The Technology 202: China is doing what the U.S. can’t seem to: regulate its tech giants

The shakeout continued Tuesday as Tencent’s WeChat, China’s dominant social and messaging platform, stopped registering new users, saying it needs to upgrade certain security systems to comply with unspecified “laws and regulations.” The company expects registrations to resume in early August. 

The WeChat news comes a day after Chinese regulators issued tough new worker protection rules for food delivery services, including industry leader Meituan, and weeks after ride-hailing giant Didi was removed from app stores as part of a cybersecurity investigation, widely viewed as punishment for the company going public in the United States. 

The government’s hard line has sent Chinese tech stocks plummeting and rippled across the financial world. Shares of Chinese companies listed in the United States this week saw their steepest two-day drop since the 2008 financial crisis, according to BBC News.

Some observers see the moves as part of a political power play against an industry that has grown too wealthy, powerful and independent for the comfort of President Xi Jinping’s regime. In a Substack newsletter, economics commentator Noah Smith argued that it represents a broader shift in national priorities from consumer-facing online platforms and apps to harder, more cutting-edge tech, such as artificial intelligence and chip-making, that supports the country’s geopolitical objectives. There may be truth to both views.

But there’s another way of looking at these developments, in which China’s goals for its tech industry are not so different from those of its Western counterparts. It just has fewer checks and restraints on the use of state power to achieve them. 

Rui Ma, an investor and analyst of China’s tech industry and founder of Tech Buzz China, the country isn’t “smashing its tech industry,” as Smith put it. Rather, the crackdown shows that China’s government harbors many of the same concerns as tech critics in the United States and the European Union, and is intent on constructing the ground rules for an ever more digital economy. 

Protections for gig workers in China, for example, followed years of reports of such workers being overworked, underpaid and abused by unaccountable management algorithms. The tightening of data security laws, focusing on firms with a significant presence outside China, mirrors U.S. fears about data privacy and spying, notably by Chinese firms such as Huawei and ByteDance. The antitrust push draws on the arguments advanced by U.S. Federal Trade Commission Chair Lina Khan and others that dominant digital platforms lend themselves to new forms of monopolization and anticompetitive behavior. 

“The headlines are virtually the same as what I read in the U.S.,” Rui said. 

One big difference: Tech regulation in China faces fewer political hurdles than it does in the United States, where a gridlocked two-party Congress and intense lobbying by Silicon Valley firms have so far thwarted meaningful legislation. Despite broad agreement that tech giants are too powerful, both major U.S. parties are divided on how to address issues of competition, consumer protection and online speech. 

Of course, China’s approach comes with its own big downsides: The lack of democratic process and transparent debate means its regulations can come across as arbitrary, vindictive and unpredictable — traits that tend to spook investors and risk chilling innovation. 

There is one argument against U.S. regulation, however, that might be crumbling before our eyes: the specter of global domination by an unfettered Chinese Internet sector.

In congressional hearings and media interviews, U.S. tech executives have repeatedly warned that onerous regulations, including new antitrust and privacy laws, would hamper their ability to compete with China’s tech gladiators on the world stage. The implication, often unspoken but sometimes explicit, was that China understood that having powerful tech giants was in its national interest, and wouldn’t dare sacrifice that power in the name of values such as privacy, competition or consumer protection.

China does see value in its tech giants competing globally, Rui said, and the current regulatory wave is not a sign that it wants to destroy the industry’s ambitions abroad. But it does signal an abrupt end to the country’s hands-off approach to the tech sector, and demonstrates a new willingness to impose its own priorities — even at the cost of their profitability and international standing.

There’s been a narrative for years that the United States, the E.U. and China are competing in global “races” in realms such as artificial intelligence; Rui suggests China sees itself as racing to establish a world-class regulatory regime to guide the sector’s future. 

“China wants to be world-leading in regulations,” Rui said. “They don’t just want to follow the E.U. and the U.S.”

From its censorship of the Internet to its surveillance of vulnerable groups, many aspects of the Chinese government’s approach to are cautionary tales for the West. But its aggressive stance toward anticompetitive practices, speculative and carbon-intensive cryptocurrencies, and gig worker exploitation aren’t necessarily the destructive moves they might seem to U.S. observers and investors. On the contrary, they may be laying the foundation for a more sustainable and vibrant Chinese Internet sector in the decades to come. 

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A top FTC official foreshadowed the regulator going after algorithms “juiced by ill-gotten data.”

Federal Trade Commission chief technologist Erie Meyer said companies that “sacrifice security in service of speed” could face stronger enforcement, including subjecting them to “bans just like abusive debt collectors,” Protocol’s Ben Brody reports. Meyer also slammed one-time penalties and suggested that the FTC needed to take on some industry business models.

“We’re going to make sure that data abusers face consequences for their wrongdoing,” she said. The comments came six weeks after President Biden elevated antitrust critic Lina Khan, known for her ambitious agenda to break up Big Tech, to lead the commission.

Top U.S. law enforcement officials told lawmakers to consider requiring companies to report data breaches.

Top officials with the Justice Department, FBI, Secret Service and Cybersecurity and Infrastructure Security Agency said Congress should consider the requirements so that the U.S. government has a better idea of the cyberattacks companies are facing, Gerrit De Vynck reports. Many companies are reluctant to say they’ve been breached because it casts a shadow over their brands, ransomware negotiator Kurtis Minder said.

“The main concern would be reputational damage and loss of revenue as a result,” Minder said. “If the government made these disclosures — to the extent that a breach disclosure is not already required by law — confidential, it would help. Bonus would be if the government actively assisted in the recovery.”

NSO Group’s owner lost control of a major investment fund, raising questions about the spyware company’s future ownership.

Investors in private equity firm Novalpina’s fund voted to take control this month, and the fund could be liquidated or handed over to a third party by Aug. 6, the Financial Times’s Kaye Wiggins and Anna Gross report. The news comes as NSO Group is already struggling in the wake of reports by The Washington Post and 16 media partners that its Pegasus spyware targeted journalists and human rights advocates.

The firm has reportedly grappled with an internal power struggle for months. The conflict isn’t related to the Pegasus Project investigation but could affect interest in owning the Israeli spyware company. Novalpina did not respond to a request for comment from Sky News, which first reported on the development.

Israeli Defense Minister Benny Gantz is set to discuss the spyware reports Tuesday with his French counterpart, Reuters reports. French President Emmanuel Macron’s phone number was on a list of 50,000 phone numbers that included Pegasus targets, our colleagues reported. NSO Group has repeatedly disputed the findings.

Rant and rave

Instagram’s new restrictions on teens had some people skeptical. The New York Times’s Shira Ovide:

The Guardian’s Alex Hern:

The New York Times’s Cecilia Kang:

Hill happenings

• Microsoft President Brad Smith, Lyft President John Zimmer, Peloton CEO John Foley and Etsy CEO Joshua Silverman were among the 146 business leaders who signed on to a letter calling for Congress to quickly pass a bipartisan infrastructure package.
• The Semiconductors in America Coalition, which is made up of major companies that make and use chips, is calling for congressional leaders to ensure that $52 billion in funding for the CHIPS for America Act makes it to President Biden’s desk for his signature.

Inside the industry

Rising seas are coming for Big Tech campuses. Who will pay to protect them? (NPR)

Workforce report

We reviewed 36 NDAs from major tech companies and discovered how far Silicon Valley's giants will go to silence and control their employees (Insider)

Your Apple laptop is probably repaired at a facility workers say is a 'sweatshop' (Insider)

Trending

Dating is tough. Could dressing up as a praying mantis help? (Lisa Bonos)

Martin Shkreli had the only copy of a Wu-Tang Clan album. The U.S. government just sold it to cover his debt. (Sonia Rao)

Mentions

• Penny Lee, who led Invariant’s public affairs practice, has joined the Financial Technology Association as its first CEO.

Daybook

• Top American, Australian, Indian and Japanese officials speak at the Quad Open RAN Forum today at 8 a.m.
• FTC Chair Lina Khan and four FTC commissioners testify before a House Energy and Commerce Committee panel today at 10:30 a.m.
• Facebook holds an earnings call today at 5 p.m.
• Amazon holds an earnings call on Thursday at 5:30 p.m.
• NetChoice hosts an event on the implications of U.S. lawmakers and regulators adopting a European antitrust approach on Aug. 3 at noon.

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