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Can Beijing avoid repelling global investors while tightening grip on China’s tech companies?

Overseas investors overlook the risks of the Communist Party’s involvement in chasing access to the massive Chinese market and promise of big returns

PUBLISHED : Tuesday, 16 January, 2018, 1:00am
UPDATED : Tuesday, 16 January, 2018, 1:12am

Beijing is tightening its grip on China’s technology companies, but Western investors – salivating over big returns from a massive market – remain unfazed by the reality of doing business in this newly politicised sector.

With more than 30 Communist Party committees having formed in Chinese tech companies in recent years, the government is now talking about increasing its influence by taking equity stakes.

In October, China’s government reportedly was in discussions about taking a one per cent stake in some of the country’s largest tech companies, such as affiliates of Alibaba Group Holdings, Tencent Holdings and Sina Corp (Alibaba owns the South China Morning Post).

Executives at these companies had been concerned in recent months about losing their independence and seeing relationships with Western investors damaged. Investors, however, have overlooked the risks of the party’s involvement and bowed to the massive Chinese market that promises growth and return on investments.

For most Western investors, the Chinese consumer market is moving so fast that there has been little time to ponder companies’ affiliation with China’s ruling party, investors said last week at an event held by the Centre for Strategic and International Studies in Washington.

“When we think about investing in Chinese tech companies, we don’t spend a single second to study how active their Communist Party committees are,” Hans Tung, managing partner at GGV Capital, said at the conference. GGV invested in Alibaba in 2003, among other early-stage venture funds.

For example, when Groupon was popular in the US a few years ago, 3,000 Groupon-like companies popped up all over China.

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“There is no time to think about the Communist Party, because you need to hurry up or you will be killed in the battlefields,” Tung said.

Western investors’ nonchalance about government ownership is a telling reflection of how quickly they have come to terms with the reality of doing business in a newly politicised tech sector.

The rewards of access to the massive Chinese market still outweigh the risks of investing in businesses that may increasingly be subject to political influence.

Since the start of the People’s Republic in 1949, China’s economy has been made up largely of state-owned enterprises. Privatisation began in the 1980s to allow some enterprises to operate independently. The government continued to wield strong control over most industries, especially ones deemed strategically important.

“We are talking about a party state that generally insists on dominating the strategic heights of any important sector,” said Kaiser Kuo, founder of the Sinica podcast on China and former director of international communications at Baidu.

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China’s tech industry has, by and large, evaded the reign of Beijing in the last decade. Start-ups were mostly funded by venture capital firms in Silicon Valley. This process allowed the industry to stay out of the spotlight for years.

Less than a decade ago, it would have been hard to imagine any non-state-owned Chinese enterprise having a greater value than a state-owned one. Today, Alibaba and Tencent are bigger than any Chinese bank or state-owned behemoth such as China National Petroleum Corp.

“Clearly, the internet sector is one of (the strategic sectors). It just happened too fast. The government has been catching up the whole time,” Kuo said.

As the influence of China’s tech companies with their hundreds of millions of online users grows, the government has become concerned about the lack of control over these businesses.

Baidu Inc and Sina, among more than 30 Chinese tech companies, formed Communist Party committees in recent years. Most stayed low-key out of a fear of losing investors and having their global expansion plans made more difficult.

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In the most recent discussions, the government is seeking to take a small stake in the tech companies in exchange for a seat on the board, ostensibly gaining a say in critical business decisions.

As news of the party’s deeper involvement in the companies has circulated, tech executives have worried in private that it would alienate foreign investors. The West’s continuing interest in the sector, however, has helped alleviate any anxiety.

In July, Ofo went a step further. The Beijing-based bike-sharing start-up, which recently expanded its business to the US and Britain, announced via a press release it had formed a party committee, signalling a corporate view that aligning with Beijing could be good for business.

This perspective contrasted with the negative reputation Beijing has gained in the West through its efforts to censor and control the tech and media sectors in China.

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The government has blocked numerous Western tech giants, including the sites of Facebook and Google. It has limited or completely shut down access to The New York Times and Bloomberg, among many other news outlets.

Nevertheless, the acceptance of the Communist Party’s involvement in Chinese tech companies highlights executives’ years-long struggle with the question of how much independence to give up for a share of this large market.

Facebook CEO Mark Zuckerberg, regarding China as his company’s most important market, has made a repeat effort to charm President Xi Jinping after China blocked Facebook and its popular Instagram and WhatsApp services.

Undeterred by the government’s action, Zuckerberg jogged in Beijing’s smog, asked Xi to name the social media guru’s soon-to-be-born son, made a speech at Tsinghua University completely in Mandarin, read Xi’s most recent book and made it required reading for all Facebook employees, according to news reports.

Zuckerberg’s tactics would seem to come straight from the Chinese playbook.

Early in his career, Alibaba founder Jack Ma had criticised China’s financial system. But in December, the e-commerce giant launched a US$1.5 billion foundation to help fight poverty in China, a campaign that Xi made his signature policy issue in October.

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A major difference is that the Western driving engine is making a profit.

Large US companies have long used political campaign donations and involvement with industry groups and public causes to influence policymaking that would affect their businesses and enhance profitability.

But for Beijing, making a profit may not be its top priority.

The government could raise taxes on companies to pad its coffers. Instead, it has sought to gain seats in boardrooms where crucial decisions are made that could hurt or help the party’s interests.

“At the end of the day, companies don’t have all the cards,” Kuo said. “There is a limit to how much they can push back.”