Thread by @bauhiniacapital

Very interesting thread on China's "crackdown" and within a Chinese perspective on control, makes utter sense.

https://twitter.com/kendraschaefer/status/1412968264343322628

A lot of tech development in China has been in the mode of "move fast and break things" (or "Shenzhen speed") and the war has been a war for territory on the idea platform size will eventually win in "winner-take-all" markets.

China has, sporadically, been taking aim at the

"winner-take-all" construct and abuse of market power. The pulling of the Ant Financial IPO and BABA's fine were recent examples.

There was a good article in the WSJ about 3mos ago which talked about the aftermath of how officials had been shocked about the potential for media

control which could be exerted by BABA, Tencent, and other platforms. This came after the April 2020 scandal where the wife of a BABA partner Jiang Fan went on Weibo to warn a model/influencer/celebrity to stay away from her husband.

That was 17 April.

Weibo deleted the post

and related chatter super-quickly, and deleted trending subjects. Immediately, netizen chatter of conspiracies popped up. Why? BABA owned 31% of Weibo.

3 days later, Jiang Fan apologized and called for the company to investigate him. 10 days later BABA demoted him to VP and he

was no longer a partner.

The Cybersecurity Administration of China (CAC) investigated the situation, found BABA had been responsible, and said to CCP leadership Alibaba had "used capital to manipulate public opinion" (the 'capital' here was nebulous - it could be BABA's 31%

ownership, or it could have been that in 2019, BABA had been Weibo's biggest customer, with $100mm of billings).

In June 2020, the CAC penalised Weibo for interfering in the spread of opinion regarding a person of surname Jiang, calling on Weibo to "rectify the situation"

which allowed "interference with online communication."

This also drew HUGE attention to the media clout Alibaba wielded, through its stake in Weibo, its ownership of the South China Morning Post, Focus Media, Beijing Media Corp, Momo, Pingwest, Yicai Media, and other entities,

while Ant Financial owned a stake in Caixin (sold in 2019), and owns stakes in Zomato (up for IPO now), Huxiu, and 36Kr. Then there is media-like entertainment with movie studios and distributors, Youku, Bilibili, Huayi Brothers, etc.

In November 2020, "Xu Lin, a vice-director of the party’s central propaganda department, said in a public forum that China must “resolutely guard against digitalisation diluting the party's leadership, resolutely prevent the risk of capital manipulating public opinion."

That word choice was not coincidence.

And that speech was re-published everywhere at the time. There was a key quote.

scmp.com/news/china/pol…

Four months later, China told BABA to divest itself of [its] media assets (not clear if all, some, or which).

And that was the month when everything picked up pace. SAMR cracked down on a DIDI acquisition. A month later they cracked down issuing fines

wsj.com/articles/beiji…

on 10 more actions of forming JVs or making investments without appropriate approvals (another 22 fines announced y/day - all to internet companies), and with the ByteDance issue, and Meituan comments flying around, national security of data was not something people could ignore.

April saw the draft of the first Chinese law on personal information protection submitted to the Standing Committee of the National People's Congress for second review.

And on 27 April, CAC and 11 other govt departments issued the "Measures for Cybersecurity Review" effective

June 1. The measures REQUIRE a review on "critical information infrastructure" operators (undefined) bearing on national security.

And it requires that such CII operators conduct a national security assessment on procurement/supply networks, and if any question, the operator

MUST apply to CAC Examination Office for review. DIDI falls under "national security" because of the vast number of users.

Who is a CII operator? Anyone big.
wilmerhale.com/en/insights/cl…

The link is worth a read. It is, as far as I can tell, a clear method for China to have an official construct to put western firms on an "unreliable entity list" the way the US banned Huawei and other firms. The link references a Global Times article saying as much.

Some 30 internet companies were called on the carpet to CAC and the State Admin on Taxation and given a month to conduct a "comprehensive self inspection." The IPO docs for DIDI said they couldn't be sure the regulatory authorities would be satisfied.

As I said to a journo who asked yesterday, the era of "move fast and break things" is now over. Everyone involved in internet space - listed abroad, listed in China, unlisted now has homework to adapt to the new control reality. "Compliance" as this thread puts it.

This is relatively normal as industries mature and the disruption cycle of tech/service within a domain slows down.

What that does is it puts a moat around businesses which are playing musical chairs when the game is halted early on account of player inebriation.

It doesn't help things that China and the US have a spat going on, but if that spat were lower temperature, I expect this would still be happening. Luckin was a bad look. This was a name which trumpeted China's superior growth model. Never mind investors/execs had a history of

making up numbers and getting caught. A couple of years ago, the SFC in HK penalised four foreign brokers for leading IPOs in China Metal Recycle, Tianhe Chem, and others, where insufficient underwriting diligence had left investors holding the bag.

Luckin last year came just

as a new Securities Law - which itself had national security implications built in - was promulgated, and with it came a quasi-legal administrative framework for the CSRC to investigate Chinese businesses listed overseas which threatened to do damage to Chinese capital markets.

Later in summer, a framework which allowed Chinese investors the ability to bring class action lawsuits against Chinese companies listed overseas.

If you go back to the Opinion and Corrections regarding the launch of CDRs (China Depository Receipts) a few years ago, the idea

was to say "They're Coming Home" and allow a place where VIEs listed overseas could list in China. A number eagerly stood up to say it had been their dream to list in China. Others (BABA) were curiously silent. The clamor by foreign companies to list in Shanghai was a deafening

roar of silence. There was simply no way a foreign company could reasonably subject its executives and business to a political machine built for the purpose of bending companies to its bureaucratic will for the sake of a heretofore unnecessary secondary listing in Shanghai.

But the clamour by major execs interviewed on the sidelines of the Two Sessions to say "I'm doing my part" was understood.

The CDR construct was meant for those overseas-listed companies to comply. They knew. And the fact that few took up the challenge meant investors wait for

the next few shoes to fall. The rush to see NYSE ADRs do secondary listings in HK was the next. Last year's Securities Law overhaul was another. The change in Hang Seng and Stock Connect rules was key. The Ant Financial fiasco came later. Baba's subsequent public shaming next.

And this year's slew of new laws/rules/guidelines/frameworks is just the natural evolution of the framework which has been in process.

And...

https://twitter.com/FinancialTimes/status/1413120703994417154?s=20