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12 Nov, 8 tweets, 2 min read

Chinese tech giants lost ~$260 billion in market cap in just two days after news broke that the Chinese Govt is trying to clamp down on tech companies.

So, why is the Chinese govt doing this?

China’s authoritarian Govt is notorious for keeping an uncomfortably tight grip on the country’s economy. However, it has more or less given free reign to sprawling businesses like Alibaba and Tencent, that dominate China’s internet, e-commerce, and digital finance industries.

These companies have been free to explore new ventures, invest in multiple startups, amass huge swathes of customer data, and set whatever prices they like for their services. And as a result, they have become way too powerful.

For e.g. Alibaba, Ant Financial, and Tencent alone commanded a combined market capitalization of nearly $2 trillion. For context, Chinese companies' total market capitalization was ~$10 trillion this October.

So, the Chinese govt is changing its non-interfering approach.

Earlier this month, they shockingly suspended the Ant Group’s $35 billion IPO 2 days before the shares were due to list. And since then, they have been pushing to control the unmitigated growth of private internet companies and the risks that come with the formation of monopolies

Also, China’s antitrust watchdog is establishing a framework to restrain private firms from sharing sensitive customer data, forming alliances that force out smaller competitors, offering customers only bundled products, and selling services below cost to price out other players.

Consider Alibaba Cloud. In the pursuit of growth, they've been operating on losses ($1 billion last year). But the thing is, Alibaba has $60 billion in cash. So it can offset these losses and continue offering its services at low prices until competitors run out of money.

But under the new regulations, this kind of subsidization may not be allowed.

As Zhan Hao, a managing partner with Beijing-based Anjie Law Firm said, "China’s Big Tech will have to rethink their business models."

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