Is this China’s technology moment?

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Shifting relations between technology and the state

It can be difficult to get credible and accurate reports about what is happening in China, especially when it comes to technology (and the Chinese tech industry).

However over the past couple of months there has been a notable shift in both Chinese government policy and the state of China’s technology companies. These include a revised privacy policy, increased antitrust measures, and the much anticipated launch of a national digital currency.

Ironically this shift has been partly possible due to a comparable shift that is underway here in North America. While China has always taken an aggressive approach to their development, use, and regulation of technology, the government has been sensitive to external perceptions that the state tightly controls both the industry and the use of the tools themselves.

However now that North America is seemingly joining Europe in taking a tougher or more openly regulatory stance with regard to the digital giants, China may feel room to flex their own regulatory might.

Similarly China is also a major exporter of technology, as well as an importer of data, actively extracting and employing information from around the world to build their increasingly sophisticated machine learning technologies.

We should resist simplifying or glorifying how technology is used by Chinese industry and government. However we can also recognize that the US and China are currently engaged in an emerging form of digital imperialism, in which they compete to export and standardize the use of technology (and automation) around the globe.

Which may also explain why Silicon Valley’s troubles at home, in particularly regulatory threats, may provide a strategic advantage for Chinese companies. Especially given the relatively futile attempts by the Trump administration to curb the success of Chinese tech companies like ByteDance, the owner of TikTok.

Although that hasn’t stopped the outgoing administration from taking one last shot in the ongoing trade war between the two countries.

U.S.-Sino tensions ratcheted up in recent days as outgoing President Donald Trump’s administration pushed through a ban on Americans investing in 35 firms it considers to be linked to China’s military.

Sources in Washington last week said Trump was considering adding Alibaba and Tencent, worth a combined $1.3 trillion, the second and third biggest EM stocks in the world and held by almost every major U.S. investment fund, to the list of banned firms.

Targeting China’s two most valuable companies would be the most dramatic step yet against the country’s firms as Trump seeks to cement his hardline policy against Beijing during his final days in office.

It will certainly be interesting to see how the new administration handles both this trade war but also the growing geopolitical contest between these countries respective technology sectors.

The rise of TikTok, an app whose parent company is the Chinese firm ByteDance, has struck at the heart of Silicon Valley’s supremacy. Along with other digital products coming out of China, TikTok has the potential to reshape the future of technology – a future in which the culture, and the interests, of Shanghai or Beijing could mould the industry more than that of San Francisco Bay.

It’s hard to overstate just how much of a switch this is.

“The narrative previously was about China coming up with its own versions of [Western] digital products,” says Elaine Jing Zhao, senior lecturer in the school of the arts and media at the University of New South Wales in Australia.

“Nowadays, you see the narrative shift towards how Western social media platforms are learning from Chinese social media platforms.”

I’ve been saying for well over a year that TikTok outperforms other social media platforms by a wide margin. This remains the case, and the last week I’m blown away by just how incredible the coverage of the social media coup in DC and its fallout has been on TikTok. It’s like the Chinese owned app has an interest in the instability of the US state?

Jokes aside, there is a relevant link between the capabilities of a social media platform to make sense of the massive sea of content it hosts, and the needs of the state.

By co-opting Chinese companies’ data-processing capabilities, U.S. officials say, Beijing’s spy agencies can rapidly sift through massive amounts of information to find key nuggets of intelligence value—for example, to help identify an undercover CIA operative by cross-checking real-time travel intelligence with other sources gathered by China’s Ministry of State Security (MSS). And by outsourcing these expensive data-processing functions to private companies, Chinese intelligence agencies can also exploit these commercial capabilities at a scale they don’t possess themselves or don’t want to build in-house, officials say. Alibaba and Baidu did not respond to multiple requests for comment.

The cooperation hasn’t always been frictionless. “The private companies are hostages to it,” a former counterintelligence executive said. “Arguments ensue.” Sometimes, U.S. intelligence officials would learn about “pissed-off employees” at Chinese companies upset about “doing extra work” on behalf of Chinese intelligence, the former executive said. But they were obligated to comply. “All the major Chinese firms have benefited from knowing, at various points, how to not be too big to fail the party,” the former senior CIA official said. The companies’ at-times begrudging cooperation with Beijing’s intelligence agencies is still, in the end, a subordination to them.

While this relationship comes as no surprise to anyone paying attention, the relevant question has to be the extent to which this happens in other countries, whether US, Russia, India, Israel, Brasil, or even Canada.

For example the massive amount of data that the SolarWinds episode may have made accessible to Russia would require a lot of processing. Is the Russian state alone in a position to use it?

Although in China it’s not just the technology industry itself, but also tech savvy residents who are willing to work (one assumes for pay) for the state.

However the story of China’s relationship with it’s tech sector is not one of harmonious unity. As with anything there’s nuance and shifting allegiances.

Which is why the ongoing story of Jack Ma is relevant and fascinating.

Chinese President Xi Jinping personally made the decision to halt the initial public offering of Ant Group, which would have been the world’s biggest, after controlling shareholder Jack Ma infuriated government leaders, according to Chinese officials with knowledge of the matter.

The rebuke was the culmination of years of tense relations between China’s most celebrated entrepreneur and a government uneasy about his influence and the rapid growth of the digital-payments behemoth he controlled.

Mr. Xi, for his part, has displayed a diminishing tolerance for big private businesses that have amassed capital and influence—and are perceived to have challenged both his rule and the stability craved by factions in the country’s newly assertive Communist Party.

In a speech on Oct. 24, days before the financial-technology giant was set to go public, Mr. Ma cited Mr. Xi’s words in what top government officials saw as an effort to burnish his own image and tarnish that of regulators, these people said.

Although the reporting on this incident made it seem as if the state was just picking on Ant Group, when in reality, this was part of a larger shift in regulatory attention and enforcement.

China has vowed to strengthen oversight of its big tech firms, which rank among the world’s largest and most valuable, citing concerns that they have built market power that stifles competition, misused consumer data and violated consumer rights.

Last month, Beijing issued draft rules aimed at preventing monopolistic behaviour by internet companies, marking China’s first serious regulatory move against the sector.

Regulators globally, including in the United States, Europe and India, have already been carrying out tougher anti-trust reviews of tech giants such as Alphabet Inc’s Google and Facebook Inc.

SAMR had so far produced less “headline-grabbing” cases compared with global regulators, Jiaming Zhang, a senior associate at law firm Allen & Overy, said.

“However, all these recent developments seem to suggest that SAMR is ready to open a new chapter for its enforcement actions in the internet sector,” she said.

It does seems as if the government is acting, not in step with the rest of the world, but in response to it. As if a shifting tide in policy enables greater agency by the state when it comes to taming the power of technology and the companies that wield it.

Ant Group was just the most visible and symbolic, but the message was felt throughout the Chinese tech sector.

In North America antitrust action happens slowly. It might seem that things move far faster in China. Often with powerful and symbolic flare.

Although it can be difficult to get the details on what has happened and why and to whom. It certainly feels as if the state moves fast, but we’re still not sure what the state’s full intentions are.

Reports from China indicate that the Chinese government may be working on a plan to nationalize Jack Ma’s Alibaba and the Ant Group. China’s ruling Chinese Communist Party (CCP) has gone further ahead with the antitrust investigation into e-commerce giant Alibaba.

“Based on tip-offs received by the State Administration for Market Regulation in recent days, the administration will be investigating Alibaba … for suspected monopolistic activities,” the government said.

The investigating agencies had set up an office at the Alibaba headquarters in November. Apart from the e-commerce giant, investigators are also probing social media giant Tencent and e-commerce company Meituan.

That would obviously be a radical move, and not necessarily an effective one, as there is good reason to be skeptical of the ability of the government to manage a tech giant like Ant Group or Tencent. I’m sure they’d disagree with such an assessment.

Nationalizing these companies, while unlikely, could coincide with the country’s debut of their digital currency.

There’s something to be said about being first, not just because of bragging rights, but more importantly the chance to learn and iterate. To find the bugs, figure out the features, and adapt accordingly.

An obvious benefit to a digital currency is the data generation and analytics opportunities. Similarly China would be the first country with a digital currency at a time when the value of Bitcoin continues to climb.

Yet the value of BTC is very much a reflection of a general distrust and disbelief in government.

After all, one of the goals of any state is to convince its subjects of its omnipotence.

The reality is that most governments range between incompetent and dysfunctional. One of the reasons they require considerable resources is due to the waste and inefficiencies they inevitably incur. While I certainly believe and hope that digital technologies can radically improve and enable government services and capabilities, nothing of the sort has happened yet.

This is obviously true of the US as it craters in the face of a pandemic and social media inspired extremism. However it is also true of China, in spite of fears that it has become a techno-dystopian state.

China’s social credit system is supposed to control the trustworthiness of not only individuals, but also companies and government entities.

However, in reality, it focused more on companies and individuals. Government entities are both “the referee and the athletes of a race,” as Wu Jinmei, a professor at Renmin University of China, puts it. Ms Wu argues that the social credit system, in its current form, is very chaotic, with too many actors involved. The lack of central coordination and the absence of an underlying legal framework are the fundamental reasons for the chaotic situation, she says.

Shao Zhiqin, vice chairman of Shanghai’s municipal committee, concurs. The chaos is a reflection of the lack of a framework for the social credit management system, he argues. This makes the local authorities lose the general direction.

China did not develop a unified credit information collection and classification management standard. Instead, each region and each government department built their own credit platforms. As a result, information sharing is very difficult. Various departments and local authorities have from time to time competed for dominance in the construction of the credit system, based on their interests, leading to further inconsistencies.

We’ve written previously about social credit systems, specifically noting that there is no unified system. Similarly the attempts to create a framework that at least connects the many systems active throughout the country is still not happening.

In December 2020, the government missed the deadline it set itself in 2014. However, it issued guidelines for further improvements. It highlights the importance of central legislation and lays the ground for a future national law on the social credit system. The government says that local authorities misapprehended the definition of “bad behavior”. Spitting in public and fare dodging should not be part of the credit score, for instance. Only illegal activities defined by law should be in this category, it said.

The government is determined to pass the law that will bring much-needed clarity to social credit systems. The only unknown is when. Until then, the motley collection of credit scores, ranging from city-level schemes to commercial credit scores and national blocklists, will continue to confuse Chinese citizens – and European journalists.

I wouldn’t be surprised if a place like the UK or Israel or even the US were to come up with a national social credit system before China does.

Similarly, it is possible that China will come up with a national privacy framework before the US does.

In October, China’s National People’s Congress (NPC) released a long-awaited draft of the Personal Information Protection Law (PIPL, translation here), a milestone in China’s years-long effort toward a comprehensive privacy and data governance regime. If enacted, not only would the law reshape privacy law in China, but it would also be a major force in the evolving global privacy landscape and a highly consequential regulatory framework for international business.

China’s draft PIPL represents a third way between the sectoral U.S. approach, which applies different rules for specific industries or classes of consumers, and the European Union’s comprehensive General Data Protection Regulation (GDPR) framework, which enshrines fundamental rights across contexts. With the draft law, China’s evolving data governance regime emphasizes consumer privacy while also prioritizing national security through data localization measures, cross-border data flow restrictions, and continued surveillance and law enforcement powers.

We’ll have to keep an eye on the development of this law, if anything to help us understand what kind of privacy legislation we desire here in North America.

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