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The Importance of Specifics

by Patrick Body

November 11, 2022

Dan Wang, Technology Analyst at Gavekal Dragonomics, discusses the changes in China’s tech industry and the prospects for China-US economic cooperation

Bio: Dan Wang is a Technology Analyst at Gavekal Dragonomics. He is also a contributor to Bloomberg Opinion and writes a highly-regarded annual newsletter that covers China, technology, culture and philosophy

While the traditional drivers of the Chinese economy, such as the property sector, are looking increasingly shaky, the country’s tech sector continues to be a major area of positive development. At the same time, some tech companies have not been immune to the negative impact of changes to both regulation and expectations on their role in society. The most prominent example is ride-hailing firm Didi’s forced delisting from the NYSE and the subsequent $1.2 billion fine imposed on it for misuse of data.

In this interview, Dan Wang, Technology Analyst at Gavekal Dragonomics, discusses the guiding ideas behind China’s recent regulatory changes, the lack of nuance in the often-used term “tech crackdown” and the benefits and drawbacks of the ever-greater integration of technology in our lives.

Q. “Tech crackdown” is a term often used to describe the regulatory changes and ideological shifts that took place in China last year. How accurate do you think the term is in describing what happened?

A. I certainly push back against the premise that there is any sort of a generalized crackdown on technology. I think the term has been confused, in part because Silicon Valley has done a splendid job of marketing itself as the next wave of technology. Going from semiconductors to telecommunications to the internet might seem like a natural path, but I think it is a bit of a departure from working in science-based industries, like chips and telecommunications, and aviation before that.

Also, a lot of these consumer internet companies that felt most of the effects of the changes are not necessarily very R&D focused or doing a lot of science-based research. They are superb at business model innovation, as well as exploiting network effects, but I don’t think that they are necessarily at the peak of technological progress in things such as chemicals or high-end manufacturing or ICT goods.

In addition, we know that the Chinese leadership has spoken at length about the importance of science and technology. We see Chinese leader Xi talk a lot about having some sort of sovereignty in R&D. Talking about breaking foreign controls over what are called “chokepoint” technologies [those that are dominated by one or a handful of companies in other countries]. And so, while the country’s leadership has been talking much more about science and technology, and has been cracking down more on social problems, I don’t think it is a generalized technology crackdown.

Q. How does Beijing’s approach to regulating Big Tech differ from that of the US and other Western countries? And what are the advantages and disadvantages of China’s approach?

A. The speed and the severity of Beijing’s crackdown, I think, would not occur in the US. We know that the US, Europe and China have pretty much identical concerns around Big Tech: that there are too many of these big platforms that may be clogging up economic activity for smaller firms, that they have far too much data and that they may be abusing their market position. And so these are, I think, fairly common concerns across these three jurisdictions. But we also know that Europe and especially the US have really dragged their feet in implementing serious regulations against these big firms. It has mostly been slaps on the wrist in the form of fines.

So I think the jury is still out, and it’s too soon to say whether China’s approach is correct. But, these three jurisdictions have the same questions, and China, because of the nature of its system, is able to move much more quickly without generating a lot of pushback from these companies.

Q. How would you describe the position of Big Tech in China compared to two years ago and what effect is this having on China’s technological aspirations?

A. Certainly [the standing of Big Tech is] much reduced in China, but also in the US. In the US, it would now be unusual for any US president to visit a large tech company in the way that President Obama visited Google and Facebook. At this point, it is also quite unlikely to see Xi Jinping interact in a friendly way with any major tech company in the way that he used to. And so I think in both countries, there is much less love for these major consumer internet platforms and a much greater recognition that they have only generated a lot of benefits for a relatively small amount of tech employees, as well as for investors. And then, even though many of them are making the consumer experience so much better, the sum of promises of incredible productivity, great gains, as well as moving us into the future look a little bit more distant today.

Q. There has been a rapid integration of technology into all aspects of our lives, especially in China. To what extent is this a positive thing, both culturally and in terms of economic growth?

A. It’s a little bit hard to say whether it is good culturally. For example, I’m not a big fan of short videos on things like TikTok, but who am I to say that this is not a fairly positive new cultural creation? And I think, economically, the case that best shows how important these consumer internet platforms are was made during the pandemic. In the early months of 2020, those who were able to work remotely needed to go on video conferences. We could order groceries online, and children also started to do their schooling digitally. These things are all fairly positive.

We can also tell a story of consumer internet platforms really bringing smaller manufacturers into the market: their being able to sell on Taobao is a good example. But I think I am a little bit reluctant to endorse the entire consumer internet platforms economy as a major economic benefit, because a lot of the products around, let’s say, short videos, new art forms or video games, do not obviously seem to increase economic activity very substantially. So a lot of these companies are making very good products to help entertain us, and to give us more consumption options, but I’m not sure that they are necessarily very important in terms of boosting economic activity.

Q. To what extent do you agree with the notion of a decoupling between China and the Western world?

A. I think a lot of people would situate the start of decoupling to be China’s ban on Google and Facebook and not letting Twitter in a decade ago. It really accelerated under the Trump administration, when the US government weaponized its dominance in semiconductor technologies to try to set back the advances in Chinese capabilities, especially with firms like Huawei, as well as SMIC.

The world today is much more decoupled and I think that is not likely to shift in a new direction anytime soon.

Q. To what extent has China’s regulation of various areas of the tech sector been rules-based, or is it more bureaucratic whim?

A. I think it is not based on either whim or very clear legal rules, but it has to do with the political direction of the country set down by the top leadership. There are a few slogans that the leadership has really rallied around over the last two years, and I think these ideological drivers do a pretty substantial job in explaining the regulatory crackdown. These slogans include common propserity, dual circulation, as well as rule of law.

Another regulatory or ideological backdrop I perceive is that the Chinese leadership is quite worried about the country’s demographic situation, so the leadership is willing to do a lot to try to encourage families to have children. Part of that means reducing the costs of education, which is why there’s a big drive to regulate the industry.

Tech companies have been the biggest victim of this approach, but they haven’t been the only victim. I think there is also an effort to try to bring down the cost curve on health care, and to try to make sure that property is for living in and not for speculation.

Q. The property industry has historically been a major growth driver for China. What are the prospects of consumer spending by the growing middle-class forming the basis of a new growth model?

A. Certainly the Chinese government’s desire is to have more consumer spending—that has been a long-term goal for quite a long while now. But it is also fairly difficult to stimulate the country’s consumer spending. In the meantime, because of how big the property sector is, and how much economic activity is associated with it, it is just far easier to focus on the supply side for generating economic growth.

Q. You have said in the past that China has an inefficient but robust economy, in comparison to the just-in-time model in the US. To what degree do you think there is room for either side to learn from each other in this area?

A. There probably ought to be a happy middle ground between this focus on efficiency in the US and the focus on resilience in China. Terms that we associate with supply chain efficiency, like “inventory is evil,” were shown to leave us in limbo during the pandemic. Now, I think it’s perhaps not quite fair to use a once-in-a-century catastrophe to condemn an entire economic system, and I think the Chinese system certainly needs to learn how to be more efficient, especially in the state sector. But I suspect that there ought to be a point where the US is, after two years or so, able to produce more of its own goods, and China’s state-owned enterprises (SOEs) have learned to be more efficient and not always be laggards that are employing far too many people.

Q. China is increasingly becoming recognized as a scientific and technological powerhouse, but the country has so far failed to become a cultural exporter in the same way that many developed countries have, particularly other Asian countries. Why do you think that is and to what extent does this failure pose a barrier to China’s development?

A. I think the Chinese people are highly creative, but the Chinese government and its efforts to control things has stifled a lot of the creative aspects of cultural production, such that China has not concurrently created many new art forms for the rest of the world alongside its incredible surge in wealth. I think the best example to compare China with is Japan. Post-war Japan has, over 40 years or so, created new consumer electronics devices like the Sony Walkman, it has created new cultural genres, like Anime and Manga, and created a lot of movies that people in Western countries really enjoy today. And I think the scale of Chinese achievement is not really comparable.

China certainly keeps the domestic population happy with cultural products, but I think it is very striking that it has failed to create new things that the rest of the world really enjoys. One can say that the arts are not very economically important, but I think cultural products are important for more intangible political as well as diplomatic reasons. Without a lot of cultural products, I think the rest of the world is much less curious about China than it could be, it finds it much more difficult to love Chinese culture. And if any other developing countries, let’s say India or Vietnam, more or less catch up to Chinese capabilities in infrastructure and manufacturing, I think it is very plausible that a lot of foreign companies will pack up and leave, because they don’t have lasting impressions of great culture in China.

Interview by Patrick Body

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