Alibaba Is Fined; Other Tech Companies Are Put on Notice

Alibaba Is Fined; Other Tech Companies Are Put on Notice

In its latest bid to bring China’s tech industry to heel, the Chinese government’s State Administration for Market Regulation (SAMR) has levied a record $2.8 billion fine on Alibaba for antitrust violations. Joe Tsai, Alibaba’s executive vice chairman, told investors that the company would not appeal the fine, which amounts to 4 percent of the company’s 2019 domestic sales.

After months of pressure from the central government, Alibaba announced on April 12 that it will apply to become a financial holding company. The new designation will place Alibaba under the more stringent regulations imposed on China’s traditional banks, including requirements for higher capital holdings and less risky investments. It will also force Alibaba’s hand in data sharing with the government, a point on which the company has dragged its feet.

SAMR, the Chinese government’s antitrust watchdog, recently summoned 34 domestic tech companies, including Tencent, ByteDance, JD.com, Kuaishou and Pinduoduo, to request correction of anticompetitive actions. In a statement, regulators explicitly mentioned Alibaba as a cautionary tale for the other tech companies.

The central government wants to curtail (among other things) exclusive vendor practices, known as “choose one of two” (erxuanyi), and “walled garden” mechanisms that make it difficult to share and access content across platforms. Other points of focus for Chinese regulators have been some firms’ large market share and use of discriminatory pricing algorithms.

Regulators told the tech companies that they would have a month to reflect on and rectify their shortcomings; those that failed to do so would be severely punished. On April 14, SAMR published statements from 12 of the companies of their intent to comply, with more to come.

For the past six months, Chinese regulators have been cracking down on the country’s tech titans. Some commentators have suggested that the new scrutiny is motivated by the government’s fear of tech firms’ influence over public perceptions; others believe it to be a mere reassertion of regulatory power. Still others posit a personal vendetta of Chinese President Xi Jinping against Alibaba co-founder Jack Ma.

These latest developments suggest that the new squeeze on tech is reaching beyond Ma and his companies. A meme is circulating on Chinese social media: A young boy, labeled “Alibaba,” is being stuck with an “antitrust” vaccine, screaming in pain. The kids in line behind him, each representing a different Chinese tech company, look on nervously.

Commerce Blacklists More Chinese Companies; the Director of National Intelligence Calls China Biggest Threat

Recent developments suggest that the Biden administration will continue at least two Trump-era policies toward China: the blacklisting of Chinese tech companies and the explicit identification of China as America’s number-one threat.

On April 9, the Department of Commerce’s Bureau of Industry and Security added seven Chinese companies to its Entity List, thereby cutting off their supplies from U.S. companies. This round of sanctions focuses on Chinese supercomputer manufacturers, which allegedly help the Chinese military test weapons technology. Many such manufacturers rely on U.S.-supplied chips and hardware.

Under the Trump administration, the Commerce Department began including prominent Chinese firms in 2019; by last summer, firms were being added by the dozen. Two of the highest-profile additions have been Huawei in May 2019 and the Semiconductor Manufacturing International Corporation (SMIC) in December 2020. The Chinese government has responded by establishing its own “unreliable entities list” (which remains unused), strengthening export controls and “blocking rules” that punish entities that comply with sanctions to the detriment of Chinese firms.

On April 13, the director of national intelligence’s annual threat assessment report found that China is one of the most direct and serious threats to U.S. security. The assessment emphasized China’s desire to undercut American norms in favor of Chinese ones and “drive wedges” between the United States and its allies.

The report echoes former Director of National Intelligence John Ratcliffe’s statement in December that China was “the biggest threat to America today.” The Trump administration took an official hardline stance from its inception with the 2017 National Security Strategy, which emphasized China’s position as a strategic competitor and elicited a rebuke from the Chinese Embassy.

China Signals Openness to Crypto, Says Not Looking to Supplant Dollar

On April 19, Li Bo, the deputy governor of the People’s Bank of China (PBOC), stated that the PBOC now considers bitcoin an “investment alternative.” Last week, as Coinbase became the first cryptocurrency exchange platform to list on a major American stock exchange (NASDAQ), Chinese state media urged China to step up its efforts in blockchain and other technologies that underlie cryptocurrencies.

This marks a significant shift in China’s tone and policy toward cryptocurrencies. In 2017, China banned initial coin offerings, effectively outlawing cryptocurrencies, citing their potential for disruption of the “social order.” Last year, China moved to ban bitcoin mining.

But in 2019, Forbes reported that China was working to launch a state-backed cryptocurrency. And, although China’s Inner Mongolia banned crypto mining in March, China accounts for upwards of 70 percent of the world’s crypto mining. The country’s large share of the crypto market is partly due to its cheap electricity and surplus of undeveloped land on which miners can plant their servers. (A recent study suggests that the volume of bitcoin mining in China is sucking down so much energy that it threatens to derail the nation’s climate goals.) And China has rolled out a national blockchain network of more than 100 cities. It also holds the world’s largest number of blockchain-related patents.

The recent statements by Chinese officials and journalists are likely to fuel accounts in the West (most recently, those of Peter Navarro, a senior trade adviser to former President Trump, and PayPal and Palantir co-founder Peter Thiel) that suggest concern over China’s role in cryptocurrencies.

For years, American concerns about Chinese efforts to supplant the dollar have dominated discourse around global financial supremacy. They still do. In an attempt to assuage those concerns, Bo said that although the Chinese government wishes to internationalize the renminbi, it is not designed to supplant the dollar as the world’s reserve currency.

But now, concerns are shifting to digital yuan, rather than cash. Today, four out of every five transactions in China are completed digitally. China has been working on a digital yuan since 2014 and began testing the currency in various cities in 2019. That same year, a deputy governor of the PBOC, Fan Yifei, said that financial applications of blockchain would be the key to global financial competitiveness.

Unlike bitcoin, where control is decentralized, the government controls China’s digital yuan, but its transactions occur on a blockchain structure. The digitized ledger will lend increased transparency and reliability to financial data, enabling the Chinese government to better track money and reduce fraud. It also comes with a host of privacy concerns and potential for coercion. Some commentators believe it poses a threat to the long-term future of crypto.

Top U.S. government officials are now being asked what implications a digital yuan has for the dollar, and whether or not a digital dollar will soon be a necessity. Nicholas Burns, who is favored to become the new U.S. ambassador to China, said that the digital yuan could take away the power of American sanctions, because it operates outside the normal financial system. Some commentators believe the digital yuan, if internationalized, could break the United States’s “monetary sovereignty.”

Digital yuan trials are soon to expand to additional cities in China, and the digital currency is to be fully operational for both domestic and foreign users by the start of the Beijing Olympics, set to be held next winter.

One former member of China’s National Reform and Development Commission described the digital yuan as “crypto with Chinese characteristics.”

Kerry Secures Chinese Cooperation Ahead of Biden Climate Summit

Former Secretary of State John Kerry, in his capacity as President Biden’s official climate envoy, became the first senior member of the Biden administration to visit China this week. Secretary Kerry held two days of closed-door meetings in Shanghai with his Chinese counterpart, Xie Zhenhua, on April 15 and 16, where he secured Chinese agreement to cooperate on certain high-level climate issues.

The secretary’s trip to China ended on April 17 without an official statement. Some commentators believe the silence indicated that the leaders had failed to reach a meaningful agreement. However, on April 18, the U.S. State Department released the text of a joint U.S.-China statement pledging to work together to “tackle the climate crisis … with the seriousness and urgency that it demands.” The U.S. and China also announced their intentions to “cooperate to promote a successful COP 26 in Glasgow” later this year.

COP 26 is the annual meeting of parties to the Paris climate accords, to which both the U.S. and China are parties. One of the earliest actions of the Biden administration in January 2021 was to reinstate the United States as a party to the Paris agreement, after the Trump administration withdrew from the accord in 2017. China and the United States are currently the world’s largest carbon emitters, responsible for 28 percent and 15 percent of global carbon emissions, respectively.

The U.S.-China joint statement described the two nations’ intent to cooperate to “maximize international investment and finance” to support a host of emerging renewable energy technologies. The listed technologies included energy storage, climate capture utilization and storage (CCUS), green hydrogen, green and climate resilient agriculture, energy-efficient buildings, and green, low-carbon transportation.

President Biden plans to hold a two-day virtual conference coinciding with Earth Day on April 22 and 23, and he has invited 40 world leaders to attend. Chinese President Xi has not yet officially accepted his invitation, but the recently issued joint statement makes it seem likely that Xi will attend. Xi had also spoken with French President Emmanuel Macron and German Chancellor Angela Merkel to brief the leaders on China’s intentions ahead of Biden’s conference.

Other News

U.S. Limits Semiconductor Exports to China as Global Shortage Worsens

Technology makers across key industries, including automakers and consumer electronics manufacturers, continue to face a global shortage of chips due to increased post-pandemic demand. The United States reportedly plans to issue additional restrictions on the export of semiconductor manufacturing components to China. Meanwhile, President Biden has announced a plan to increase domestic production of semiconductors in the United States.

Several Republican lawmakers in the U.S. have issued calls for increasing existing sanctions on China’s largest chipmaker, Semiconductor Manufacturing International Corp., to the level of the Huawei restrictions. This would “prohibit the transfer of goods that might support SMIC’s production of semiconductors.” However, other nations may not follow suit: ASML, a leading Dutch company supplying semiconductor manufacturing equipment, has indicated its unwillingness to completely break with China.

The world-leading semiconductor manufacturer is Taiwan Semiconductor Manufacturing Co., which controls 51.5 percent of the market for semiconductor foundries. The semiconductor industry is seen by many as a potential flashpoint in U.S.-China-Taiwan relations.

U.S. Senator Proposes Bill to Curb International Data Trade

U.S. Sen. Ron Wyden, known for his activism around technology and privacy, has introduced a bill to restrict the export of U.S. citizens’ data to countries that pose a national security risk. The Protecting Americans’ Data From Foreign Surveillance Act would enable the regulation of third parties that sell U.S. data abroad, similar to the regulatory regimes that govern intellectual property or international weapons sales.

The bill gives the secretary of commerce the authority to identify what categories of consumer data and which foreign entities pose a national security risk. If enacted, it would impose civil or potentially criminal penalties on individuals who “know or should have known” they were exporting U.S. citizens’ data in violation of the act. It also creates a private right of action for anyone harmed or detained in a foreign country as a result of an illegal export of their data. Proposed on April 15, the bill is unlikely to see any significant progress for several months.

The bill comes on the heels of increasing criticism of China’s use of artificial intelligence-enabled surveillance technology to facilitate repression domestically, and claims of wrongful collection and abuse of U.S. citizens’ data. U.S. companies like Procter & Gamble that have collaborated with China to collect data for online advertising have also faced pushback.

Meanwhile, China is developing its own consumer protection-focused version of data privacy legislation and has accused Tesla, a U.S. automaker, of exporting Chinese data back to the United States.

Commentary

Maya Wang writes for The Diplomat on the role of automated surveillance methods in China’s fight against the coronavirus.

The Biden administration named Chris Inglis, a career National Security Agency veteran, as the first-ever national cyber director.

Melissa Chan writes for The Atlantic on China’s transnational repression of Uighur women outside of China.

Zeyi Yang writes for Protocol on the Chinese Communist Party’s increasing reliance on unpaid members of the Chinese public to support its online hate campaigns targeting critics and promoting nationalist propaganda.

For the Brookings Institute, Rush Doshi and Kevin McGuiness offer a history of great power competition in telecommunications, putting debates over Huawei in historical context.

Akinori Kahata wraps up a series of four blog posts for the Center for Strategic and International Studies on U.S.-China technology competition.

Eric B. Brown, John Lee and Thomas J. Duesterberg write for the Hudson Institute on the importance of the “Quad” alliance of the United States, India, Australia and Japan for winning the “geo-tech battle” in the Indo-Pacific.

For Rest of World, Yi-Ling Liu covers the exploitative nature of China’s food delivery apps, highlighting recent protests of working conditions by food delivery drivers across China.