Power in the 21st century: A guide to China's "battle for Big Data" - - China Boss update 8.13.21
Update
Data is 21st century gold. China tech companies have built their fortunes off it. But it’s also a convenient means for a dictator to consolidate his power and strengthen surveillance. So, it should come as no surprise that President Xi wants massive troves of data, too. And why should a busy autocrat invent the algorithms that collect information on hundreds of millions of people from scratch when he can just take the data and knowhow already amassed by China's private Big Tech companies in the name of the state?
That’s right. Nationalization of China’s Big Tech data has been going on for years.
But why haven’t you heard about it before?
Few China business journalists - even the more celebrated ones who are tasked with explaining Beijing’s regulatory measures time and time again - have any training in law or the Chinese political/legal system. This is not to say they are always off the mark. They are, as a cohort, really sharp folks and gifted writers. Unfortunately, however, their deficits really do impair the quality of their Beijing regulatory analysis.
The most frequent logical fallacy? The false analogy in which it’s assumed that Chinese regulation can be understood - and explained - like Western lawmaking.
I know I’ll keep saying it until I’m blue in the face - but China has never had a rule of law system. Most of China’s current political administration evolved from the Communist revolution when the People’s Liberation Army held political power to stabilize the country while Mao’s communists got their administrative act together. Mao found the military system to be a convenient way of building his new socialist state, and, so, he kept a lot of it in place.
Stew on that for a bit. It means everything you think you know about democratic legislative and regulatory systems does NOT apply. We may not refer to Beijing as a junta, but the central government's administration and enforcement of law has more in common with a communist military dictatorship than with a constitutional democracy.
Take this point, for example. Rather than follow the well-established principle of transparency in law, Chinese “law”-makers draft orders that are intentionally left vague to systemically encourage, read intimidate, “The People” - read non-elites - to take extra precautions and self-police lest they cross “invisible red lines.” Screw personal liberty or property rights. In the eyes of an autocratic state, law enforcement for over a billion people is made a whole lot simpler that way. It’s more cost-effective, too.
So, the next time you read a China news analyst or “expert” discussing Beijing’s regulation of data as if it makes perfect sense from a “balancing of rights” point of view, remember - and you’ll make me really happy if you do - to call bullshit.
Here are some of my picks for best reads and videos (free on YouTube) on China’s battle for data from folks who I think get it.
****
Best Reads
What is China’s ‘battle for data’ and who will be targeted next? (Edward White & Sun Yu, Financial Times)
Read to understand the recent slew of regulatory moves that Beijing is pursuing to nationalize and monopolize data.
FT:
Chinese companies — and potentially anyone doing business in China or trading with the world’s second-biggest economy — face a string of laws on data.
The best understood is the Cybersecurity Law, which came into force in 2017, covering network and equipment security. It has a review process for establishing which companies are handling so-called “critical information infrastructure”, or data that is viewed as potentially damaging to Chinese security or posing a risk to the country’s citizens.
In September, China will introduce a new Data Security Law. This will help regulators define which data can be transferred outside of China without the state’s approval and what is prohibited.
By early next year, the Chinese government is expected to also release a Personal Information Protection Law, similar to Europe’s General Data Protection Regulation. The law is expected to have far-reaching implications for China’s huge digital economy, including establishing processes for data audits of apps such as Didi.
Emphasis added.
Notable takeaway:
Ernan Cui, a China consumer analyst with Gavekal Dragonomics, said behind Beijing’s waves of regulatory action were essentially a “battle for control over data” between the government and the private sector.
Didi Weighs Giving Up Data Control to Appease Beijing (Vinicy Chan, Dong Cao, Heng Xie, Zheping Huang, and April Ma, Bloomberg)
Read for a dramatic - and absurd - illustration of how Beijing is attempting to strong-arm e-commerce data. Didi, a ride hailing app, can't survive without access to its data.
Bloomberg:
Didi Global Inc. is weighing giving up control of its most valuable data as part of efforts to resolve a Chinese regulatory probe into the aftermath of its controversial U.S. initial public offering, people familiar with the matter said.
The ride-hailing giant has put forth a number of proposals to appease the powerful internet industry overseer, including ceding management of its data to a private third party, the people said, asking not to be identified talking about internal deliberations. Regulators have signaled a preference for that third party to be state-controlled, one of the people said.
It’s uncertain how such an arrangement, if pursued, would impact Didi’s access to the data, which is crucial to helping the firm orchestrate 25 million rides a day between some 400 million riders and drivers. Also unclear is whether the proposals would appease the watchdog.
Didi is fighting to ensure its survival after forging ahead with its American float despite objections from officials worried that a foreign listing could leak data and undermine national security. Regulators regarded its decision to go public despite pushback from the Cyberspace Administration of China as a challenge to Beijing’s authority.
They are weighing a range of potential punishments, including a fine, suspension of certain operations or the introduction of a state-owned investor, the people said.
Notable takeaway:
One proposal on the table was to bring in a state-owned firm with a larger stake than current top shareholders SoftBank Group Corp. and Uber Technologies Inc., one of the people said. Also possible is a forced privatization and delisting or withdrawal of Didi’s U.S. shares, though it’s unclear how such an option would play out.
Jack Ma’s Ant in Talks to Share Data Trove With State Firms (Jing Yang and Xie Yu, Wall Street Journal)
Read for the Ant/Jack Ma rendition of the Didi story described above. Sad.
WSJ:
Ant Group Co. is in talks with Chinese state-owned enterprises to create a credit-scoring company that will put the fintech giant’s proprietary consumer data under regulators’ purview, according to people familiar with the matter.
The new entity, which could be established as soon as the third quarter of this year, could result in Ant ceding some control over the voluminous data it has on the financial habits of Chinese citizens. More than one billion individuals use Ant’s Alipay app to spend, borrow or invest their money, and the information that Ant has collected and used has been the secret sauce behind the company’s success in recent years.
The talks between Ant, which is controlled by billionaire Jack Ma, and Chinese state-owned companies are likely to result in the formation of a joint venture that would be licensed as a credit-scoring company. Ant and regulators have also been discussing whether the firm should be run and controlled by Ant or state-owned companies, according to people familiar with the matter.
The regulators are pushing for prospective state-owned shareholders to play a greater role in the new entity in order to have a bigger say in how it operates, according to some of the people familiar with the negotiations. Potential shareholders include a Shanghai-based financial conglomerate. There have also been talks about what sort of data would be collected by the new firm, and how the credit scores it produces would fit into China’s broader plans to build a nationwide database, the people added.
The discussions are continuing and final decisions haven’t been made, the people said.
Notable takeaways:
For all of China’s world-beating advances in mobile payments and financial technology, the country has lacked a robust national credit-scoring system akin to America’s FICO, whose scores are used by many lenders and are based on individuals’ borrowing and repayment histories from a variety of sources.
The PBOC runs a Credit Reference Center that collects credit information about individuals and companies from banks and other financial institutions. But it lacks data on many people who don’t qualify for traditional bank loans.
Over the last decade, Ant and other fintech companies ramped up lending to much of China’s population, but the information they gathered on individuals was largely kept within their own systems.
Until recently, Ant had resisted pressure from financial regulators to share its data or feed it into a central repository accessible by other financial institutions, saying that it didn’t have its users’ consent to do so.
The tables have now turned, following the cancellation of Ant’s initial public offering and a broader regulatory crackdown on China’s technology giants.
A Struggle for Information Control Between China’s Government and the Tech Giants (Canghao Chen, The Diplomat)
Read for insight into how Beijing - or, really, President Xi - sees the power of Big Tech data and why nationalization of that aspect of the e-commerce and fin-tech business models was inevitable.
Chen, The Diplomat:
Dramatic as it may seem, the DiDi episode was not the first time investors in the Chinese tech sector got shocked. In November 2020, the dual IPO of Alibaba’s subsidiary Ant Group in Shanghai and Hong Kong, supposedly the biggest IPO in the world if successful, was suddenly suspended indefinitely by Chinese regulators one day before the event. In April 2021, the government opened a case to investigate the allegedly monopolistic practice of Meituan, China’s largest on-demand delivery service app. In July, the Ministry of Industry and Information Technology initiated a campaign against the entire internet industry of China.
These antitrust actions by the Chinese government coincide with the international tide of checking the growing power of the tech giants. However, it is noteworthy that the experiences of tech companies in China reflected not only their enduring tension with the government, but also a fundamental difference between two economic models. While the tech companies prefer a liberal market economy that gives them autonomy over their business and property, the ruling CCP favors a statist model that puts governmental guidance and command at the center of everything. Essentially, it is a struggle for information control that underlies the conflicts between the tech giants and the Chinese government in the past, at the present, and very likely in the future.
Notable takeaways:
Foreign tech companies were offered only two options by the Chinese government: get locked out of the lucrative Chinese market, or be co-opted into the censorship system if they want to make any money. It seems unlikely that the Chinese government would change course in the near future.
Controlling Domestic Tech Companies
As some of the most competitive tech giants were excluded from China, domestic Chinese tech companies seized the opportunities to fill the gap. For almost a decade, they enjoyed a wildly growing market that dramatically boosted their business and market values. A few company founders even became the wealthiest people in the country. However, their growing economic and social influence has generated uneasiness and sometimes even resentment in the government.
For one thing, the Chinese government started to realize that these companies seem to know Chinese people much better than it does. The big data that these companies collect through their business covers almost every aspect of Chinese people’s daily life, ranging from their shopping patterns and eating habits to their education status and financial conditions. Unlike state-owned enterprises, these private-sector companies sometimes wouldn’t unconditionally yield their data and information to the government when asked, an alarming collision with the statist model. For instance, Alibaba initially refused to share user information with the government. This disobedience, many believe, was partly responsible for the suspension of Ant’s IPO.
****
Best video explainers (on YouTube)
*Double-click on the arrow in the center of each embedded video below to watch.
How Does China’s Social Credit System Work? (Laowhy86, 18:56min)
Watch for a great layperson explanation of China’s social credit system that should give you a better sense of what the party-state has been working on for so long. Laowhy86 is more knowledgeable (and critical) about Chinese politics than a lot of PRC specialists I’ve come across in the news and he has a easy, accessible format for conveying information on his YouTube channel.
A Look inside China’s Social Credit System (NBC News)
Watch for a slightly more professional, newsy docu-drama that also does a nice job of tying Beijing’s ambitions for its social credit system with private Big Tech data know-how. Sesame Credit is a private credit scoring and loyalty program system developed by Jack Ma’s Ant Group in an early failed attempt to appease President Xi and stop him from taking control of the company’s most valuable data. You’ll also get a sense of how important AI and facial recognition software companies, like Huawei, are to Xi’s surveillance state.
Social Credit: China’s digital dystopia in the making (Journeyman Pictures)
Watch for a dark and spine-chilling account of President Xi’s ongoing upgrades in totalitarian-tech. Depressing.
****
Unless the pandemic travel rules change drastically next week (fingers crossed!), we’re traveling to France for vacation. I’m working on a revised newsletter schedule now and will inform you of the changes prior.
Thanks Boss.
Btw, to understand what motivates …
You really should …
Have a great weekend.
Very good points about China's quest to monopolize big data and use it to consolidate its power. As someone who has lived about half his life in Taiwan with a Master's in Chinese history, I have long been following China's increasing pressure on Taiwan to "resist independence"... as if it were not already independent.
But many pundits and Poli Sci commentators still mistakenly view China as a modern state ... that should recognize Taiwan (or ROC) as an independent state. I say mistakenly, because the CCP does not see either China or Taiwan as modern states.
Their concept of China is much more aligned with an empire than nation state.
The rulers of China today, as you mentioned, have little regard for rule of law, especially if the law may destabilize their power. Keeping the empire intact and consolidating power is priority no.1, and this means controlling territories, people's thinking and big data.
Chinese Emperors of old never had the technological tools at their disposal to both unify "China" and subjugate their subjects. Today's Chinese Emperors of future~past will either successfully create a new form of governance and statehood or will implode. Time will tell, but control of big data is no doubt a crucial part of this story.