China’s Big Tech-friendly policies were instrumental in putting the country on the AI map. In fact, China is often touted to overtake the USA as a global AI leader in the coming years. However, recent developments point to the Chinese government’s increasing bid to control and regulate big tech companies.  

China’s top legislative body passed a new data-security law last month that goes into effect in September. The new data law will compel companies to handle sensitive data with care. Firms that are found mishandling the ‘core state data’ will be forced to cease operations, have their licenses revoked or be fined up to 10 million yuan or $1.6 million. The Chinese regulators are also planning to change rules that will allow them to block Chinese companies from listing abroad even if the unit selling shares is incorporated outside China.

Strict regulations

Last month, regulators ordered removing Chinese top vehicle-for-hire company Didi Chuxing from the app stores, putting it under review for possible data security and security risks. It was alleged that Didi has mishandled sensitive data about its users. This happened two days after Didi raised $4.4 billion in a New York IPO. It did not take longer than three trading days for this to trigger a sell-off in Chinese tech stocks in NY and Hong Kong, with Didi losing one-third of its market valuation. 

The Cyber Security Review Office (CSR) was created in 2020–backed by 12 Chinese ministries–to look into cybersecurity risks. It introduced a new cybersecurity regulation that demands companies to undergo a review process for transactions deemed a threat to national security. In addition, the CSR with the Chinese Securities Regulatory Commission and the State Administration of Foreign Exchange will act as gatekeepers for overseas IPOs. 

China has added a new requirement for data security reviews ahead of foreign IPOs. These self-imposed curbs by the government have pummelled tech stocks and left analysts apprehensive about the future of China’s technology economy if the scrutiny is tightened. 

In addition to these curbs, the government’s bans on profitable tutoring companies have accelerated the sell-off of Chinese stocks. This year, it has cost foreign investors more than $US1 trillion ($1.4 trillion) of paper and real losses. 

Air of uncertainty

Venture capitalists to secondary market investors are all in the process of second-guessing the regulators’ next move amid the market unfolding after the curbs. Investors are mainly uncertain about the impact of the new data laws on China’s tech firm access and data usage; and, expecting a hit on the valuation of Chinese unicorn companies. 

Didi has warned the government of the negative impact of these restrictions on the tech industry after the company was ordered to remove 25 apps from mobile stores. 

The Nasdaq Golden Dragon China Index — which tracks 98 of China’s biggest firms listed in the US — plunged 22 percent in July, its biggest one-month drop since October 2008. These restrictions can have a backlash on the innovation of China’s tech sector.

China’s restrictions on Chinese companies listing on the US stock exchange, along with Washington’s legislation of delisting Chinese stocks for companies that don’t submit documentation for audits, can hugely hinder the growth of the Chinese tech sector. In the face of this difficulty, China’s competition- the American tech giants could be the beneficiaries.

All ten industry groups in the MSCI China Index posted declines as the gauge sank 5.6 percent, the most since March 2020.