How China Regulates Tech

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China's governance of its tech sector features a complicated balance of regulation, self-regulation, and state intervention to shapes the industry's trajectory. Today's guest on the podcast is the author of a comprehensive analysis of Chinese tech policy that introduces a dynamic pyramid model to understand this complex regulatory system, focusing on the interplay between key players and their incentives.

Angela Zhang is the author of High Wire: How China Regulates Big Tech and Governs Its Economy, published this year by Oxford University Press. With a career in the practice of law and in teaching it, Zhang has held roles King’s College London and at New York University School of Law, and most recently served as Director of Philip K. H. Wong Center for Chinese Law at the University of Hong Kong. She will join the University of Southern California as a Professor of Law in fall 2024.

What follows is a lightly edited transcript of the discussion.

Angela Zhang:

My name is Angela Zhang. I am a professor at the University of Hong Kong and I will join the University of Southern California as a professor of law later this summer. I'm the author of High Wire: How China regulates Big Tech and Governs Its Economy.

Justin Hendrix:

Professor Zhang, I'm so excited that you can join me today to talk about your new book and to talk about this subject. We spend most of our time on this podcast talking about the regulation of technology in Western contexts and occasionally look elsewhere in the world, but I think spend too little time trying to understand China and the way that it has gone about regulating tech. But I first wanted to just ask you a little bit about yourself. Can you tell the listener a little bit about your research agenda, how you came to these subjects?

Angela Zhang:

I was born and raised in China and then study in law in both China and the United States and then practice law in both US, Europe and Asia. Before I became an academic. I actually, during my graduate study, I focused on Chinese antitrust policy and that's why I gradually become interested in tech regulation more generally because antitrust is one of the main tool that the Chinese agencies use to discipline the big tech companies. In the past few years, I have gradually expand my focus to all sorts of law that governs tech firms, not just antitrust, but also data, labor, content regulations, et cetera. So a broad range of tech policies relating to Chinese companies. I also look at now because I'm moving to the US, I am also interested in US policy against China. There's a lot of activities going on.

Justin Hendrix:

Absolutely. And I'm talking to you just a couple of weeks after, of course, President Biden has signed a law that would force the divestiture of TikTok by ByteDance or potentially face a ban on that app. Of course, those issues about China, US competition over tech are heating up. This book is Mammoth taking us through everything from platform regulation on through to all sorts of questions around regulating generative AI, essentially a comprehensive look at the way China goes about tech regulation. But when did this project start? How did you get this going?

Angela Zhang:

Actually, this is my second book. I have been closely monitoring the development of China's tech regulations since the Chinese government initiated a massive enforcement campaign against its own tech giants because this is something that people were really surprised at. Back in late 2020, the Chinese government all of a sudden suspended in groups IPO at 11th hour, actually two days before it's launch. And is the largest FinTech company and actually the largest company in the world, FinTech company in the world. So why did the Chinese government want to regulate its own national champion?

This is something that really fascinated me. And so I've been closely monitoring this development of the tech crackdown, which lasted for really 18 months. It wasn't until early 2022 that the government sent a very clear easing signals. It was at that time I really started to write this book. It took me another 18 months to finish writing the manuscript and submitted it. So yes, it's a very long process, but for book writing it is actually really fast.

Justin Hendrix:

Of course, it's been a crazy period in which you've been doing that work. We've had COVID. You've had of course protests in Hong Kong. You've had lots of various developments there and abroad that have affected the way perhaps we look at Chinese regulation of tech. Have your personal experiences played into your analysis at all? Have you been able to combine your observations of what's going on around you into this book?

Angela Zhang:

Yes. I think my previous experience as a lawyer, particularly my experience as an antitrust lawyer and my previous academic writing on Chinese antitrust policy definitely have informed my analysis on China's tech crackdown because that was an unprecedented law enforcement campaign that the government had initiated against its own companies. But we observed quite similar dynamics in the sense that you see this bureaucratic rivalry, bureaucratic politics and interaction among different tiers of the players in the regulatory system.

These are the familiar themes that we have observed in overall the bureaucratic politics of Chinese regulatory policy. So because of my knowledge and also my familiarity with these issues, it really helps me to pick up and understand what's going on the ground despite the random regulatory interventions. And that's the reason why I can write this book fairly quickly within such a short period of time.

Justin Hendrix:

So one of the key thoughts that you put forward in this book or kind of conceptual frameworks is this dynamic pyramid model that you suggest you use it to elucidate various aspects of the Chinese tech regulatory scheme. What is the dynamic pyramid model and why do you think it's so useful as a way to understand Chinese tech regulation?

Angela Zhang:

Because I am a lawyer, like other lawyers, I pay more attention to the law that is coming. However, law is very fluid. They can change all the time, and enforcement intensity can also change. So I want to develop a framework that is more robust that can help us to think about in the ebbs and flows of Chinese tech regulations. And in fact, this framework is very useful not just to explain China's tech regulation, but also the policy challenges that China is facing today.

The dynamic pyramid model is actually inspired by the system theory which sees the world as a very complex interconnected system. So in Chinese regulatory system, I identify three main features. One is hierarchy, then its volatility, and third is fragility. So I use hierarchy to describe the regulatory structure being very hierarchical because it involves players from different tiers of the regulatory system.

At the apex, we have the policy makers and then we have the regulators and the farms and the public. These players are tightly coupled, tightly organized in a very centralized way. And because the regulators, they need to look up to the top because they are accountable to the top leadership, these actually lead to a very paradoxical phenomenon that you see in China. Regulators either do very little or do too much. The reason they do very little is because when the policy signal is not very clear or what they're supposed to do might contravene with the tops initiative, they might do very little.

They tend to do very little, which is exactly what we see with Chinese tech regulation in the past because they have very little intervention in that area because the top was very supportive of the development of the tech sector. But then once they see the policy wind have shifted and the top leadership send a very clear signal to tighten regulation, they will err on the side of doing too much. And this is a point where you see a lot of agency overreach.

So we see a very dramatic regulatory pendulum swing in China, and that leads to volatility, which is a second distinct feature in the dynamic pyramid model. You see the regulatory process tends to be quite erratic, characterized by cycles of regulatory tightening and then regulatory easing. And with China's tech regulation, we see the full cycle. Initially, it's very lax and suddenly there was a big crackdown, lasted for 18 months, but eventually they have to relax the regulation.

So we see this full cycles and which confuse investors who think that the Chinese regulatory policy is very arbitrary, very unpredictable. And some of them, in fact, many of them have decided to retreat from the Chinese markets thinking that it's uninvestible. So that leads to very fragile regulatory outcome. When I say fragile, it means that in many ways the Chinese tech regulation, they're well-intentioned. They genuinely want to address the serious regulatory challenge.

If anything, the problem is way more severe in China because the years of bureaucratic inaction by this agency so that... Actually the regulatory problems is very serious. However, though the heavy-handed approach they took to tackle this problem generate very strong market backlash and very strong unintended consequences.

And they often take a long time for the regulators and the policy makers to realize this problem, and as a result it leads to very fragile regulatory outcome. So hierarchy, volatility and fragility describe China's regulatory system in general.

Justin Hendrix:

So we're talking about the way information travels between leaders, between firms, between participants in the marketplace. I think a lot of folks in the West may have a little bit of a caricature in mind when they think about Chinese regulation that it's all just top down. That's the way information flows from Xi Jinping or the Chinese Communist Party straight to the CEOs and that's how it goes. Is that caricature in any way accurate in your mind or totally just wrong?

Angela Zhang:

I think information deficit is actually one of the biggest witness of an authoritarian regime. And honestly in an authoritarian centralized regime, they can get things done very quickly if they're able to get very timely, accurate feedback of their actions. However, very often they don't because when information will pass down, pass along this very hierarchical regulatory system, and when the information travel from the bottom to the top, that information tend to be lost or be distorted.

So by the time it reached the very top, it often has resulted in a very long inflammation lag. And that's why the problem, the unintended consequences. Those side effects have become really strong and any cause of reversal will trigger very dramatic pendulum swing. And that again leads to very big volatility. We see this with China's tech crackdown, but we also see in other policy scenarios like China's COVID control, it's very similar dynamic. You see very dramatic policy changes at initial stage of very lax regulation.

All of a sudden there was a severe lockdown and then eventually they all of a sudden relax all the COVID restriction overnight. And then it all has to do with information deficit in an authoritarian system.

Justin Hendrix:

I wonder if you can discuss a specific case where China's regulatory measures impacted one of its tech giants, maybe a case that reveals something about the broader regulatory landscape.

Angela Zhang:

There was a very dramatic example that we already mentioned China is canceling an IPO at 11th hour actually today before its launch. And after this, you saw many regulators started to take actions, but this is a point that they want to demonstrate loyalty to the top. They want to showcase their proudness. They want to show that they're serious about reigning in big tech. And on the Christmas Eve of 2020, we saw Chinese antitrust regulator just release a one sentence announcement on its website that it is investigating Alibaba for the choose one from two business practice.

So this is a very short one sentence announcement of an antitrust investigation, but the next day the firm stock tumbled more than 13% wiping out over $100 billion market cap from this e-commerce giant. So four months later, Alibaba received a fine of $2.8 billion which is the largest fine in Chinese antitrust enforcement history. But that was nothing compared with this market sanction.

The reputation damage the firm had already suffered the next trading day, after could the Christmas Eve upon the announcement of antitrust investigation. So you see in China there are so many different ways agencies can use to discipline a company. So formal legal session is one method, but they have way more leverage than the western counterparts in disciplining firms.

Obviously, I think that this kind of reputation section was deliberately inflicted over the firm because the agency had never the state administration for market regulation. They didn't publish, make this kind of surprise announcement in the past on its website. And the fact that they did that send a very strong policy signal to the investor community, the Alibaba being another important part of the business empire of Jack Ma, who also owns Ant Group is in trouble. So that's why investors reacted so strongly to this investigation.

Just the announcement. Not even a penalty. And in fact, when Alibaba eventually receive its penalty, antitrust fine, its stock prices actually rebounded 7%. So actually investors were relieved. That's it, right? So we probably have overreacted at the beginning. But despite that, you see a firm like Alibaba, which is once the biggest tech giant in China, lost over 75% of its market cap during this tech crackdown.

So you see how much fear the Chinese firm have towards government intervention in China. I bet firms like Google, Amazon, Facebook, they will never ever imagine a day FTC investigation or DOJ investigation could cost their market cap to lose 75%, but it happens in China.

Justin Hendrix:

Is there any way to separate the kind of politics of that type of situation and the reporting over here about that? A lot of it appeared to be about Jack Ma, it appeared to be about putting him in his place. There were those types of headlines or a sense that came from the reporting. I don't know. How do you describe that phenomena as a business or regulatory matter versus a political matter?

Angela Zhang:

This is a very good question. To be fair, it depends on how we define politics. But the fundamental trigger of the tech credit that actually originated with Ant Group's IPO and with that issue, I don't think the Chinese government specifically want to target Ant. After all, this is its own national champions being the world's biggest FinTech giant. There's no reason, no clear reason the government want to bring down its own company unless something really bad is going to happen.

What was happening at that time was the end trying to pitch itself as a tech company rather than a financial firm so that it doesn't need to apply for all these financial licenses, does not need to satisfy all these financial requirements. But at the same time Ant got a really large valuation because it's a tech firm. We actually get four times as much higher valuation as a financial company.

It was estimated to be worth about $320 billion and actually higher than the market valuation of JP Morgan. So that really put the Chinese regulators, the financial regulators on high alert because this company putting aside the financial issue, because given its scale and the size, it potentially can pose systematic financial risk. And that's why the Chinese regulated financial regulators was very determined to try to stop the IPO for fear that there is a big imminent bubble that is going to burst.

I think this come out of genuine regulatory concern. However, the fact that Jack Ma directly challenge the agencies in the financial summit and make this a very highly controversial speech that the regulators who eventually reported the matter to top leadership and then the subsequent massive crackdown in a way does have some political implications because not just affected Jack Ma's business empire, affected everybody in the tech sector, right?

So this incident just demonstrated to the top Chinese leadership that this sector seems to be out of control in a way that these farms have grown to be so powerful and so successful and so pervasive that we somehow need to keep things under control. From Ants IPO, it shows that it's already directly threatening financial stability and not to mention many other aspects.

In a way it also carries some political elements to it, but for the most part I do think it's driven by genuine regulatory concern. The intentions are good, but the way they go about it is problematic.

Justin Hendrix:

You mentioned the COVID pandemic lockdown protests really brought to the fore a lot of the complications of the censorship regime, the broader challenges of managing social media. What did COVID teach us about how China regulates technology in particular, how it handles online speech?

Angela Zhang:

As an authoritarian government, China has always been quite insecure about online speech and from the start it has taken a very strict approach with online content moderation. And the main agency in charge is the cyberspace administration of China and it's China's internet watch dog mainly in charge of cybersecurity and information control. And starting in 2018, we saw this agency have mandated the security assessment requirement for online services that have public opinion mobility in the sense that what the CAC most concerned about is whenever a platform have reached a certain scale that it can mobilize public opinions because it doesn't want online services to interfere with public discourses that it want to keep it within its control and it cares deeply about this online content is political aligned with the communist value.

Because ever since then we see consistent regulations come out from the CAC on this kind of content moderation requirement including subsequent regulation we see how they want to regulate recommendation algorithm like the things that power addicted apps like TikTok and how they want to regulate deepfake and then how they want to regulate generative AI.This is the major priority of the agency to ensure political alignment with the communist value.

Justin Hendrix:

I want to maybe combine a couple of questions here. We started this off by talking about the geopolitical competition between the US and China in particular and how that seems to be affecting both countries approach to things. I suppose want to ask you a little bit about how you think China's approach does play into that geopolitical competition, how its approach to regulation may impact the way that it competes with the west, but also do you think this regulatory scheme in China sets it up well to compete on the global stage or there are ways in which it may hold the country back or otherwise set up that competition?

Angela Zhang:

It's actually a very good question. So the Chinese distinct approach, this dynamic pyramid model of regulation, it doesn't directly influence global policies unlike the famous Brussels effects people were talking about how Brussels regulate firms have strong spillover effects in the rest of the world where a lot of countries are now emulating EU in adopting a lot of the EU policies.

That doesn't happen with the case of China because western countries, they don't have the similar institutional dynamics in China. And agencies face very strong resistance when they go after big tech firms because they're accepted to very stringent judicial review. So in this way we don't expect the Chinese approach can directly influence global regulatory policies, but it does have indirect effects on Western countries in the sense that you see more Chinese farms that actually keen to expand in overseas market, partly because the tech crackdown in China has made life very difficult for its own tech firms and it has also contributed to the current economic slowdown in China.

So that makes competition, domestic competition even more fears and that gave more pressure and incentive on its domestic tech giant to look overseas for more opportunities. So we are already seeing many successful examples in the US and in Europe and elsewhere like companies like Temu, Shein and most prominently TikTok have achieved great success in overseas market.

Now, these Chinese big firms because they have survived and thrive in China's fierce competitive environment, they actually can do pretty well in the US market, particularly when we're talking about consumer tech businesses. So in this way the strict Chinese tech regulation are actually pushing more Chinese competitors in the western market.

Now, has this regulation affected, say for instance, the US-China tech rivalry and has it make Chinese tech firm more competitive as a result of the crackdown? A lot of the observers, including myself at that time was thinking one of the consequence of the tech crackdown. What we have observed at the beginning is that Chinese tech firm has retreated from the consumer tech businesses and investors have done similar things and then instead they began to divert their investment into hardcore technology, those most strategic technology that can help China to become more self-sufficient and compete with the US.

Even though companies Alibaba and Tencent, these are not our companies, but they can invest as a passive investors in those funds that support this companies. However, because the crackdown has severely damaged the market sentiment, the massive sentiments towards these companies, these companies have all become smaller companies that Alibaba and Tencent lost about 60 to 75% of the market cap during the crackdown.

The market has rebounded a little bit in the past couple of weeks. They still become much smaller. They were much smaller compared with what they used to be. While at the same time US tech firms have really grew exponentially in the past couple of years due to the AI boom, right? You see the gap actually between the US and Chinese tech firm, tech giants that actually have become bigger in the past few years since the crackdown, right?

So to the extent that, look, the government may have wanted to reorient these firms towards more cutting edge technology to stay competitive with the US, however, the unintended consequence is that they're perhaps widening the gap between the US and China because it's significantly held back these firms because investors have retreated and the entrepreneurial spirits have also been damaged and undermined during the crackdown.

Justin Hendrix:

So it sounds like to some extent in your view, the Chinese regulatory approach has put China somewhat on the back foot when it comes to competition as we enter this age of AI. Is there anything about the government's investment in artificial intelligence or its strategy or approach to artificial intelligence that could change that or you think is important to point out?

Angela Zhang:

The Chinese government has always been very supportive of AI development. And in fact, it is itself an important investor in this field because in China government's not only in charge of formulating regulatory policies, they also directly invest in this funds like the government. They created guidance funds and trying to enlist private and public institutions to contribute to the guidance fund to support critical technology like AI.

So the government itself is deeply embedded in the AI ecosystem to start with as an investor. The government is also important supplier to the AI industry. Back in the days when they were developing facial recognition technology, the Chinese government was the one that partnered with a lot of AI firms and supply them with a lot of facial data allowing these companies to train the AI model. And that's why China was able to foster the world's best facial recognition companies and then now they're exporting it all over the world.

The Chinese government is also an important customer of these AI firms and it was the biggest client of all the major facial recognition firms in China. So you see the government is everywhere in the host AI supply chain from beginning to end. And yes, they have tried to contribute, but still at the end of the day, the ones that is most basically competitive remains the existing tech incumbent and the fact that this company have lost so much money and has become smaller just make it more difficult for them to compete with the US firms. And particularly after considering the US export restrictions of advanced trip to China that make it even more difficult for them to catch up.

Justin Hendrix:

So you mentioned you're about to come to the US and continue your academic career here. When you look at the US news media or you look at the kind of conversation about China as it's reflected back from the west, is there a particular kind of message, I don't know that you wish would get through to folks like me or others who are engaged in the tech policy debate? What do you think we misunderstand about China and its regulatory approach?

Angela Zhang:

Actually, not just about how the western government or policymakers have misunderstood China. It's more about my main perception of the US policy against China is actually you see a lot of parallels between the US type policy towards China with the Chinese own type policy in the sense that the dynamic pyramid model I develop in my book in many ways can be used to describe what the US is doing towards Chinese companies, Chinese tech in general.

Just give the TikTok as an example. The decision was sent from a hierarchy the president can make an executive order to ban TikTok back in the Trump era. And then you see volatile regular decision because when Trump left, there's no political view to pick up on the TikTok matter and now it's election year and all of a sudden this become the epicenter of debate. And query when the new president come in like Trump right now expressed that he's not interested. He doesn't think that TikTok should be banned. So that, he again changed his mind.

So you see volatility in the US policy and then fragility. I also think that a lot of the US policy towards China, US tech policy towards China were not very well thought out. It's not entirely clear what they want to achieve from this policy. In many ways, it seems to be quite symbolic and often it's counterproductive. A lot of the restrictions towards Chinese companies, they're not actually achieving the intended policy outcome, but instead they're helping the US allies to actually sell more to the Chinese market because US firms were not able to sell to the Chinese market.

At the same time, a lot of Chinese firms like Huawei and ZTE will see this US restrictions as a strategic gift to them because now these policy are really aligning the interest of the Chinese government with its own domestic companies that they need to double down on their own tax development and so that they can stay self-sufficient.

So at the same time, the US policy is actually fostering a stronger Chinese type industry. So it could also lead to counterproductive consequences. Similar to what we observed with the Chinese tech crackdown. I think it all originated from the fact that these US tech policy towards China, they do suffer from a democratic deficit problem because when it comes to issues relating to national security, the US president and executive branch has a lot of discretion in doing things and they can do things very quickly and subject to very little judicial oversight.

The TikTok issue is subject to more in terms of extensions and restrictions. Commerce department can introduce rules very quickly and get things done very quickly. Sometimes you may not want the policy changes to happen so quickly as you see in the Chinese example. And by the way, now the line between what is national security and what is commercial interest is in increasingly blurred because the US policy has gradually expanded not just from very clear cut national issues, but now to TikTok and now to EV and to cranes in US port to all sorts of things.

It's not clear where this will end. Everything has become national security. And so that's why I actually plan to write an article on the democratic deficit in the US tech policy towards China.

Justin Hendrix:

We will look forward to that. I suppose that's a good place to ask you a concluding question about what is next for you. You'll continue, I assume, to look for how phenomena advanced that either affirm or challenge your thesis in this book. And you're coming to the states where I suppose you'll get another opportunity to look at this interplay between Chinese and US tech policy. What's on the horizon?

Angela Zhang:

I'm very interested in the AI development. I guess everybody is interested in AI these days. So I will continue to monitor this area development. And because I'm moving to the states, I will focus more on global regulation looking at not just China, but also US and Europe. I also spent quite extensive period of time in Europe before. So I'm interested in all the three main jurisdictions and how they direct regulatory policy and interact with each other.

I would love to observe my prediction for Chinese AI regulation because in my book in the last chapter, I do predict that Chinese AI regulation will be very lax and for quite some time until something really bad happened. So that will be similar to what we observed with Chinese consumer tax regulation in the past. I will continue to monitor and see if my prediction is correct and whether the model will continue to be relevant in the years to come.

Justin Hendrix:

I may have made the book sound a little more imposing a kind of tone at the outset of this than I should have. I would encourage my readers to pick it up, High Wire. Professor Angela Zhang, thank you so much for speaking to me today.

Angela Zhang:

My pleasure. Thank you.