There is a seismic shift occurring in technology; no one saw it coming, and no one knows when it will end. Local tech companies have been targeted by Chinese regulators, in contrast to how they were previously protected at the expense of foreign tech companies. The tech crackdown has impacted major tech companies such as Alibaba, Tencent, Didi, and more.

The Government Asks for Changes

It all began in October 2020. Alibaba's plans to list its fintech arm, Ant Group Co., in China have been stymied by the Chinese government. The Chinese government launched an antitrust investigation against the company, forcing it to halt operations. Didi, a ride-hailing company, was forced to stop accepting new customers and had its app removed from app stores two days after its initial public offering (IPO) in early July. It had been subjected to a security audit by regulators due to how it handled consumer data.

Meituan, a food delivery service, lost $62 billion in market value after the Chinese government demanded better working conditions for its employees. In a statement, China's State Administration for Market Regulation said companies should ensure that riders earn the local minimum wage, reduce the intensity of the workload, and strengthen traffic safety education and training, among other measures. Meituan promptly promised to comply with the requests.

In July, China's Ministry of Education stipulated that education and private tutoring companies can't be for-profit entities. They can't raise funding from stock markets or seek foreign capital through mergers and acquisitions. Before this, the tutoring companies were flourishing due to China's ultra-competitive education and exam system. Parents needed the companies to give their children an advantage. The Ministry of Education said that it wanted to reduce the workload on students and improve after-school services.

Two days after the announcement, New Oriental Education and Technology lost roughly $7.7 billion in market value in Hong Kong. Another education firm, Koolearn Technology, lost approximately $250 million in market value soon after the announcement. In comparison, TAL Education (TAL) lost more than $9 billion, and Gaotu erased $1.5 billion in value in their respective markets.

Growing Concerns about the Crackdown

The crackdown has scared many investors. Goldman Sachs estimates that Chinese tech firms have lost $1 trillion in value since February. On the surface, it appears that the Chinese Communist Party is authoritarian and overregulatory. Others have suggested that the party is worried about the companies' power and they don't want a situation where tech companies and executives can distract the country's direction.

But others see something else, a pragmatic approach to reigning in an industry that is becoming monopolistic and seemingly above the law. Instead, the Chinese government wants to give innovative small companies a chance to compete and hold big tech accountable for its social impact. This policy is a clear departure from the American model, which encourages unrestricted growth of big tech.

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