Chill pervades China’s tech firms even as crackdown eases

A grinding crackdown that wiped billions of dollars of value off Chinese technology companies is easing, but the once-freewheeling industry is bracing for much slower growth ahead.

Analysts say China’s easing of restrictions on companies like e-commerce giant Alibaba and online games company Tencent and talk of support for the private sector reflects Beijing’s decision to refocus on growth after the economy was ravaged by the pandemic and restrictions imposed to fight COVID-19.

But controls on internet content r emain firmly in place. And the crackdown has left a “chilling” effect on the industry, potentially slowing innovation, while U.S. restrictions against China’s computer chips industry are hindering progress in developing leading edge technology in 5G and artificial intelligence.

In January, a top official at China’s central bank said in an interview with state-owned media that the crackdown on technology companies was “basically” over, adding that companies would be encouraged to lead economic growth and create more jobs. That came just weeks after China dropped stringent entry restrictions and testing and quarantine requirements that were part of its “zero-COVID” strategy meant to quash the virus.

“With the end of the zero-COVID policy, China is returning to prioritizing economic growth, and the technology sector is obviously a critical driver of growth in China and a celebrated source of innovation,” said Gregory Allen, a senior fellow in the Strategic Technologies Program at the U.S. research organization Center for Strategic and International Studies.

Companies like Alibaba and Tencent control everyday apps and services that are used ubiquitously by large swathes of the population – including online payments, messaging, food delivery and e-commerce.

Such companies flourished for two decades with scant regulation before Beijing launched a barrage of anti-monopoly, data security and other restrictions from late 2020, seeking to rein in e-commerce, social media and other companies it viewed as too big and independent.

Signaling an easing, Didi Global — which was ordered to stop new-user registrations in 2021 following accusations that it violated data security rules — recently was allowed to resume taking on new users.

“The crackdown was deep and cut far to the bone, probably more than the government expected it to,” said Shaun Rein, founder and managing director of China Market Research Group in Shanghai. “Because what’s happened is over the last two years, venture capitalists and entrepreneurs have been scared to deploy capital and start new companies.”

The value of venture capital deals in China plunged 44% to $62.1 billion in the first 10 months of 2022 compared to the same period in 2021, according to research firm Preqin.

The Biden administration has stopped approving renewal of licenses to some U.S. companies that have been selling essential components to the Chinse tech giant. That’s according to two people familiar with the matter who were not authorized to comment publicly on the sensitive matter and spoke on the condition of anonymity.

Washington gradually has tightened controls over U.S. exports to Huawei but had allowed some companies like Intel and Qualcomm to sell it processors used in devices like laptops and lower-end smartphones. The U.S. has justified such sanctions on national security grounds. Huawei denies the accusations.

Under such pressure, China has accelerated efforts to become more self-sufficient in semiconductors and other advanced technologies, providing billions in subsidies and investments for the industry. But it remains years behind in some of the most advanced semiconductor manufacturing processes and a U.S. prohibition against supporting development and production of integrated circuits at some chip factories in China has deprived Chinese chip firms of the foreign talent that has long contributed to its domestic industry.

A U.S. ban on selling crucial semiconductor manufacturing equipment to China is another obstacle.

“It’s one thing to go into areas like software and cloud services, in which Chinese companies are already quite strong,” said Allen of CSIS.

“It’s a very different thing to take Chinese companies that are a decade or two behind in state-of-the-art semiconductor manufacturing equipment and tell them to grow up immediately by replicating some of the most advanced technologies that the world has ever produced.”