsinghua.
Internet platforms aren’t the only industries under suspicion. Beijing is also falling out of love with finance. It looks unwilling to let the vagaries of the financial markets dictate the pace of technological investment, which in the US has favored the internet over chips. Beijing has regularly denounced the “disorderly expansion of capital,” and sometimes its “barbaric growth.”
The attitude of business-school types is to arbitrage everything that can be arbitraged no matter whether it serves social goals. That was directly Chen Yun’s fear that opportunists care only about money. High profits therefore are not the right metric to assess online education, because the industry is preying on anxious parents while immiserating their children.Beijing’s attitude marks a difference with capitalism as it’s practiced in the US. Over the last two decades, the major American growth stories have been Silicon Valley (consumer internet and software) on one coast and Wall Street (financialization) on the other. For good measure, I’ll throw in a rejection of capitalism as it is practiced in the UK as well. My line last year triggered so many Brits that I’ll use it again: “With its emphasis on manufacturing, (China) cannot be like the UK, which is so successful in the sounding-clever industries—television, journalism, finance, and universities—while seeing a falling share of R&D intensity and a global loss of standing among its largest firms.”
The Chinese leadership looks more longingly at Germany, with its high level of manufacturing backed by industry-leading Mittelstand firms. Thus Beijing prefers that the best talent in the country work in manufacturing sectors rather than consumer internet and finance. Personally, I think it has been a tragedy for the US that so many physics PhDs have gone to work in hedge funds and Silicon Valley. The problem is not that these opportunities pay so well, rather it is because manufacturing has offered dismal career prospects. I see the Chinese leadership as being relatively unconcerned with talent flow into consumer internet and finance; instead it is trying to fashion an economy in which the physics PhD can do physics, the marine biology student can do marine biology, and so on.
There are of course risks with a blunt reshuffling of technological priorities. The investment model of venture capital—in which a relatively small amount of funding can trigger explosive growth—fits like a hand in glove with consumer internet business models. VCs don’t tend to offer quite as much patience as semiconductors demand. Furthermore, many technological advances have been driven by consumer uses that Beijing no longer looks upon with favor. Demand for better video game graphics, for example, improved the sophistication of GPUs, which in turn produced better machine-learning algorithms.
But it’s also the case that state-driven technology efforts can work. The CPU, after all, grew out of the barrel of a gun. To be more precise, the beneficence of the Pentagon and NASA (another state-driven effort) gave the chip industry its crucial first customers. And venture capital did after all fund the first chip companies, including Intel. Beijing is trading unfettered exploration for state-directed goals, and it’s possible to argue that both the US and China are pursuing optimal strategies. As the technological leader, the US must encourage active exploration, because it has to blaze a new path. As the technological follower, China can simply follow the roadmap set by the US, while enjoying the easier task of reinventing existing technologies rather than dreaming up new ideas. It can worry about new invention after it has caught up.
A more serious risk with Beijing’s crackdown is its potential to dampen economic dynamism writ large. People working in online education today suffer from PTSD. Jack Ma has been mostly out of the public eye for a year. Meanwhile, many of the most successful Chinese founders have stepped down or into the background. No public figure in China dares to be too visible today. One motivation for dreamers to start companies might be to enjoy the outrageous excesses of being billionaire playboys. While I’m on the subject of Elon Musk, we should note that he did after all make his fortune in consumer internet before he embarked on manufacturing.
It’s too early to tell if in a decade China will have fewer founders of Jack Ma’s daring. So far at least, entrepreneurial types around me have found his example too removed to be worth bother. He remains, after all, one of the wealthiest people in the world, while he spends his time playing golf, doing calligraphy, or examining agricultural technologies in the Netherlands. My view is that it’s going to take more than this regulatory campaign to defeat dynamism in China. We might in retrospect see this summer as China’s high point in reining in the excesses of its own Gilded Age, which has produced ebullience as well as hucksterism. In this best case, Beijing would succeed at taming its robber barons without extinguishing dynamism in the following century.