China takes control of large technology companies

01/31/2023

4 minutes read

2023.01.31 03:38

By Ray Johnson

Budrigannews.com – This year, an apparent truce in a two-year conflict between some of the country’s most powerful regulators and its largest internet companies has prompted investors to rush back into Chinese tech stocks.

However, the enthusiasm may be premature; By acquiring so-called “golden shares,” which permit government officials to be directly involved in their businesses, including having a say in the content they provide to hundreds of millions of people, Beijing is tightening its grip on well-known companies like Alibaba (BABA).

According to business data platform Qichacha, a fund controlled by the Cyberspace Administration of China (CAC) acquired a 1% stake in Alibaba’s digital media subsidiary in Guangzhou earlier this month. Guangzhou Lujiao Information Technology, the subsidiary, oversees a portfolio of businesses, including the streaming video site Youku Tudou and the mobile browser UCWeb.

Qichacha claims that a new board member was appointed to the subsidiary at the same time as a mid-level CAC official with the same name.

A person with knowledge of the situation says that the Chinese government is also thinking about taking a similar stake in a mainland Chinese subsidiary of Tencent (TCEHY), which owns WeChat and a huge gaming company. The individual stated that the terms have not yet been finalized. Tencent’s actions come after Beijing indicated that its two-year assault on the internet industry will end. The Communist Party that is in charge of the economy needs the private sector to create more jobs and grow the economy.

However, this does not imply that China is altering its attitude toward businesses that it believes have grown too powerful.

Brock Silvers, chief investment officer of Kaiyuan Capital in Hong Kong, stated, “It wasn’t a change of heart that caused Beijing to pull back its regulatory push on tech companies; it was a concession to economic reality.”

However, “the goal of furthering state control over vast tech empires was not abandoned.”

Silvers added that Beijing is returning to the “golden shares” strategy instead, which allows the state to maintain control over these businesses while minimizing its impact on markets.

The owners of “golden shares,” typically governments, acquire some degree of control over businesses, frequently those that were previously owned by the state.

These shares are referred to as “special management shares” in China and grant the government veto or voting rights over specific business decisions or content, in the case of internet companies.

Alex Capri, a research fellow at the Hinrich Foundation, stated that foreign investors may face a “nightmare” scenario as a result of the policy.

This is because the Biden administration has restricted securities investments in Chinese companies that the United States believes are assisting China’s military.

Capri stated, “The CCP’s presence spills over into all areas, both military and civil.” This “represents a murky grey zone for investors.” Due diligence will be difficult for American and other foreign investors in China’s opaque system.

In order to strengthen its control over state-backed media companies, the Chinese government first introduced “golden shares” in 2013. These shares were later made available to private investors. However, in order to maintain its control over online information, it purchased such shares in a number of private tech companies that operate news and video apps as the mobile internet grew in popularity.

According to Capri, “Beijing’s Golden Share initiative is about embedding the Chinese Communist Party within the nerve-centers of China’s most important internet-content companies.” Several government entities took 1% stakes in popular news and content platforms between 2018 and 2022. From the inside out, it’s about achieving capabilities for pervasive surveillance, censorship, and policing,” he added.

According to Qichacha, a government entity purchased a 1% stake in a Beijing subsidiary of Bytedance, the parent company of TikTok, in April 2021.

Some Chinese operating licenses for Douyin and Toutiao are under the control of the subsidiary. With over 600 million active users, Douyin is the most popular short video app in the country. Toutiao is an app that aggregates news.

At a congressional hearing in the United States later that same year, a TikTok executive stated that the company had “no affiliation” with the Bytedance subsidiary.

By suspending its severe tech crackdown, Beijing has attempted to halt a rapid economic slowdown in the nation. At the World Economic Forum in Davos last week, Chinese Vice Premier Liu He stated that China will further facilitate foreign investment and support the expansion of the private sector.

Analysts, however, suggested that investors might not be as easily enticed to return to China.

Capri stated that the “golden shares” strategy seeks the same goal, which is “control and tight oversight,” despite the Communist Party’s easing of penalties.

Silver noted that, in addition to the risks posed by government control of listed entities, Western institutional investors may be reluctant to invest alongside Beijing due to an increasingly wary US administration.

He stated: