Even in a state-run economy, digital companies are becoming too powerful

China’s digital economy has grown rapidly over the past two decades as services, communications and commerce move online.

The Chinese government has generally encouraged its citizens to accept digital technologies in all aspects of daily life. Today, China has about one billion Internet users.

China has made it clear that it aims to be a world leader in digital infrastructure and technology. Leadership in digital technology has been deemed essential for China’s future economic growth, both domestically and internationally.

Like Western countries, China has seen the rise of a handful of dominant digital platforms or “big internet companies”. We’ve studied China’s recent efforts to regulate these companies, which could be telling for Western countries trying to deal with their own big tech issues.

China’s ‘big four’ tech companies

The biggest Chinese tech companies are Baidu, Alibaba, Tencent, and Xiaomi (often collectively referred to as BATX for short). Broadly speaking, Baidu is built around search and related services, Alibaba specializes in e-commerce and online retail, Tencent focuses on messaging, gaming and social media, and Xiaomi manufactures phones and other devices.

Like their Silicon Valley counterparts Google, Amazon, Facebook, and Apple (or GAFA), BATX companies dominate their competitors. This is largely due to the enormous network effects and economies of scale of data-driven online activities.

BATX companies (again, like GAFAs) are also notorious for gobbling up potential competitors. In 2020, Tencent reportedly made 168 investments and/or mergers and acquisitions in domestic and international companies. Alibaba made 44, Baidu 43 and Xiaomi 70.

Technological repression

Over the past 18 months or so, BATX companies have come under increased scrutiny from the Chinese government.

In November 2020, a planned IPO for Ant Group, an Alibaba subsidiary, was effectively cancelled. Ant Group was forced to restructure after Chinese regulators ‘questioned’ the company’s founder.

The following month, Alibaba’s Ali Investment and Tencent’s Literature Group were fined 500,000 RMB (about A$110,000) each for issues related to anti-competitive acquisitions and contractual arrangements.

At the same time, China’s General Administration for Market Surveillance filed a lawsuit against Alibaba for abusing its dominant position in the market for online retail platform services.

In March 2021, other fines were imposed, including on Tencent and Baidu. They were fined 500,000 RMB each for anti-competitive acquisitions and contractual arrangements.

Then, in April 2021, Chinese authorities met with 34 platform companies, including Alibaba and Tencent, to offer “administrative guidance sessions” for internet platforms. That month, Alibaba was also fined a dramatic 18.228 billion RMB (about 4 billion Australian dollars) and Tencent an additional 500,000 RMB for anti-competitive practices.

In July 2021, Chinese authorities banned a merger between two companies that would have further cemented Tencent’s position in the gaming market.

Government efforts continue. Earlier this week, regulators imposed new fines on Alibaba, Tencent and others for breaking anti-monopoly rules regarding the disclosure of certain transactions.

What motivates the Chinese authorities to intervene?

The evolution of Chinese digital giants shows how data-driven markets operate on a “winner takes all” basis in state-run and capitalist economies.

BATX companies now wield significant social and economic power in China. This is at odds with China’s ideological commitment to the state-run social order.

In January 2022, President Xi Jinping called for stricter regulation and administration of China’s digital economy. The goal, he said, was to guard against “unhealthy” development and prevent “platform monopoly and disorderly expansion of capital.”

State-orchestrated social order is not possible where there is an excessive accumulation of private power.

China’s digital policy agenda is designed to achieve strong economic growth. However, the Chinese Communist Party also seeks to maintain strong state control over the structure and operation of digital markets and their participants to ensure that they operate in accordance with Chinese values ​​and the goals of the Chinese Communist Party.

What can we learn from China’s approach to big tech?

How to regulate digital platforms, in particular to improve competition and public oversight? This remains a largely unresolved public policy challenge.

Australia and the EU, like China, have shown great willingness to meet this challenge.

In Europe, for example, where American platforms dominate, policymakers are actively seeking independence from foreign tech companies. They do this by improving their own national technological capabilities and imposing rules on privacy, data collection and management and content moderation that align with European values ​​and standards.

While the EU and China pursue very different goals, both are prepared to play an important role in regulating digital platforms in accordance with their stated economic, political and social values.

This contrasts sharply with the situation in the United States, which has so far shown little inclination to significantly restrict the behavior of tech companies.

In theory, China’s centralized political power gives it room to try different approaches to platform regulation. But it remains to be seen whether the Chinese authorities will succeed in overcoming the tendency towards the formation of monopolies in digital markets.

If China succeeds, there could be valuable lessons for the rest of the world. For now, we have to wait and watch.

Joanne Gray has previously received research funding from Meta Platforms Inc. formerly known as Facebook Inc.

Yi Wang does not work for, consult, own stock, or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond his academic appointment.

/ Courtesy of The Conversation. This material from the original organization/authors may be ad hoc in nature, edited for clarity, style and length. The views and opinions expressed are those of the authors.