Why is Xi Jinping Destroying China's Tech Companies?


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Deng Xiaoping was China's Premier more than 40 years ago. Deng challenged China's existing economic structure, which relied heavily on state control of the market, implying that private companies had limited freedom. Deng reduced the state's influence on the Chinese economy. This helped many private companies. And, over time, Chinese products flooded the global market. And this model was so successful that, in 2010, China surpassed Japan to become the world's second-largest economy. Xi Jinping, on the other hand, came to power in 2013. And he had some other plans for the country. Xi believed that technology is divided into two categories: "nice to have" and "need to have." And Xi appears to regard WeChat, Alibaba, Tencent games, and Didi as "nice to have" technologies. This ideology is not unique to Xi.

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Xiaomi's founder, Lei Jun, once famously said, "Even a pig can fly if it stands in the center of a whirlwind."

It means that any company can succeed if it capitalizes on the right trend at the right time. And Xi believes that all of these internet companies have done just that. The Chinese government appears to think that the profits of companies such as Alibaba and Tencent are derived more from rents than from actual value-added — that they are simply capitalizing on first-mover advantage to capture strong network effects. This makes sense in some ways. Facebook and Google are two of the most valuable companies globally, but many argue that they produce little value compared to their profits.

"I find it bizarre that the world has decided that the consumer internet is the highest form of technology," says Dan Wang, a technology expert based in Hong Kong. "The apps they develop offer fun, productivity-draining distractions," he says, adding that "the companies pull smart kids from fields like materials science or semiconductor manufacturing into ad optimization and game development." He believes that "just because a country has a large population that plays video games, buys household goods online, and orders food delivery does not make it a technological or scientific leader." So, if not consumer technology companies, what does China intend to prioritize? According to Dan, Xi Jinping believes that the manufacturing sector holds the key to China's future. He claims that "companies that manufacture semiconductors, aircraft, batteries, and telecom equipment, rather than internet companies, will play an important role."

As a result, while the stock of the world's leading internet companies has plummeted, the stock of China's leading semiconductor companies has risen. Let us try to deconstruct this argument. Agriculture, manufacturing, and the service sector are the three major sectors of an economy. Typically, society begins by focusing on the agriculture sector, followed by the manufacturing and service sectors. Countries such as the United Kingdom and the United States have started to prioritize the service sector. And China does not want to do so. So, why do politicians dislike technology companies while investors appear to adore them? First, large tech companies impose societal costs that are not reflected in private market values. This is why Chinese state newspapers referred to video games as the "opium of the mind." American leaders would agree. They, too, are concerned that big tech suffocates competition, violates privacy, spreads misinformation, and encourages online addiction. And none of these issues are reflected in their stock prices. Second, technology firms challenge government market control. Take, for example, Alibaba's sister company Alipay, which has significantly disrupted China's public banking sector. Alipay would make low-interest loans to small businesses, which public banks would be unable to do. This reduced the government's control over the financial system. We talked about the negative effects of technology companies on society.

Let's talk about how the manufacturing sector benefits a country. Manufacturing companies provide social benefits that market values do not reflect. Manufacturing firms, for example, create jobs, boost productivity, and disseminate critical skills. Manufacturing innovation can help countries gain an advantage in geopolitical rivalries and military power. In fact, technological advancements benefited nations throughout the world war and cold war eras. Manufacturing sector innovations have a wide range of applications. For example, the Defense Advanced Research Projects Agency, or DARPA, is a US defense department agency that developed technology that everyone now uses in the late 1960s: the internet. Furthermore, as military technology becomes more software-driven, the need for manufacturing technological goods such as chips and semiconductors will become more critical. And this need for manufacturing was evident during the recent trade war between the United States and China. The US government has restricted China's access to biotechnology, nanotechnology, and cloud computing infrastructure. Let's see in the future if the USA's economic model or China's new economic model wins in the future.

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