Lu Zhengyao, the founder of Luckin Coffee who was forced out of the company following a 2020 admission that as many as half the coffee chain’s sales were fiction, is back in the retail game. This time, he’s running what looks like just another noodle shop.

Qu Xiaomian, whose name you could translate as “Charm Noodles,” opened its first two locations in Beijing and Chongqing on Sunday. It serves Chongqing-style noodles and bingfen, a type of sweet jelly dessert popular in Sichuan. The company is reportedly targeting (in Chinese) a first wave of 500 shops.

For connoisseurs of retail strategy, the noodle chain is a letdown.

Luckin had three advantages: it was introducing consumers to a new habit, it was lean, and its product was crazy cheap. When it launched, coffee in China was a high-end niche product, dominated by Starbucks and specialty cafes. Luckin made it a daily necessity for millions of office workers, using locations in office buildings, delivery, and discounts to push coffee into consumers’ hands. A focus on app-driven pick-up and delivery let the shops stay lean on labor costs—it wasn’t uncommon to see only one person in a shop, working through a queue of fifty orders. 

Luckin never made a profit, but it grew like an invasive species to a peak of some 4,500 stores in 2019. When it was forced to cut back in the wake of the accounting scandal, it had opened a market for newer chains like Manner Coffee. Luckin never went away, and after a long quiet period trading on the OTC markets, it’s expanding again and claims to be profitable per-store.

READ MORE: The Big Sell | Luckin is not dead

Qu Xiaomian doesn’t seem to share any of Luckin’s advantages.

The product isn’t new to anyone in urban China. Chongqing xiaomian (little noodles)—essentially, a vivid red bowl of chili oil with some pickled beans and noodles for contrast—are a common breakfast food in their home city. Around 2015 or 2016, the meal broke into the national consciousness as a quick lunch, and a Chongqing noodle craze saw China’s cities carpeted with shops selling them. It’s died down a bit from the peak. Yet it’s still a challenge to find a mall in Beijing, or a cluster of restaurants near an office park, that doesn’t have at least one Chongqing noodle shop. Qu Xiaomian doesn’t do much to stand out. 

The Beijing location is a stall in an underground food court, sharing seating with neighboring restaurants. Located in a well-hidden corner of the basement of Phoenix Retail City, a high-end mall, it saw a bustling lunch trade a little past noon on Monday—perhaps 20 customers at one time, enough that the shop’s red bowls pushed into the space in front of food court neighbors, but not so many that it was hard to find a seat.

Luckin’s operational innovations are not in evidence at Qu Xiaomian. Customers do order on phones, but the WeChat mini-app is relatively clunky, requiring one scan to open the app and another to identify what shop you’re at. Staff count seemed high: I counted seven people preparing food behind the counter, four or five bussing tables, and two whose job seemed to be calling order numbers and helping customers figure out which bowl of noodles was theirs. Another three middle-aged men in polo shirts loitered attentively by a wall, discussing the business. Asked about business so far, they said “pretty good.”

Nor is the food distinguished by low prices, or especially high quality. Customers seemed neither over- nor underwhelmed. “It’s kinda spicy,” said a woman finishing a bowl of noodles. “It’s OK if you like spicy.”

The food was a little pricey, but generous. A bowl of wanza (crushed yellow pea) noodles, a soy-braised egg (lu dan), and a bottle of water cost me RMB 33 ($5.10). That’s more than you’d pay at a typical Chongqing noodle shop, but probably in line with a location in the embassy part of Chaoyang District. It is not offering discounts to first-time customers.

The noodles had a rich soup, and a good amount of the traditional toppings—even peanuts, which at a cheaper shop can be detectable only in trace amounts. It comes at only one level of spice, well-calibrated to be hot but not nuclear, allowing the customer to taste the other ingredients. But the noodles themselves tasted over-cooked, or hastily defrosted—short on al dente character. The braised egg was rubbery and bland.

An extensive jelly menu could be the shop’s distinguishing feature—a good third of the menu was taken up by bingfen, served in plastic cups and containing brightly-colored syrups. Colorful jellies could be a riff on the vast fancy tea market, which Luckin entered in 2019 to a muted reaction.

Bottom line: Qu Xiaomian doesn’t look like the Luckin of noodles. As of now, it looks like just another noodle shop.

CORRECTION: An earlier version of this article described wanza noodles as “crushed chickpea noodles.” Wanza sauce is in fact made from yellow peas.

The Shenzhen government issued the most detailed data regulation on data in China yet. The regulation laid the groundwork for future national and regional data legislation, experts said. 

Passed on June 29 by top legislators in Shenzhen, the regulation bans several common data practices seen as invasive or unfair, and will push the government to make public data available for free. The regulation also addresses ownership of data, an important gap in Chinese law. 

“It affects every possible interested party about data, from data user, to data processor, to market operator, government, court, and so on,” said Devin Song, a partner at Fieldfisher law firm in Beijing.

Since the 1980s, the Shenzhen special economic zone has served as a testbed for national policies—starting with allowing private enterprise. “Shenzhen is being used as a trial are for experimental regulation, which makes sense because Shenzhen is a hotbed of innovation and is China’s silicon valley,” said Kendra Schaefer, head of tech policy research at strategic advisory Trivium China.

Why it matters: China is writing a rulebook for data that will shape the tech industry and could be a model for governments worldwide. Shenzhen’s regulation is likely to set a pattern for other regions and national rules, experts said. 

China is passing a series of laws on data and privacy, including the Data Security Law passed in June and a forthcoming Personal Information Protection Law. Shenzhen’s regulation offers specific details about how these laws will be implemented for the first time.

Details: The Standing Committee of the Shenzhen Municipal People’s Congress published the Data Regulation of Shenzhen Special Economic Zone on Tuesday. They will be effective in the city from Jan. 1, 2022. 

Limit data collection: The rules ban apps from requiring users to sign data agreements to access “core services,” and from requiring face recognition or other biometric data. Devin Song pointed out the regulation also prohibits apps from profiling users under the age of 14 in order to serve them targeted ads.

Most apps will need to rewrite privacy policies, and many will need to be redesigned to offer less invasive options, said Calvin Peng, a senior partner at Jincheng Tongda & Neal law firm. 

Chinese apps frequently make broad demands for personal information, and in China’s ultra-connected cities, it can be hard to say no. Many restaurants require users to provide name and contact information before using WeChat mini-apps to order food. One TechNode reporter was recently asked for his “name, telephone number, and gender information” in order to use a tap to wash sand off his feet at a beach. (He consented.)

The age limit “challenges the business models of many popular applications, including short-video app Douyin,” wrote Carolyn Law, China analyst at Control Risks, in an analysis of the regulation. But “it’s unclear what the practical impact is on these companies as this is only a local-level regulation,” she added.

Opening ‘public data’: The regulation also addresses data collected by the state, requiring the government to make its data available to the public for free by default. The regulation defines a category of “public data,” and states that this data will be “shared by default, with non-sharing as an exception,” describing a system in which data from different government platforms is compiled in a single public database. The regulation also prohibits the government from charging fees to access data.

Schaefer told TechNode that data openness has been encouraged by national policy documents, but this may be the first example of a regulation spelling out requirements.

Data ownership: Another “massive deal,” Schaefer said, is the creation of a new category of “public data,” owned by the state. Since a decision last year to recognize data as a “new factor of production,” the Chinese government has sought to develop markets around it. But these have been hampered by confusion over what it means to own data. 

In an interpretation attached to the regulation, the legal committee of Shenzhen’s legislature wrote that “It is difficult to clearly create a new type of ownership rights through local regulations,” but “There is a general consensus that data products and services enjoy property rights. The regulation took the lead in exploring the scope and types of data rights.”

The regulation defines this new category of public data as “data generated by public agencies when providing public services.”

READ MORE: The loophole in China’s privacy regime: anonymization

What’s next? Shenzhen’s approach to regulating data will likely shape the national environment, as other regional governments and Beijing write their own rules. Peng told TechNode that Shanghai will likely be next to publish a data regulation, and that Guizhou province and Anhui province could follow.

ByteDance announced Friday that it will cancel weekend work days at the beginning of August, an employee told TechNode. The company currently requires staff to work every other Sunday in a schedule known as “big and small weeks.” The change in policy comes amid a national backlash against extreme working schedules like “996″—9 a.m. to 9 p.m., six days a week. ByteDance rival Kuaishou abolished big and small weeks on July 1.

READ MORE: Kuaishou to cut Sunday workdays amid 996 backlash

Chinese media confirmed the ByteDance news.

The change may cut employees’ take home pay by as much as 20%. Under the current system, as much as 20% of employees’ salaries are considered overtime pay for routine Sunday work.

The company did not say whether it will raise salaries to make up for lost overtime pay.

Chinese media reported in June that the company polled employees about abolishing big weeks, suggesting that shorter work weeks would mean a pay cut. About 30% of employees told the company that they would prefer to keep longer hours and overtime pay.

Chinese firms, especially those dealing with data, may have to submit every overseas IPO to regulators for a data security review, experts told TechNode. 

China’s top leaders called for increased supervision of data during international IPOs on Tuesday, days after ride-hailing giant Didi Chuxing and two other recently US-listed firms were banned from registering new users during a “cybersecurity review.”

Senior party and government officials issued a directive (in Chinese) on Tuesday night, calling for an increased crackdown on “illegal securities activities.” The directive was jointly issued by the General Office of the Central Committee, the administrative branch for the party’s top leading groups, and the General Office of the State Council, the Chinese cabinet. 

The document appears to confirm that Beijing is worried about data security during the overseas IPOs process. Taken together with the Data Security Law passed on June 10, these new documents provide clues that data may be a key factor in the decision to launch an investigation on Didi. 

Three newly US-listed firms have been blocked from registering new users since Friday by China’s data watchdog, the Cyberspace Administration of China. The CAC has cited concerns about data and national security and the collection and handling of personal private information, but has not published specific reasons.

READ MORE: How did Didi get in trouble with data regulators?

One of the document’s sections focus on overseas listings. Article 19 directs regulators to “improve relevant laws and regulations on data security, cross-border data flow, and confidential information management.” Article 20 asks regulators to increase scrutiny on Chinese companies listing overseas, which refers to China concepts stocks, and “clarify regulatory responsibilities in China and strengthen cross-department cooperation.”

‘Data practices that used to be legal might become illegal’

Zhu Bao, a Beijing-based attorney specializing in corporate compliance, said the directive’s focus on tightening data management is new and signals a shift in priorities. 

“I don’t think this prohibits all Chinese companies from going public overseas. It signals that internet companies, especially those dealing with data and seeking an overseas listing, will face much stricter regulation and approval processes,” Zhu said. 

“Certain data practices that used to be legal might become illegal now,” Zhu added. He said companies that collect users’ information should consider seeking legal advice and review their data servers to make sure they are compliant with the directive. 

Yang Zhaoquan, director of Beijing Vlaw Law Firm, told TechNode that “data could be leaked during the review and auditing procedures in a IPO process.” 

“In the age of big data, internet companies can collect massive amounts of sensitive data, including citizen’s personal information, state agency data, and operation data of other companies,” Yang added. 

More than Didi

Chen Long, a partner at Plenum, an independent research firm on Chinese politics and economy, told TechNode that the documents clearly relate to Didi’s investigation, but reflect concerns broader than this case. 

Apart from data security issues, the directive also asks to increase punishment for accounting fraud cases like Luckin Coffee’s 2020 fraud scandal, Chen said. “The directive is a culmination of the past year’s events and providing clarity on regulatory responsibility,” he added. 

The directive didn’t specify a government body to take charge of the data review. Chen said China needs to clarify which government body should be responsible for reviewing Chinese companies filing for overseas IPO. Currently, it’s a gray area, he added. 

Chen expects the Chinese government will task the China Securities Regulatory Commission (CSRC) and the Cyberspace Administration of China (CAC) to review the data of companies seeking overseas IPOs. 

Bloomberg reported in May that China is considering rules that would require firms to seek formal approval before listing in overseas markets. 

Zhu said he expects the CSRC will work with the Ministry of Public Security in the future to review these cases. He added it will probably take about six months for the government to finalize all the details and responsibilities. Still, tech and data companies seeking to list overseas should brace for a stricter review process from now on. 

Translation of directive excerpts

Article 19: Strengthen cross-border supervision cooperation. Improve relevant laws and regulations on data security, cross-border data flow, and confidential information management. Regulation needs to be revised to strengthen the confidentiality and file management related to the issuance and listing of securities overseas, and consolidate the main responsibility of information security of overseas listed companies. Strengthen the standardized management of cross-border information provision mechanisms and procedures. Adhere to the principle of law and reciprocity, and further deepen cross-border audit supervision cooperation. Explore effective ways and methods to strengthen international securities law enforcement cooperation, actively participate in global financial governance, and promote the establishment of law enforcement alliances to combat cross-border securities violations and crimes.

Article 20: Strengthen the supervision of China’s concept stocks. Effective measures will be taken to deal with risks and emergencies of Chinese concept stock companies, and push to set up relevant regulatory systems. Amend State Council’s special regulation on companies raising funds and listing overseasing. Clarify which domestic industry supervisors will be responsible and strengthen cross-departmental supervisory coordination.

It has been a rollercoaster week for Didi Global. Last Wednesday, Didi raised $4.4 billion in a behemoth US IPO. Two days later on Friday evening, China’s cybersecurity regulator announced an investigation into the company. Then on Sunday night, less than a week after Didi went public on the New York Stock Exchange, the regulator asked app stores in China to remove Didi’s app.

The probe of China’s dominant ride-hailer follows other large penalties for Chinese tech majors, such as the abrupt suspension of Ant Group’s giant $34 billion dual IPO listing in Shanghai and Hong Kong in November 2020 and a $2.8 billion antitrust fine for Alibaba in April. 

Authorities at the Cyberspace Administration of China (CAC), a cyberspace watchdog, said on July 2 that they launched a “cybersecurity review” of Didi to “guard against risks to national data security” and “protect the public interest.” Citing national security law and cybersecurity law, they also asked Didi to stop registering new users. Two days later, they ordered operators to pull Didi’s app from all app stores for issues concerning user data protection, saying the app “seriously violated Chinese laws and regulation on personal information collection and usage.”

The app store suspension, although dramatic, hasn’t stopped Didi from operating. Didi’s service is still widely available in China. The ban means new users cannot download Didi’s app and use its service. Yet new users, at the time of this writing, can still register for the service through Didi’s mini-program embedded in apps like WeChat, a popular Chinese messaging app, according to our observations. Also, existing users, which account for most Chinese ride-hailing customers as the company holds 90% of the market share, can still use the service, either through Didi’s app or its mini-program on WeChat. 

On Monday, the CAC expanded its probe, announcing that it also launched similar cybersecurity investigations into three other companies and asked them to stop registering new users. All these companies have recently debuted on US stock exchanges. Job recruitment platform Boss ZhiPin debuted on Nasdaq under Kanzhun, a Tencent-backed company, on June 11. Partner transport companies Huo Chebang and Yun Manman went public together on the New York Stock Exchange on June 22 as a single company called Full Truck Alliance. 

The actions are a notable step up for privacy regulation. But they come as part of a long-term effort to regulate data use during an ongoing crackdown on big tech, experts told TechNode.

Business may be… fine?

Didi said in a July 4 statement that it expects that the app takedown may have “an adverse impact on its revenue in China.” 

According to a 2020 regulation for the review process, a cybersecurity review should be completed within 45 days. However, it can be extended if “the situation is complicated.”

James Hull, analyst and portfolio manager at Hullx Capital, said a suspension of 45 days or longer isn’t “that bad for the company,” because most Chinese users already have the Didi app and could access Didi through WeChat mini-programs. The Chinese version of the app was downloaded about 900,000 times in June, according to SensorTower, or 30,000 times per day.

Michael Tan, a partner with international law firm Taylor Wessing Shanghai Office, told TechNode that he thinks the investigation could take six months. Didi’s stock price is likely to take a hit, but the company is unlikely to be delisted from the US, he added, because Chinese regulators will focus on data security more than the listing.

But Tu Le, founder and managing director of business intelligence firm Sino Auto Insights, told TechNode that he thinks US investors may demand more information. “If I were a US investor in Didi, I’d like to know what Cheng Wei, Jean Liu, and the rest of the management team ‘knew,’ if anything at all, and ‘when’ they knew it.”

“If there was prior knowledge that Cyberspace Administration of China would block new users due to security issues, then it should’ve been disclosed prior to the IPO,” Le added.

Didi shares on the New York Stock Exchange fell 5.3% on Friday, following the CAC announcement of a cybersecurity review of the company. The US market had not opened on Monday at the time of this publication. 

Both Le and Michael Tan say Didi’s probe could have broader implications for Chinese data companies planning to raise money in the US.

Le said the Didi probe “should really freak out any data company planning to IPO in the US.” Data companies need to make sure that their data management strategy is bulletproof if they decide to list in the US later this year, he said. “I’d say they’ll still do it, but this should give them pause, if only for a brief moment,” he added.

Why is Didi being investigated?

It’s not entirely clear what got Didi in trouble. The notices refer to national security and to “serious problems with illegal and irregular collection and use of personal data.” Timing suggests that the recent US IPO could also be a factor. All three firms that were penalized this past week have been listed on US markets since early June 11. 

The company says that all information related to Chinese users is stored in China, in response to speculation of Didi sharing sensitive data. Company Vice President Li Meng wrote on Weibo Saturday that the company was willing to sue over speculation that it had shared sensitive information during its IPO process.

Tan said that alleged data privacy abuse is the main reason for Didi’s investigation. Didi’s US IPO likely accelerated the probe but didn’t trigger it.

In 2015, Chinese state news agency Xinhua collaborated with Didi’s big data analytics department on a report focusing on commuting patterns of state staff working for different Chinese ministries. “Almost all ministries work overtime,” the report said, “The Ministry of Land and Resources is the busiest. There were 298 rides hailed between 6 p.m. to 2 a.m. in two days,” Xinhua said. China could deem data like this as sensitive.

The investigation targets Didi’s potential privacy breach activities in China, Tan said. “US IPO will result in disclosure of much business-related information to the US markets and other third parties in the US,” he said. “This will inevitably lead to some speculation, such as Didi being investigated due to national security concerns or providing access to sensitive data,” he added.

Legal background 

The investigations are based on a relatively new CAC power called a “cybersecurity review.” This review process was created by the 2016 Cybersecurity Law, but has never previously been implemented, according to the Beijing News. According to the law and 2020 implementation measures, the review system focuses on operators of “critical information infrastructure,” and their purchases of “network products and services that might impact national security.” The Cybersecurity Law, along with landmark laws on privacy and data security, is part of an ongoing effort to regulate the use of personal data by companies in China. Cross-border data transfers are a focus of these laws, but the laws also require companies to implement best practices for collecting and storing data.

“That could cover anything from Didi’s servers to cloud computing to basic network equipment,” said Tiffany Wong, a consultant at research-based consultancy Sinolytics.

Wong said that it’s also possible for companies to get in trouble under these laws due to how they store and process important data. “It could be that Didi hasn’t segmented their personal information to the CAC’s liking, or don’t have good data protection mechanisms in place as required, and the state wants Didi to have full compliance before collecting any more personal information,” Wong added. 

Moreover, Xie Maosong, a senior politics and governance researcher at the Chinese Academy of Sciences, told TechNode that he thinks Didi and other internet companies need to develop a better sense of social responsibility in China instead of focusing only on making money. Xie studies Chinese governmental policies and he gave lectures a few weeks ago to the Cybersecurity Administration in Hangzhou on regulating Chinese internet companies. 

“In the western society, capital takes priority,” said Xie, “but in China, politics always takes priority. Here, politics doesn’t refer to the Chinese government, and it refers to the interests of the nation, a collective interest, in contrast to the interests of a few capitalists,” he added.

Tech crackdowns in China

The investigation into Didi came as China widened an ongoing crackdown on tech companies. The crackdown started in November when authorities halted Chinese fintech giant Ant Group’s plans for a mega dual IPO, citing “changing regulatory environment.” Since then, regulators have abandoned their laissez-faire approach to tech firms and put them under the microscope.

In December, the State Administration for Market Regulation (SAMR) announced an anti-monopoly investigation into e-commerce behemoth Alibaba. The probe was closed in April as the market regulator imposed a record RMB 18.2 billion ($2.8 billion) fine on Alibaba. 

Anti-monopoly has been the most active area of the campaign, hitting tech titans like Tencent, Alibaba, Meituan, and Didi itself, according to TechNode’s Techlash Tracker database. But the campaign also involves privacy protection, data security, and financial de-risking. Over the past year, hundreds of companies have been hit with small fines over privacy and data security violations.

READ MORE: INSIGHTS | Making sense of China’s big tech crackdown

The Didi probe is the first major case in the privacy and data security section of the campaign. 

In the past, companies like Tencent, search engine Sogou, and smartphone maker Xiaomi were fined small amounts of money for collecting excessive or unnecessary data from their app users. Those enforcements usually cite China’s 2017 Cybersecurity Law and regulations on how apps should collect and store user data. 

The investigation into Didi, however, probably involves national security issues, according to the CAC. In addition to the Cybersecurity Law, the CAC also cited China’s National Security Law in announcing the Didi probe. The 2015 National Security Law has a clause (in Chinese) vowing to “safeguard the nation’s cyberspace sovereignty, security, and interests.”

“The state attaches great importance to cybersecurity and data security. The Cybersecurity Law passed in 2017, the Cybersecurity Review Measures issued in 2020, and the Data Security Law that is taking effect in September are all signs of the government’s determination to protect cybersecurity and data security,” said Qi Aimin, a professor at Chongqing University’s School of Law.

Recent cybersecurity reviews on tech firms, including probes into Boss Zhipin, Huo Chebang, and Yun Manman announced on Monday, proving that “large-scale cybersecurity and data security investigations of internet companies will become a trend,” said Qi.

A timeline of Didi’s regulatory woes

Dec. 24, 2020: Chinese transport minister Li Xiaopeng pledges to ramp up antitrust enforcement as one of the ministry’s priorities in 2021. The head of Chinese transport watchdog made the comment a month after the release of the draft anti-monopoly guidelines targeting the country’s big tech companies by the SAMR.

March 12, 2021: China’s top market watchdog SAMR fines (in Chinese) Didi Mobility Pte. Ltd., a subsidiary of the Chinese ride-hailing giant, RMB 500,000 ($77,400) for failing to seek antitrust clearance for the establishment of a joint venture with Softbank. In the current antitrust law framework, companies need to receive approval for mergers or acquisitions involving firms with annual revenues of RMB 10 billion and above globally or more than RMB 2 billion in China.

April 30, 2021: Didi is again ordered (in Chinese) to pay a penalty after insufficiently disclosing three acquisitions and investments for antitrust reviews, including a takeover of a Shenzhen-based car rental firm. Chinese gaming powerhouse Tencent and retail giant Suning were also punished for the same reasons, with each fined RMB 500,000, the highest amount stipulated by the law.

May 12, 2021: China’s cyberspace administration issues new draft rules on data collection applying to both carmakers and ride-hailing platforms, stipulating that companies need to gain regulatory approval before providing “important and private data” to foreign entities (our translation). Coming after growing concerns about vehicle cameras and where the car data is going, CAC writes in the announcement (in Chinese) that the rules have been drafted to safeguard national security and the public interest.

May 14, 2021: Chinese antitrust regulators order ride-hailing platform Didi and online services giant Meituan to rectify their ride-hailing practices, reports Bloomberg. The two companies were among 10 online on-demand services ordered to make changes to their operations, including increasing drivers’ commission fees.

June 17, 2021: Reuters reports that China’s market regulator is investigating whether Didi violated antitrust rules. Didi dismisses the report as “unsubstantiated speculation from unnamed sources.” However, the company acknowledged that it has just completed a one-month self-inspection to correct monopolistic practices, along with dozens of other companies, as required by regulators, in its IPO prospectus filed last month.  

In China, big tech is in the regulators’ crosshairs. Since financial regulators spiked an IPO for Ant Group, the Alibaba-affiliated fintech giant that was slated to outraise Saudi Aramco, tech majors have had to get used to fines, investigations, and meetings with regulators. This big tech crackdown shows no sign of slowing down.

Most recently, Reuters reported that ride-hailing firm Didi Chuxing is facing an anti-monopoly probe as it prepares for a New York IPO. Alibaba was hit with a $2.8 billion fine in April. JD delayed an IPO for fintech unit JD Technology in the wake of the Ant fiasco. Tencent and Meituan are both reportedly the target of antitrust investigations.

In May, TechNode launched a techlash tracker, aiming to take stock of the big tech crackdown by counting enforcement actions. So far, we’ve identified 29 such events, and we’re regularly adding to it.

How do we make sense of the trend?

Bottom line: China is working through a broad change in its approach to managing tech giants. The crackdown is broader than anti-monopoly, finance regulation, or Jack Ma, seemingly reflecting a change in attitudes to the power of big tech.

It’s a big deal, but it’s surely not the end of big tech. No one ever got big in China tech without knowing how to work with the state, and so far, we see regulators prioritizing compliance over punishment.

But expect to see business models changed, especially around lending and the use of data, likely in ways that will cut into profits for tech majors.

How the crackdown affects tech

It’s not about fines: Compared to the size of the companies, the fines are small. Alibaba’s $2.8 billion fine, a record for Chinese antitrust, represents only about a week and a half of the company’s revenue. Other companies have seen fines in the millions: tutoring platforms Zuoyebang and Yuanfudao paid RMB 2.5 million ($389,000) for unfair competition, while community group buy platforms paid up to RMB 1.5 million.

It is about changing businesses: Ant didn’t pay a fine, but it was forced to agree to a far-reaching “rectification plan” in the wake of its failed IPO that will likely leave it looking a lot more like a bank. Fidelity estimated that these changes will wipe out about $150 billion in value, about half the company’s valuation pre-fiasco.

READ MORE: INSIGHTS | Deciphering the Ant Group rectification plan

A lot happens behind the scenes: In fintech, we’ve seen JD Technology and Tencent prepare to make changes along the lines of Ant Group without publicly getting involved in investigations. Chinese authorities often care more about getting their way than getting a pound of flesh, and many changes will likely be carried out without the public knowing exactly who made the decisions.

Big tech will survive: Rumors that Ant Group would be broken up do not seem to be panning out. While it’s likely to look quite different after rectification, it appears that it and other targets will emerge still massive.

Five ways to understand a crackdown

So what’s the crackdown about?

1. Anti-monopoly is the most active area of enforcement right now. It’s also the biggest change—until late 2020, the anti-monopoly law was not successfully applied to tech majors.

We’ve identified 18 events, starting in December last year. Led by the State Administration for Market Regulation (SAMR), it appears that the campaign will hit every leading firm in the sector. To date, only Alibaba has seen a major fine, while other tech majors have paid small fines for failing to submit mergers and acquisitions for review or face reports of ongoing investigations. The focus of investigations seems to be on the widespread “choose one of two” model under which major e-commerce platforms demand exclusivity from merchants. Didi, Meituan, and Tencent are all reportedly targets of ongoing investigations.

Tencent has also faced lawsuits from ByteDance and private citizens over its practice of blocking users on messaging platforms from opening links that lead into apps from other major tech ecosystems.

We expect to see bigger fines and orders to change business practices as investigations unfold, but it’s not clear if the campaign will challenge the dominance of monopolies on the Chinese web. Choose one of two, or blocking links, are pretty marginal elements of the power of big tech.

2. Privacy enforcement dates back farthest, and has affected the great number of companies. We’ve identified seven events, dating back to 2019. Typically, we see dozens or hundreds of companies fined in each event, for issues like over-collecting data or failures to store it securely. With major data breaches a routine event even at major tech firms, it’s no surprise that fines are common. These fines have come from the Cybersecurity Administration and the Ministry of Industry and Information Technology.

Fines over data violations have come in parallel with a series of laws on data collection and storage that experts have said are turning China from one of the world’s least regulated data environments to one of its most. These laws limit the transfer of much data outside of China, and create what Control Risks’ Carley Ramsey described as a “mandatory how-to guide” for cybersecurity at TechNode’s Emerge conference last year.

3. Financial de-risking also dates back years. Beijing’s campaign to bring lending under control originally focused on bank loans to “zombie” state-owned companies. But the spectacular collapse of hundreds of online peer to peer lending companies around 2018 showed that small loans to individuals could also drive risks. By 2019, regulators had largely shuttered the once-thriving industry.

But the Ant Group IPO fiasco marked a new wave of fintech regulation. Financial authorities, most importantly the central bank, became concerned that online lending products offered by Ant and its peers—often available during checkout on major e-commerce platforms—were leading retail borrowers into unsustainable levels of debt, and creating systemic risks. After a dramatic intervention, the company and its peers are transforming into more bank-like entities, which will likely focus more on profiting off loan interest than using data to sell loans to other investors. It’s also likely these companies will take steps to add friction to taking out loans.

We’ve identified only three events in the fintech crackdown, but they were doozies. So far, JD Technology and Tencent’s fintech divisions appear to be mirroring the changes at Ant without a public regulatory proceeding.

4. Jacklash may be the most popular frame, but for our money it’s the least convincing taken alone. This theory holds that Alibaba founder Jack Ma fell out of favor with politicians first, and that the Ant suspension and Alibaba antitrust case flowed from that. The theory doesn’t explain why so many non-Ma firms have been caught up in the crackdown. But it is true that his Ant Group and Alibaba have suffered by far the biggest consequences so far. Our feeling is that you don’t have to pick between believing in the policy story or the personalities story—often, they go together. TechNode doesn’t cover politics, but we can recommend some reading on how a policy disagreement turned nasty.

5. Data monopolies are a speculated fifth theme. Some clued in observers predict that the crackdown will end with tech giants forced to share—or at least, to rent out—their data. The Wall Street Journal recently reported that Ant Group is in talks to share its data with a state-backed ratings company, which would fulfill a request regulators have made for years. Protocol recently wrote that companies, both Chinese and multinational, may soon have to comply with wholesale requests from the government for user data.

Tiffany Wong, a consultant at research-based consultancy Sinolytics, told TechNode that there is evidence that data monopolies are one of the issues on regulators’ minds. SAMR’s ruling on Alibaba, she said, argues that “because they own so much data on trade, logistics, etc., they have a huge benefit over competitors. They’re able to do calculation for targeted marketing, and because they own all this data the market entry barriers are very high for other platforms.” Influential former central bank chief Zhou Xiaochuan argued that the amount of data held by platform companies is a threat to competition in a Macau speech last November.

What’s behind it?

Beijing is clearly rethinking how it governs tech. But why now? Outside the policy issues listed above, there’s two more factors worth considering.

One is popular tech skepticism. In recent years, the Chinese public has turned from admiration to skepticism of big tech, following a global trend. Repeated scandals and controversies over extreme working schedules like 996, dangerous false advertisements, and deeply indebted young people have made big tech a popular target. Critical reporting on tech firms regularly goes viral, while self-organized groups of angry consumers are getting traction with companies like Tesla.

On the other side is an international movement toward regulation. On Thursday, the US House Judiciary Committee approved the final piece of a package aimed at curtailing big tech companies’ power to use their platforms to promote their other business lines. The move could make it easier for lawmakers to break up the likes of Facebook, Google, and Amazon.

In fact, China’s concerns are not too different to the arguments made by American thinkers like Elizabeth Warren, Tim Wu, and Dina Srinivasan. Beijing’s privacy model is based on Europe’s GDPR. As China cracks down on big tech, it’s participating in a global trend.

Graphics by Chris Udemans

Editor’s note: The ‘Techlash Tracker’ stopped updating from November as tech crackdowns became recurring in China. The topic is now part of TechNode’s daily news coverage. 

Starting this week, TechNode is launching a new open resource. The “Techlash Tracker” is a database of major regulatory moves involving big tech in China, an open-source project to help make sense of a major trend defining China tech this year. 

The tracker is a regularly and openly available updated set of spreadsheets, built in Airtable, recording events. Click here to view. 

We invite anyone interested in China tech to use this resource for analysis, and to contribute to it.

Something is happening here, but we don’t know what it is

In China tech, the word of the year is “antitrust.” Alibaba was fined a record-breaking $2.8 billion for “forced exclusivity” and other anti-competitive practices, while Meituan faces a probe by market regulators over the same practices. Tencent, Didi, and Baidu—to name only a few—have been fined lesser amounts for failing to submit M&A deals for review.

Or is it “de-risking”? The IPO of fintech pioneer Ant Group, slated to be the world’s largest, was abruptly axed late last year as regulators prepared a series of changes to its operations. JD Digits, a competitor, withdrew its IPO application voluntarily in the wake of the fiasco. This week, 11 other tech majors were summoned to Beijing to discuss changes to their fintech operations.

Some say it’s all about data. Beijing has moved in the past year to recognize the strategic importance of this resource, which it has called ”the new oil,” and hopes to prevent tech companies using walled gardens to monopolize access to it.

Related to data, the list continues: consumer rights, privacy, cybersecurity.

We can see the trend: Big tech is being regulated as never before. At TechNode, we’re seeing a big trend, and we’ve been wondering how to understand it—and what to call it.

It’s tempting to see it as the local vector of a so-called global “techlash” that embraces everything from the EU’s General Data Protection Regulation (GDPR) to US Senator Elizabeth Warren.

Or maybe it’s just “Jacklash”: both Alibaba and Ant were founded by Jack Ma, a flamboyant billionaire who annoyed regulators when he dismissed banking authorities as “old men” in a speech last year, and some commentators have interpreted many recent moves as personal attacks on him. But then, how to explain the broadening scope of the investigations?

Just make a list

When we don’t know where to start with a topic, we often approach it by just making a list. In our new “Techlash Tracker,” we aim to make a database of key events in big tech regulation. We plan to include enforcement actions, fines, and announcements of new laws and regulations. We will track private antitrust lawsuits in another sheet.

We’ve chosen an intentionally vague name, “techlash,” rather than “antitrust” or “crackdown,” to indicate uncertainty about an interpretation. 

The tracker is intended as a living document: we aim to update the list at least once a week with new events, if applicable. We’ll also continue to dig through our archives to add more previous events, and plan to create some visualizations to help understand the material as the list grows.

The material here is also a bit raw. Expect to see it in more digestible forms in our reporting in the coming months as well as, we hope, in the work of our friends and colleagues.

An open resource

The Techlash Tracker is an open resource. In addition to making it free to use, we invite other analysts to use the data we’ve collected (but please do credit us if so). We’re also counting on our readers to help us catch events. Click here to submit more events for the tracker if you see something we’ve missed.

Thanks for your support, and we hope you’ll find the tracker useful!

Your techno-friends,

The TechNode team

As we followed the Shenzhen-based digital artist Niko Edwards toward the back wall of the gallery, the enthusiast who had introduced us leaned in and told me in a stage whisper: “He is obsessed with the universe because he believes himself an alien.”

That was the tone of “the world’s first major exhibition” of blockchain-registered crypto art on show at UCCA Lab in Beijing’s 798 gallery district: absurd, but frank enough to be charming. It’s an art gallery as a carnival, complete with a claw game for souvenirs, rather than gallery-as-high-culture-church.

The show, titled “Virtual Niche: Have You Ever Seen Memes in the Mirror,” gathered blockchain-related art, mostly sold as non-fungible tokens (NFTs). NFT mania has soared since a collection of 5,000 Instagram posts by digital artist Beeple sold for $69 million at Christie’s on March 11. NFTs are essentially deeds, often for publicly available image or video files. They’re not a style or school of art, any more than climate-controlled Swiss free ports are. 

READ MORE: CHINA VOICES | What China thinks of NFTs

So when we went to see NFTs on display, I had a simple question: is the art any good? With a show themed around a financial instrument, frankly, I didn’t have very high hopes.

But the show was a pleasant surprise! The art worked, and the exhibit was dense and well-curated, packing a good number of pieces into a compact exhibition space. It scores high on playfulness but low on context—the pieces are presented with no interpretation whatsoever. It’s not all NFTs, mixing in a good amount of traditional meatspace art you have to go to a gallery to see.

An NFT in an art gallery is a digital screen showing a picture or video that you can view right now from the comfort of the same screen on which you’re reading this review. Provided your screen has a high enough resolution, what you’ll see, pixel-for-pixel, is identical to the piece on the gallery wall. 

As a result, the big name pieces in the show didn’t hold the most attention. A rotating selection of Beeple “Everydays” on five TV-sized vertical screens was jammed into a hallway, while the collective project “First Supper” hovered over the main space on a larger screen. “The First Supper” is a collection of mismatched cartoon figures gathered around a MySpace-ish rendition of Leonardo’s “Last Supper” table. The gimmick here is that each figure in the composition is sold separately, potentially to a different collector; the collectors can then modify some aspects of the figures. 

The dumbest stuff in the show tried to make the abstract world of computing concrete by printing a lot of 1s and 0s and claiming it represented something to a computer. This is about as effective as writing down a sequence of DNA elements and calling it a portrait, but it seems to be required by statute that every computer-themed show include at least one of these. 

The show’s most charismatic piece also used untranslated numbers. “Block 8,” from Robert Alice’s series “Portraits of a mind,” presents a sequence from the source code of Bitcoin in hexadecimal code. It’s printed on what I first thought was a disk of stamped metal. In fact, it’s carefully treated canvas. It looks like a vintage magtape wheel would if it were redesigned by Jony Ive, or a high-tech version of the huge stone rings used as ceremonial currency on the islands of Yap. (Much like NFTs, Yapese Rai stones are often immobile and left in public places, while people around them negotiate and renegotiate whom to call their owner in ritual exchanges).

It feels immutable and infinitely reproducible, and in fact it is one of a set of 40. It conveys the majesty blockheads see in the technology—but it also illustrates what a tangible thing can do that a block can’t.

At the other end of the gallery, by the entrance, there was a slice of a blockchain mine—something most blockheads at the event, even the investors, had never seen up close. A bank of old Bitmain Antminer S9s—a slightly obsolete model of the specialized computers that power blockchain which saw its heyday in 2017—likewise gives you a tangible sense of blockchain as a physical thing.

Curator Sun Bohan also projected an unlabeled financial chart on the wall about five feet high, showing the kind of screen crypto traders presumably spend much of their days looking at.

Digital shows do come with glitches, and I didn’t fully understand at least one piece as a result. “Do Androids Dream of Electric Cows” by Chen Baoyang is a small glass labyrinth with an associated virtual reality program. The VR set was not working while we visited, so I did not learn how it related to the labyrinth. Walking through a transparent labyrinth is enjoyably trippy, however, and I did walk nose-first into one pane of glass.

The screens also occasionally went to screensaver, inviting viewers to make the digital gallery equivalent of mistaking a fire extinguisher for a piece of modern art. I asked the name of the artist behind a cascading wave of silver needles, and was told “It’s actually a Mac screensaver, but it is quite beautiful.”

READ MORE: World’s first ‘major’ NFT exhibition to open Friday: producer Q&A

Lastly, some of the show was pure novelty items. A bank of four actual claw machines offered logo plushies and a sort of simple construction toy as souvenirs. Both I and my colleague managed to get a prize, so I suspect the machines are fixed in the user’s favor. One work attributed to an AI and hidden in a niche in the wall melted and blended faces in weird ways but left me wondering how much of the work the AI had done versus its human collaborator.

Bottom line: It’s not every day you get to win a prize at a claw machine. The show is well worth RMB 80 if you’re in Beijing.

“Virtual Niche: Have you ever seen memes in the mirror?” is on display at UCCA Lab until April 4. Tickets are RMB 80.

As China’s legislature prepares to meet tomorrow, we’re bringing you a special edition of our Insights column: a preview of tech in the 14th Five-Year Plan. We’ve looked through the last plan, and the documents describing priorities for the new one, to give you our baseline expectations for key tech areas in the new plan.

Greetings from Beijing, where the weather is just turning to spring, the air this week feels like taking a bath in an ashtray, and, across town, about 3,000 people are getting together Friday to kick off the annual meeting of China’s national legislature.

This is one of the big meetings: This year, the National People’s Congress will approve China’s 14th Five-Year Plan, which will set out the government’s economic priorities for the next half-decade. The meeting lasts from March 5 to March 11, and in previous years the plan has come toward the end of the session.

Technology and innovation are sure to play a leading role. “Innovation-driven development” was one of the first topics addressed in the 13th Five-Year Plan, issued in 2016, and the phrase is equally prominent in previews of the new plan.

What is (likely) new is emphasis on another key phrase: “self-sufficiency.” As the US has used its control of key technologies as a weapon, China’s efforts to produce its own have a new urgency.

For people with tech projects, the start of a new plan period means opportunity. The “money spigot” for homegrown tech and innovation is likely to get even more generous, said Uny Cao, vice president at the Zhejiang University Intellectual Property Exchange Center and friend of TechNode.

What are we looking for when the new plan is published next week? What’s likely to get the most attention—and which will get less? Below, you’ll find TechNode’s roundup of key mentions of technologies we expect to see highlighted in the 14th Five-Year Plan.

Data

A new approach to data management will reverberate across tech industries. The next stage of China’s tech policy will shift from an emphasis on developing cybersecurity and big data, to building up the data economy.

Mentions in the 13th Five-Year Plan: The last five-year development plan focused on building up cybersecurity and control over data. But it also set goals to get government offices to share data with each other and industry.

• The 13th plan promised crackdowns on black markets for personal data, and strengthened privacy protection for big datasets, including government credit information systems. The government also aimed at opening up government big data to the public through a digital platform.
• The 2017 Cybersecurity Law was the first big step for reform of China’s information security. Implementation of the Multi-Level Protection Scheme, a key part of the CSL, picked up in the summer of 2020, Carly Ramsey, who leads regulatory and political risk consulting at Control Risks in Shanghai, told TechNode. 

READ MORE: Dust has yet to settle two years after China’s landmark cybersecurity law

Expectations in the 14th Five-Year Plan: In the Fifth Plenum guidelines, data has joined an impressive new crowd: “[We will] advance the marketization and reform of the economic factors of land, labor, capital, technology, and data.” When a Communist Party puts you on the same level as labor and capital, you know you’ve made it big.

The Fifth Plenum guidelines call for the development of a rules-based data economy. Or as they put it: Establish basic systems and standards for data property rights, transactions and circulation, cross-border transmission, and security protection to promote the development and utilization of data resources.

“Ensuring the fluid circulation of data is now an economic imperative,” said Kendra Schaefer, head of tech policy research at Beijing-based strategic advisory firm Trivium. “In practical terms, that means that the overarching theme of China’s data policy over the next five years will focus on allowing data to be shared, transferred, bought, sold, and utilized,” Schaefer said. The plenum’s recommendations called for “systems and standards” in data property rights, market mechanisms for data, as well as cross-border data transfers.

READ MORE: China sets the rules for its new data economy

So what? “The 14th Five-Year Plan will mark the beginning of a new era in China’s approach to data policy,” Schaefer said. China is stepping up from the securitization of data resources to developing a system in which data can be exploited as a resource. In the upcoming plan period, we can expect more support for trade in data alongside a continued crackdown on bad cybersecurity practices and insufficient privacy protections.

Environment

One of the biggest components of the 14th five-year plan deals with action to combat the environmental damage that followed years of rapid industrialization and economic growth. In the wake of a vow to set China on a path to carbon neutrality by 2060, economic planners will be under pressure to come up with big changes. China’s tech sector stands to benefit: To reach the country’s emissions goals, investment in clean technology could reach $16 trillion in the next 40 years.

In the 13th Five-Year Plan: The 2016 plan laid out targets to reduce carbon emissions by cutting the country’s carbon intensity—the amount of carbon dioxide produced for every unit of GDP. Through subsidies, state planners pushed prices in the solar industry so low that it effectively went from being a high-tech sector to a commodity business.

• The document laid out action plans to combat air, water, and soil pollution. By last year, Chinese cities were expected to meet “good” air quality standards for more than 80% of the year. 
• The plan sought to reduce the country’s reliance on coal-fired power plants, and promote environmentally friendly construction and mining. 
• Also included were “improvements in supportive policies” for renewable energy sources.

Expectations: The new plan will likely clarify how China will reach peak carbon emissions by 2030 and carbon net zero by 2060, goals laid out to the UN General Assembly by President Xi Jinping in September.

• The thrust of Xi’s speech has been factored into energy and environmental planning in the new five-year plan.
• The new plan will likely outline ambitious capacity and consumption targets for wind and solar energy production, while placing further caps on coal-fired power plants. 
• Energy storage is also expected to play an important role in the new plan, as China seeks to improve grid and power security. 
• It is unlikely that there will be a move away from carbon intensity caps to hard carbon caps, as the country attempts to balance economic growth and cutting emissions, analysts said. 
• While the last five-year plan placed emphasis on reducing emissions from energy production, the new plan will place increased focus on minimizing pollution from industry, including steel and transportation. 
• Further integration between China tech and energy industries is expected, a goal laid out in the 13th five-year plan. 

So what? The world is waiting to see how China plans to reach its emissions targets by 2060. We expect the plan to create more targets and pressure on local governments to improve carbon emissions, but details on how these will be implemented—and how cleantech investment will be affected—will likely be spelled out in lower-level plans.

Autos

A pillar of China’s economic growth, the automotive sector has long been dominated by well-established foreign brands, which hold more than 60% of the market share, while domestic automakers are concentrated in the low-end segment. But that is changing as China’s strength in electric vehicles is boosting its position on the global industry value chain, thanks to strong policy support over the past five years.

In the 13th Five-Year Plan: When China’s cabinet in 2010 initiated a development plan (in Chinese) for seven strategic emerging industries, new energy vehicles (NEVs) was one of them. In 2016, Beijing set an ambitious target of 5 million sales of NEVs in the coming five years, a number which would mark the beginning of mass adoption. This initiative became part of Beijing’s larger goal of becoming the world’s next innovation powerhouse.

• The central government carried out a series of stimuli to foster a new source of economic growth—by offering subsidies for NEV purchases, especially for all-electrics and plug-in hybrids—in both public and private transport sectors.
• China’s top policymakers also vowed to achieve major breakthroughs in battery technologies, such as a higher energy-density level, which enables a longer driving range as well as better resistance to extreme temperatures.

Expectations: NEVs were briefly mentioned as one of the strategic emerging industries in the fifth plenum guidelines, but with no detail about the growth outlook.

• However, according to a policy paper released by the State Council in November, NEV sales were projected to account for 20% of total new car sales by 2025, up from the 2020 level of just 5.4%.
• Beijing also expected “significant improvement in the competitiveness” of its homegrown players in the fields of battery safety and in-car operating systems, among others, while promoting highly autonomous vehicles for commercial use cases in pilot programs. 

So what? China’s electric vehicle market staged a strong rebound after disruptions caused by the Covid-19 pandemic last year and has remained the world’s biggest market since 2014. However, there have been bumps on the road, including electric car fires and the ongoing auto chip shortages.

China also lags the US in the vehicle autonomy competition, raising calls for more effort put toward core technology advancement. Pledging for quality growth amid rising superpower tensions in the next five years, Beijing would have to stay the course in boosting the sector, while realizing little near-term profit.

Semiconductors

Chinese leaders have long vowed to achieve “self-reliance” in strategic technologies, and semiconductors are one of the priorities. The sector is expected to get major attention as China issues its development blueprint for the next five years.

In the 13th Five-Year Plan: The five-year plan ending in 2020 saw semiconductors, along with other high-tech sectors like robotics, smart transportation, and virtual reality, as “new areas of growth” for the nation’s economy, but didn’t make production of semiconductors a strategic priority.

• Priorities certainly have changed over the past five years as Chinese leaders realized how troublesome it is to rely on foreign imports of semiconductors. Huawei is a brutal example.

Expectations: In 2015, China set a goal to make 70% of the chips it uses by 2025 as part of its “Made in China 2025” initiative. Now the question is how China will achieve that goal. The country only produced 6% of the semiconductors it consumed in 2020.

• The fifth plenum vowed to implement a series of “foresightful and strategic” technology research projects including integrated circuits, quantum information, AI, and neural science.
• Despite the industry’s importance, the National Development and Reform Commission didn’t include semiconductors on a list published last September of “strategic emerging industries.” Electric vehicles and artificial intelligence were on the list.
• The central government will increase investment in the domestic semiconductors industry through vehicles like the National Integrated Circuit Industry Investment Fund.
• More favorable policies towards domestic chip companies are likely such as tax breaks and heavier tariffs on imported electronic components.
• Bloomberg cited sources as saying that Beijing has added in a draft of the 14th five-year plan “a suite of measures to bolster research, education, and financing” for the semiconductors industry. 

E-commerce

E-commerce falls under the broader concept of the digital economy, a major theme in the plan that also covers 5G, artificial intelligence, and big data. E-commerce is expected to play a greater role in driving China’s economic growth in the next plan period.

In the 13th Five-Year Plan: The development plan that ended in 2020 set out to expand the e-commerce sector by facilitating its deep integration with traditional industries and prioritizing its governance. China sought to integrate e-commerce into various areas including education, healthcare, culture, and tourism to drive innovation.

• The 13th five-year plan set out expectations for China’s e-commerce transactions to exceed RMB 40 trillion ($6.19 trillion) in 2020, the last year of the plan—double the transaction value in 2015. The figure includes RMB 10 trillion from online retail businesses. The sector was projected to employ more than 50 million people by the end of 2020.
• The period of the 13th plan showed mixed results for e-commerce. The country missed the plan’s goal of RMB 37.21 trillion in e-commerce transactions in 2020. Online retail sales hit their target, however, totaling RMB 11.76 trillion in 2020, data from the National Bureau of Statistics showed.

Expectations: China expects online commerce to continue supporting its macro strategies, notably poverty alleviation and the One Belt One Road initiative. E-commerce has become an important means for China’s rural dwellers to sell their agricultural products. With more free trade zones on the horizon, China looks to expand its cross-border e-commerce market in the next five years.

• As a booster for both domestic and international commerce, the industry plays a central role in goals set for the “dual circulation” concept, which refers to spurring domestic as well as global demand, creating circumstances where the two boost each other’s growth. The idea featured predominantly in recent policy statements, although the term has been a policy meme for several years.
• Chinese regulators are stepping up monitoring for unfair competition and monopolistic practices.
• Consulting agency Jiuhou Zongheng has forecast that China’s e-commerce transactions will reach RMB 50 trillion by 2024.

Blockchain

Blockchain could be a new item in the 14th plan. It’s had plenty of attention at top levels in the past year.

In the 13th Five-Year Plan: Zilch. Blockchain was not on top policymakers’ agenda back in 2016.

Push from the top: The technology had its breakout moment in Chinese policy in October 2019, when President Xi Jinping praised the technology at a Politburo study session.

• Since then, local governments have embraced blockchain governance projects and tried to spur innovation in the field.
• The National Development and Reform Commission is supporting the development of the Blockchain Services Network, an “internet of blockchains.”

No crypto: Chinese regulators are not big fans of one of the technology’s most popular applications: cryptocurrencies. The past year’s clampdown on unregulated cryptocurrencies “is meant to clear a path to regulated forms of digital assets, starting first with DCEP [the central bank’s R&D project that includes the digital RMB],” said Michael Sung, co-director of the Fintech Research Center at the Fanhai International School of Finance at Fudan University, told TechNode.

Expectations: The technology was not mentioned in the 14th plan guidelines issued after the Fifth Plenum.

• The cryptocurrency mining industry might be negatively affected by financial de-risking campaigns and sustainability goals. The industry consumes vast amounts of electricity and is dependent on volatile crypto assets. 

READ MORE: Inner Mongolia may ban crypto mining: Blockheads

So what? China is already very interested in blockchain, but has not given the technology the same level of support as, say, electric vehicles. A name-check in the 14th plan would seal its status as a key technology and could pave the way for a national blockchain roadmap.

Antitrust

China has recently tightened antitrust regulations on tech companies. Regulators started at the end of last year to look at tech giants’ market dominance and to use anti-monopoly tools to limit them. The country also changed antitrust laws and rules to better rein in big tech. As top leaders of China repeatedly vow to “strengthen anti-monopoly” and “rein in disorderly capital expansion,” what has affected tech companies so far seems to be just the start of severer crackdowns.

In the 13th Five-Year Plan: The 13th development plan mentioned breaking industry monopolies and rooting out market barriers. It also intended to establish an “efficient antitrust law enforcement system,” deepen international antitrust law enforcement cooperation, and check administrative monopolies.

• In 2018, China created the State Administration for Market Regulation (SAMR), a  trustbuster that centralized antitrust power previously dispersed among  four market regulators.

Expectations: China is already on the move to rein in big tech with anti-monopoly tools. If the new plan pushes government agencies to impose stricter antitrust regulations and break monopolies, tech giants like Tencent, Alibaba, and Bytedance may feel a lot more pain.

• China’s antitrust regulator drafted an amendment to the Anti-Monopoly Law in January 2020; China may push to finalize the law during the period of the 14th five-year plan.
• The fifth plenum also called for the establishment of an “efficient antitrust law enforcement system” and to “break industry monopoly.”
• SAMR has said tightening antitrust regulations leads the 2021 agenda for the agency.
• While companies like Tencent and Alibaba are already under the spotlight, SAMR may launch more antitrust investigations into big tech companies. 
• A few antitrust lawsuits between tech companies are set for court hearings this year. Among them are the Douyin vs. WeChat, and JD.com vs. Alibaba cases. The results of cases will provide precedents for how the antitrust rules that took effect in February will be interpreted by the courts.

Rural areas and agriculture

Agriculture, the foundation for feeding China’s 1.4 billion population, is facing a new round of restructuring and modernization. The countryside is a growing focus for tech companies because it is home to a group of maturing consumers as well as being a lower-cost manufacturing hub. That makes aligning with rural developments a big goal for these internet firms.

In the 13th Five-Year Plan: The last plan placed a high priority on continuous modernization of rural areas and the agricultural sector. The plan promoted integration of agriculture and e-commerce and encouraged the application of big data and internet of things tech in agriculture.

• President Xi Jinping announced China’s “complete victory” in eliminating “absolute poverty” at a grand gathering held February 25 in Beijing. In the past eight years, nearly 100 million rural residents were lifted from poverty, Xi says.
• Tech giants including Alibaba, Pinduoduo, and Didi Chuxing were rewarded for contributions in the poverty alleviation initiative.

Expectations: China is expected to continue to focus on improving the quality, safety, and profitability of the sector, goals that require technological assistance.

• The focus of China’s agricultural development will shift from increasing production to improving quality, according to The China Agriculture Outlook (2020-2019) released this past April.

Policymakers are counting on tech in a plan to improve both farmers’ output and their incomes, said Even Pay, an associate director at Trivium:

“Policymakers are preparing for a future where there are fewer farmers. Some of them may be older, and in need of equipment to make their jobs easier. They also hope to attract some young people back into farming by making the work easier and more interesting—like operating ag machinery or flying drones.”

“Another big reason the government is supporting agtech is the “dual circulation strategy”—which looks to make domestic consumption the main driver of China’s macroeconomic growth. Right now China’s rural areas have the greatest growth potential of anywhere in the country—provided farmers’ incomes go up.”

Fintech + digital yuan

Fintech and the digital yuan might get a direct mention in the 14th plan.

In the 13th Five-Year Plan: Fintech was directly mentioned only once in the last plan. That plan called for a risk monitoring and crisis management system for all financial activity, including “internet finance.”

• “Microfinance,” “inclusive finance,” and “green finance” were included in the plan, but these categories also refer to traditional financial tools, said Jonas Short, head of the Beijing office at Everbright Sun Hung Kai.
• The plan called for microfinance to be made more “transparent” and regulated, while “Internet+inclusive finance” was to be promoted, and a green finance system was to be set up.
• The 13th plan also mentioned the development of “multilayered” and “non-cash” “payment systems,” although it didn’t mention digital payments specifically.

Fintech development: Since the release of the 2016-2020 plan, the use of fintech has skyrocketed, and an overwhelming majority of Chinese citizens now make use of some sort of digital finance, whether that’s for lending, investment, or insurance.

• The Ministry of Commerce released a fintech development plan in 2017, focused on cybersecurity, digital payments, and risk prevention.  
• As big tech came to play an increasingly important role in China’s finance, especially with regards to consumers and SMEs, authorities started laying down the rules: In 2020, Chinese regulators ramped up their efforts to regulate fintech companies, especially after Ant Group’s IPO was suspended in November 2020. Rules for microlending, antitrust, and digital payments have been released since.

Digital yuan: China’s central bank has been working on a digital form of cash, the digital yuan, since 2014. If implemented, it will be the first state-backed digital currency by a major economy. The central bank appears to have accelerated the development of the currency in 2019 after Facebook announced its Libra project. Trials for the e-CNY started in late 2020 in four Chinese cities: Chengdu, Shenzhen, Suzhou, and Xiong’an.

Expectations: The guidelines directly called for the improvement of “the level of financial technology.” They also included language similar to the previous plan’s regarding inclusive and green finance, as well as on financial risk prevention and monitoring.

• The guidelines called for continuing R&D on digital currency.

So what? China’s fintech industry will continue to grow, especially given a lift in the 14th plan. But incumbents will face more competition as a result of antitrust regulations and the opening up of payments systems that DCEP will bring. Tech companies dabbling in finance will also be increasingly brought under the fold of financial regulation.

Dear reader:

Happy new year! China’s going on holiday to see in the Year of the Ox.

TechNode’s coverage will resume on our website Thursday, Jan. 18, and our next Filtered newsletter will be published Friday, Jan. 19.

We’ve got some exciting plans for the new year. Look forward to more deep features, and members can expect to see two new In Focus newsletters.

We wish you a restful holiday—and a very happy new year!

Best,

The TechNode Team

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode, James and Elliott are once again joined by regular guest Michael Norris to discuss Kuaishou’s blockbuster IPO. They cover what it is that Kuaishou does as a business, its financial situation, and where its growth prospects are going forward. Is Kuaishou a good company? Or is it the fast-growing short video segment which is drawing the investor interest?

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:              

• Michael Norris – @briefnorris

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

The hit audio-only social network Clubhouse appears not to be accessible in mainland China as of 7:30 p.m. Monday evening. As of writing, TechNode reporters and contacts opening the app receive an error message reading “An SSL error has occurred and a secure connection to the server cannot be made.” The main field of the app, which normally displays a list of conversations and activity, is empty except the suggestion to “Start a new room to get a conversation going!”

Why it matters: While Chinese internet regulation can be unpredictable, Clubhouse is probably gone for good from Chinese networks.

Context: The hit app has provided a rare, unfiltered space for online discussion mainland China. In recent days, thousands of users flooded into Chinese-language groups discussing normally off-limits topics, leading many to predict that it was only a matter of time before the app was blocked.

Dalian, China—“1411 hours. The station is back in crisis. Once again, we cannot use the printer.”

A railway depot in the northeastern city of Dalian held China’s technically savvy readers in suspense—or, perhaps, stitches—with a minute-by-minute bulletin of its 20-hour “battle” to revert a Flash update on Jan. 15, which achieved brief viral fame before being deleted. Screenshots are still available on programming forum Github.

Depot staff were confused when their computers lost access to the local dispatch system on the morning of Jan. 12, according to the bulletin. The reason: Adobe’s last update to its Flash Player included a kill-switch set to go off that day, when the company ended support for the notoriously virus-prone web standard. Flash was little missed—except in the Chinese government, where it remains in widespread use. 

“0816 hours: After calls and online searches, we confirmed the source of the issue is American company Adobe’s comprehensive ban of Flash content.” 

So began the “insurmountable challenge of updating Flash”—a process the depot chronicled on its WeChat public account in the style of a military thriller, written with all the self-awareness of Dwight from “The Office.” As journalist Tony Lin, who first flagged the post in English, wrote on Twitter, it was “the Y2K content the world owes us for 20 years.”

The post was later deleted after catching on with technically minded online wags, many of whom asked why the depot didn’t plan for the retirement of Flash despite three years’ advance warning. 

The staff divided into hardware and software task forces, and attempted to restore an older version of Flash from a backup “GHOST system,” an effort marked by triumphs and defeats. By 10 p.m., they had mostly restored computers to backup states—when, suddenly, automatic updates caused the systems to disable Flash again.

According to a brief statement which later replaced the viral post, the issue was limited to newer computers in the depot and no trains were affected.

After midnight, the team began to chalk up lasting victories:

“Jan. 13, 0113 hours: ‘Wan Jia Ling station is fixed! Ling Ma shouted…we all gathered and confirmed. The room burst with cheers and applause.”

Finally, after 20 hours, the team had Flash up and running again on all its computers. Flush with victory, the author of the bulletin reflected on what they’d learned:

“During more than 20 hours of fighting, no one complained and no one gave up. The slim hope motivated each and every one and turned into the fuel to push forward. In the solving of the Flash malfunction, the depot displayed true initiative, innovation, and brilliance.”

All translations are TechNode’s own. Featuring contributions from hardware and regulations reporter, Wei Sheng.

As the hourglass runs out on 2020—and good riddance to it—TechNode is celebrating as we always do. We’ve picked our 10 favorite articles of the year and compiled them into an attractive PDF. You’ll find the introduction and links to the articles below. We’re also running our annual membership sale now until Jan. 10—so if you aren’t a subscriber already, sign up now for 20% off.

A note from the editor in chief

Here’s a tough one: what’s the biggest thing that happened to China tech in 2020?

In January 2020, when we were all about five years younger, we were looking at a wave of Hong Kong IPOs and asking ourselves if “capital winter” was finally over.

The year quickly changed directions. By the Chinese New Year, we were focused on what was then, quaintly, merely a national epidemic. Our reporters took on the challenge and brought in innovative coverage. They pieced together how tech-based quarantine systems like the “Health Code” worked, asked how tech companies were responding to the challenge and documented life under lockdown in work like Shi Jiayi’s series of video shorts and Lavender Au’s on-the-ground bulletins from Shiyan, Hubei. Nearly a year into Covid-19, we’re still missing staff who got stuck overseas. Chris Udemans and Carolyn Surh are still working strange hours in distant time zones. Other friends and colleagues left the company during this difficult year.

But China’s already highly digital society adapted quickly to lockdown conditions. The country’s truck and delivery drivers, in particular, took risks outdoors to make it possible for people to stay indoors for weeks on end, allowing China to adopt an extreme, but short-lived lockdown policy that led to controlled re-opening within weeks.

That’s not to say there haven’t been big changes. E-commerce livestreaming has made a 28-year-old man in lipstick as identifiable a symbol of consumerism as Santa Claus. Growth-at-all-costs businesses like Luckin Coffee and Danke Apartment have come apart at the seams. Skepticism of the power of big tech has also taken hold among both the public and regulators—as Ant Group, most dramatically, has learned. And #techwar continued to escalate, battering telecoms giant Huawei and driving a renewed push for semiconductor manufacturing in China.

We hope the attached articles—our favorites from the last year of our coverage—will help shed some light on this remarkable year.

Here at TechNode, we’ll be doing all we can to explain China tech, and to find the markets that are emerging in China’s always dynamic tech sector. We’re looking forward to exploring emerging fields like cleantech, SaaS, and health and med tech. As ever, we thank you. Your enthusiasm, feedback, and tips are invaluable to our reporting. And to our members: Your support makes it possible for us to do sustainable journalism. Thanks for sticking with us. To all our readers, here’s to a happier, healthier new year!

Best regards,

David Cohen
Acting Editor-in-Chief
TechNode

Top 10 best of 2020

1. CHINA VOICES | ‘Bilibili is becoming Chinese Youtube’
2. How China is using QR code apps to contain Covid-19 
3. Tesla’s apprentice: Is Tesla bullying its own biggest fan? 
4. INSIGHTS | Who owns ‘internet literature’?
5. INSIGHTS | ‘Second landlord’ platforms get tenants in debt to fund growth
6. 996 in your living room
7. HSMC promised China’s first 7 nm chips. It didn’t go well. 
8. Nio, Xpeng, Li Auto: your cheat sheet to China’s listed Tesla rivals 
9. CHINA VOICES | The unsigned op-eds that foreshadowed Ant Group IPO suspension
10. How Huawei hooked Greek telcos

PLUS BONUS VIDEO:
TechNode blind tasting: plant-based meat

Download a PDF version of the top 10, with the full text of all articles, here.

And if you aren’t a member yet, don’t forget to sign up for a nice discount.

Our regularly scheduled column is having a week off. In its place, may we recommend a look at the TechNode archives? Our suggested topic: P2P lending.

The peer-to-peer lending fad is something a lot of China tech has tried to forget, but, as TechBuzz China’s Rui Ma wrote recently, you can’t understand what’s happening with Ant Group and fintech regulation without it.

The online P2P industry went from the launch of pioneer platform PPDAI in 2007 to the near-total ban of the industry in 2019, leaving behind a trail of angry and duped investors. The decision to put Ant under strict new regulations—forcing it to drop its IPO and drastically changing its business model—likely reflects fears of the consequences of letting finance grow faster than oversight.

Clearly, regulators are once burned, twice shy. But does Ant really have anything in common with the industry a senior police official later called “a disaster zone of fraud”? We’ll be back next week to examine that question with a look at the financial issues in play with new regulations on fintech.

TechNode covered the story from start to finish. Here’s a timeline of the best of our coverage:

P2P lending: 2012-19

• Nov 27, 2012: “2000 peer-to-peer online funding services in China, unregulated”
  When we first looked at the industry, it was growing fast: “Over 2000 online peer-to-peer funding services reportedly have processed RMB 20 billion ($323 million) worth of transactions in this year, twenty times of that in last year.” But the risks were already apparent, with thousands of unregulated companies taking investors’ money—and a few already charged with fraud.
   
• Jul 31, 2013: “Lending Club co-founder established Shanghai-based P2P funding service Dianrong”
  The next year, we first met industry leader Dianrong, and its pedigreed founder Soul Htite—also of the US forerunner Lending Club. But Dianrong, he told TechNode, was uniquely Chinese, not just a local version of Lending Club.
   
• Jun 24, 2014: “P2B is becoming the favorite online lending model of Chinese VCs after P2P heat ebbs?”
  By 2014, P2P lending had already acquired a shady reputation, leading some to rebrand as “P2B”—peer to business. But the sales pitch—directing capital from ordinary investors to efficient but under-capitalized SMEs—was much the same as earlier P2P players.
   
• Aug 18, 2014: “[TechCrunch Beijing] Lending Club, Dianrong cofounder Soul Htite: P2P industry to be regulated in future 3-4 years”
  Industry leaders remained confident. Dianrong boasted average returns over 14%, with only a 1.27% rate of defaults. One advantage, Htite said, was the responsible Chinese consumer: while Americans frittered borrowed funds away on “attending parties,” Chinese consumers invested it in education.
   
• Jun 29, 2015: “More challenging, greater impact: Lending Club/Dianrong founder on China”
  Soul Htite was a star, explaining his secrets to success. In 2015, Dianrong struck a deal with Alibaba’s Sesame Credit to share credit information, and told TechNode “I love Chinese food and steamed buns are my favorite.”
   
• Aug 20, 2015: “[Update] China’s P2P lending site Dianrong lands massive $207 million Series C backed By traditional banks”
  Investors were convinced—and money flowed into Dianrong throughout 2014-16 from blue chip backers including Standard Chartered Bank and Tiger Global Capital.
   
• May 27, 2016: “Chinese P2P lender closes, executives detained as industry struggles with fraud”
  By 2016, it was clear the industry had some very bad actors. In January, major platform Ezubao turned out to be a Ponzi scheme. Twenty-three executives were arrested and  accused of stealing billions. In May, police in the southern city of Huizhou shut down another platform, Esudai, and arrested 13 executives, accusing them of “absorbing” hundreds of millions of RMB. Still, many remained bullish, viewing the arrests as natural winnowing of the market.
   
• Mar 10, 2017: “A brief look at the current state of China’s P2P lending industry”

China is facing two extremes of P2P platforms going up and down: record-breaking funding rounds (Lufax, $10 billion) and record-breaking Ponzi schemes (Ezubao, $7.6 billion).

Despite the concerns, it is hard to forecast a sudden downfall of P2P platforms in a country where outstanding loans totaled RMB 816.2 billion at the end of December 2016 from P2P lending platforms alone. Using those platforms have already become a habitual thing for Chinese public, especially those who don’t fall into China’s traditional banking categories.

• May 12, 2017: “China’s average P2P investors are becoming the opposite of what you’d expect”
  Indeed, 2017 saw confidence in the industry rise: average contributions by investors increased, while the platforms’ user base broadened, adding more female, young, or rural users.
   
• Aug 2, 2018: “The rise and fall of China’s online P2P lending” 
  [Editor: Recommended—if you read one piece on P2P lending, make it this one!]
  
  2017 was the last hurrah for P2P. By 2018, it was a national scandal, with investors who’d lost money in platform collapses demanding justice. In the face of public anger, regulators opened a “rectification campaign” in late 2017, giving P2P platforms until June 2018 to get in shape. Instead, hundreds defaulted on their obligations, causing losses—and anger—to spread.

Some of them protested in front of police stations and chanted the Chinese national anthem March of the Volunteers, trying to pressure the authorities. Some of them organized online investor rights groups, making a collective effort to get back the money. They’ve made headlines of domestic media and sparked intense online debates on who will be responsible for the loss and where the industry is heading.

•  Jan 31, 2019: “China’s P2P lending sector a ‘disaster zone’ of fraud: government official”
   
• Feb 21, 2019: “China’s online P2P lending industry is undergoing a massive shake out”
  In 2019, defaults multiplied under regulatory pressure—by the start of 2019, almost 5,500 platforms had collapsed, wiping out over RMB 177 billion in investments. Even industry leaders—including pioneer PPDai and Ping’an’s Lufax—began pivoting to other markets. Others tried to escape to Southeast Asia. Still, our sources told us that “consolidation” would winnow the field to a few entrenched industry leaders.
   
• May 9, 2019: “INSIGHTS: P2P lending in crisis as regulatory bubble pops”
  But by May, we could read the writing on the wall. Regulators were moving in for the kill.
  
  One moral: TechNode called the story a “regulatory bubble.” The industry grew faster than markets would have predicted, driven by the irrational exuberance of local governments; when it started to go bad, regulators sped up the process by culling companies.
   
• Aug 22, 2019: “P2P lending platforms feel the pressure as regulators squeeze them out of the market”
  Hebei regulators told hometown giant Fincera to stop making loans in the province. The company was forced to auction off the tallest building in the province and move to Beijing, while complaining of “continuous unfounded opposition” from once-friendly provincial authorities. A battered Dianrong managed to raise an undisclosed sum of money to meet new reserve requirements, despite closing 60 of 90 brick-and-mortar lending outlets and laying off some 2,000 employees.
   
• Aug 27, 2019: “Don’t blame internet finance for all of the problems in P2P lending: Jack Ma”
  P2P? Who, me? Clearly, the Ant founder recognized that the association was not good for the brand.

“P2P lending was not internet finance from the start. It is just an industry of illegal financing businesses that have websites. We shouldn’t blame the problems all on internet finance. Of course, internet finance still has a lot of room for improvement.”

—Jack Ma, chairman of Alibaba

• Nov 4, 2019: “P2P platform operators urged to exit as regulators mull next clampdown phase”
  On Nov. 1, Shanghai told the 40 platforms left in the city—including many of China’s largest survivors—that it was time to shut down, following similar actions by Shandong and Hunan provinces. A few days later, national regulators encouraged companies across the sector to follow suit. The story of P2P lending appeared to be over.

Haunting the fintech industry

Was P2P always doomed? From the start, we could see that the industry was under-regulated: thousands of companies got into the game with little to no oversight, many scammers among them; others simply managed their finances imprudently. But if you asked Dianrong or Fincera, they said they got a bad rap: once regulators lost faith in P2P lending, they raised requirements so high that even good platforms couldn’t survive.

The industry has left a legacy, introducing many consumers to micro-borrowing for the first time, and helping to pave the way for routine borrowing to fund consumption—it helped build the market that Ant is now making billions from. But it is remembered chiefly as a cautionary tale.

For regulators, it’s a lesson about the risks of letting markets run wild. For investors, it’s a lesson that what’s booming today could be illegal tomorrow.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

Elliott and James welcome back Matthew Brennan to the show to discuss his new book: Attention Factory: The Story of Tiktok and China’s Bytedance. Matthew shares insights into the company’s beginnings as well as its meteoric rise, the people and personalities that define its culture, and how Tiktok came close to failing in the US.

Hosts may have interests in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:             

• Matthew Brennan– @mbrennanchina

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

Elliott and James welcome Joe Ridsdale, CEO of West Street Capital Partners. Joe explains why his firm is one of many who have a short position on Chinese ed-tech company GSX. The three of them also discuss the structural barriers to exposing fraud in such circumstances.

Hosts may have interests in some of the stocks discussed. Short sellers, such as the guest in this episode, earn money if the price of a stock falls. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:             

• Joe Ridsdale– @Ridsdalejoe

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

“China is in the driver’s seat” of blockchain development as blockchain adopters look for solutions to connect different chains, Fudan University professor Michael Sung said at the TechNode Emerge 2020 conference held on Thursday.

Cross-chain integration, called “interoperability” in the blockchain world, is a key challenge for the emerging technology. Blockchain promises a decentralized, largely tamper-proof way to store and share data. But as different users adopt different chains, there is a rising need for good ways to exchange data between them.

Interoperability is “going to be driven by China, because China can mandate that everyone do the same thing,” said Sung, the co-director of the Fudan Fanhai Fintech Research Center and chairman of Carbon Blue Innovations.

China’s blockchain developers are riding a wave of state support since the technology was “anointed” by top leaders, following the pattern of artificial intelligence and 5G, Matthew Graham, CEO of blockchain-focused investment fund Sino Global Capital, said during the panel discussion. This support means “huge investment, probably overinvestment,” he said. “But out of that, innovative things will emerge.”

Crypto investors are also misallocating funds in exchanges, Graham said. He cited the decentralized file storage token Filecoin as an example of frothy funding from retail investors. 

“The last time there was a digital technology that was this transformational,” said Graham, “it was probably the internet. With blockchain, we’re not even at AOL—it’s 1993.”

China’s blockchain ecosystem has weaknesses, the panelists said, naming public blockchain and token-based business models as examples. The country restricts much cryptocurrency activity, and is known for favoring more controllable permissioned or consortium chains over decentralized chains. 

But this preference is not absolute, said Harriet Cao, co-founder of Bianjie, a Shanghai-based startup that has developed both public chains and enterprise-oriented consortium chains. “Public blockchain is highly supported” as long as companies are working on the technology and not banned activities like initial coin offerings, she said. Cao said she has been invited to universities around China to introduce public chains. 

Chinese regulators are also working with companies to experiment in blockchain-based  “digital assets,” Sung said. His lab is working on a project to create blockchain-based green bonds, he told TechNode, and he expects similar projects to take root soon. The key, he says, is finding a balance: “How can we create the proper hybrid frameworks as to have enough control, whether it’s a bank, a company. There is a balance point in taking a centralized system and slowly decentralizing it,” said Sung.

Soon, Sung predicted, a digital asset economy will emerge “like the flip of a switch.” With projects already in the works, he said, he expects this change “on a sub two-year time horizon.”

READ MORE: China’s BSN to test cross-chain interoperability in October

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

Elliott and James welcome IDC’s VP of Device Research Bryan Ma to the show. They discuss how Xiaomi is benefiting from Huawei’s international troubles, the foothold they continue to establish in India and SE Asia, and how the pandemic has been a surprisingly good year for PC makers.

For a map of the Xiaomi ecosystem, and more information on its web of product partners, check out VC Roundup | How big China tech uses investments to build empires.

Hosts may have interests in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:             

• Bryan Ma– @bryanbma

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

Elliott and James try to get their minds around Ant Group’s IPO, and attempt to explain the business behind what is likely to be the biggest IPO in history.

Hosts may have interests in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:             

• None

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

Elliott and James welcome Kevin Xu to the podcast this week. Kevin is the author of Interconnected, a bilingual newsletter on tech, business, geopolitics, and US-China relations. The three guys discuss China’s cloud services landscape and its competitive dynamics. They also discuss TSMC and the intense competition in semiconductor development.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Kevin Xu– @kevinsxu

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

Elliott and James welcome Digital Asia Hub fellow Dev Lewis back to the podcast to discuss what a worsening diplomatic relationship between China and India means for Chinese tech companies in India, and what the future of India’s tech landscape will look like. James and Ell also chat about the prospects of IPOs from Ant Financial and Didi Chuxing. 

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Dev Lewis – @devlewis18

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

After taking some time to welcome his newborn son, James returns to his co-hosting duties, as he and Elliott welcome Bloomberg Chief Economist Tom Orlik to the pod to discuss Tom’s new book China: The Bubble that Never Pops. Ell, James, and Tom discuss reasons to be optimistic about the future of the Chinese economy, and why it has avoided a major crisis in the decades following Reform and Opening Up.

James and Elliott also cover a few other hot topics in the news recently, such as the prospect of a Tiktok ban in the US.

Please note, the hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Tom Orlik – @TomOrlik

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Chinese electric vehicle startup Xpeng has never been shy about its Tesla fandom.

Xpeng founder Henry Xia took Musk up on his offer. That same month, he and two friends started their own autoworks in Guangzhou.

Tesla v. Cao

Today, Tesla’s attitude has changed. It argues that Xpeng crossed the line from imitation to theft. Tesla is suing its former employee Cao Guangzhi, alleging that the engineer misappropriated code for its Autopilot driving assistance function before leaving to take a job at Xmotors, Xpeng’s US-based sister company. At stake is Xpeng’s reputation, the limits of competition, and the ability of Chinese companies to hire leading engineers from Silicon Valley.

As TechNode wrote last week, Tesla is using the case against a former employee to justify a broad hunt through a competitor’s files to find proof of its IP theft suspicions.

Neither Xpeng nor Xmotors has been named in the lawsuit, but Xmotors has been listed as a third party in the proceedings. The company has argued that Tesla’s moves are aimed at “bullying and disrupting” it.

Tesla has asked a San Francisco court to allow it access to its competitor’s entire repository of autonomous driving code and clones of its executives’ hard drives—including those of He, its CEO. A hearing on the matter was due to take place on May 7 in a San Francisco federal court, but has been delayed until May 28.

If Tesla wins its motion, Xpeng will have to hand over much of its most sensitive information. Even if Tesla ultimately loses the lawsuit, it would send a message that engineers who switch jobs to Chinese employers are automatically suspected, which could chill recruiting for years.

How did it get so bad?

TechNode reviewed public court documents, spoke to industry insiders, interviewed Chinese lawyers about the case, and attempted to reach Cao’s friends. What emerged was the story of a tragic relationship—a group of Chinese EV enthusiasts who loved Tesla so much they tried to become it, and an American company that went from nurturing competitors to accusing them of theft.

Tesla and Cao’s attorneys did not respond to TechNode’s requests for comment.

Bidding for talent

To compete in self-driving technology, Xpeng began recruiting engineers from top Silicon Valley companies, including Tesla and Apple, in 2017. For years, Tesla engineers have been sought after as some of the most capable leaders in the future of driverless mobility. These employees have been chased by US tech companies hungry for self-driving talent, as well as by Chinese tech firms with US operations.

When Xpeng hired Gu Junli, a young engineering manager from Tesla, they made her vice president of autonomous driving. The promotion allowed Gu to jump three ranks up from her previous job—equivalent to 10 years in the career of a typical engineer. Xpeng also issued a press release boasting that she was a “leading figure” in Tesla’s machine-learning technology.

But Gu’s Tesla resume did not automatically lead to success. One year after joining the company, Chinese media reported, she was missing her targets. Two persons close to Xpeng told TechNode she was just too inexperienced to build a team that could compete with the giants in a field like self-driving.

In December 2018, Xpeng replaced Gu as head of the team with a hire from Qualcomm, Wu Xinzhou. It was Wu who would later recruit Cao from Tesla.

Gu was given another job as a leader for development of “advanced” technologies, but was later sidelined. She left the company in March.

Sincerest form of flattery

In 2018, Xpeng launched its first production vehicle, the G3. At the time of launch, the vehicle had a range of around 350 kilometers and shipped with driver assistance features. Observers noticed several similarities between the G3 and Tesla’s Model X and Model S—from the front profile of the car to the interior dash design.

This influence came as no surprise, given how open Xpeng had been about where it had drawn its inspiration.

Xpeng had a lot in common with the Chinese smartphone giant Xiaomi, one of the company’s recent investors. When Xiaomi began operating, it took many of its cues from Apple—so much so that it was often called an Apple clone. The company adopted the same minimalist aesthetic as its US counterpart, but quickly began developing its own signature line of devices, from smart home equipment to computers, clothing, and cookware.

But copying an idea is not against the law. “The reason Apple won’t sue Xiaomi is that, while their products look similar, they don’t necessarily constitute copyright infringement,” Fang Chaoqiang, a lawyer at Beijing-based Yingke Law Firm, told TechNode.

Xiaomi is the poster child for an argument that critics of IP law have made for years—if the Chinese company had not been able to learn from Apple, dozens of innovative products would never have come on the market.

Allegations emerge

If Tesla took issue with the G3’s similarities to its own vehicles at the time of launch, it didn’t say much. In Musk’s 2014 patent blog post, he wrote that manufacturers of gasoline-fueled vehicles were the company’s main competitors, not rival EV companies. Indeed, the 16,608 vehicles Xpeng shipped in 2019 were a drop in the ocean compared to Tesla’s sales.

But after US-based Xpeng engineer Zhang Xiaolang was arrested by the FBI for stealing Apple IP while switching jobs in July 2018, rumors simmered that the Chinese company was cheating to catch up. Zhang was arrested on July 7, 2018, after Apple accused him of downloading sensitive information before he resigned to take a job with Xmotors in China.

Xpeng leaders deny that they encouraged Zhang to misappropriate Apple’s IP. The company added that there is no evidence Zhang transferred sensitive information from Apple to Xpeng, and that the engineer’s contract has been terminated.

The fallout for Xpeng’s reputation was immediate. Now, the company faces challenges in hiring talent, as US-based Chinese engineers have reportedly distanced themselves from the company.

In the 29 reviews about Xmotors to be found on job search website Glassdoor, three employees addressed concerns that their career prospects might be affected by these lawsuits, since “no one wants to hire someone from a company with all the public news about FBI investigation.”

An Xpeng spokesperson told TechNode that the company has not had trouble hiring new engineers in the US or China.

Cao, then an engineer at Tesla, condemned Zhang, the former Apple employee, in text messages that have since become public in the course of the lawsuit. Zhang’s case would cause a “bad impression on us Chinese,” he said, according to translated message transcripts.

Xpeng hires Cao

When Wu Xinzhou, Xpeng’s new self-driving team leader, interviewed Cao about a job as “head of perception” in late 2018, the Tesla employee was concerned about how the job switch would look. Cao later told the court that Wu had soothed his worries by saying Xpeng “did not get involved at all” in Zhang’s actions.

Cao was a high-flying computer vision expert and a natural fit for the perception job. With both a bachelor’s and master’s degree in electrical engineering from Zhejiang University—one of China’s top schools, which houses an entire startup accelerator in an ultramodern egg-shaped building at the center of campus—and a Ph.D. from Purdue University, he’d worked on medical applications of computer vision at GE and Apple before working at Tesla.

Cao joined Xpeng in January 2019.

Just two months later, he was in court.

Xpeng’s work on autonomous driving had begun long before Cao joined them. The company was developing its driver assistance technology as far back as 2015, three years before its first mass-produced vehicle was released. Level 2.5 autonomous driving capabilities were included in the G3 upon delivery in early 2019. Xpilot includes assisted lane changing, cruise control, lane centering, and automatic speed limitations.

But in December 2019, Musk aired suspicions on Twitter that Xpeng was copying Tesla’s code. When a Twitter user with the moniker “The Cyber Pope of Muskanity” suggested that Xpeng had stolen Tesla’s software, Musk replied, “That’s certainly our impression.”

When Cao left Tesla in January 2019, the company suspected another engineer, surnamed Zhang. In addition to a shared nationality, both engineers had previously worked at Apple—though Cao has testified that they worked in separate divisions located at different buildings and campuses.

When Tesla found out that Cao had copied files to a personal computer, they decided that he had taken the code for his new employer. In March 2019, the company filed a suit against Cao, formally accusing him of misappropriating code by copying it to his personal iCloud account.

Fool me twice?

Tesla is trying to paint Xpeng as a repeat offender that poached engineers in order to gain access to IP, said a Chinese lawyer who spoke to TechNode under the condition of anonymity. Successfully linking the cases could have serious reputational implications for Xpeng.

Tesla admits that it can’t prove the theft.

Unlike smartphone design, in the world of self-driving software, it’s difficult to tell if someone has copied your product without actually getting your hands on the code. Tesla claims, in essence, that the fact that Cao had the code when he left Tesla is so suspicious that they should be allowed to rifle through Xpeng’s files in an effort to prove that the Chinese company used it.

Tesla’s case is built heavily on parallels between Cao and Zhang, but the company argues that its document requests will allow it to find proof. Cao has admitted to downloading files to a personal computer, but claims it was common practice at the company.

Other evidence submitted by Tesla is weaker. For example, an edited translation of Cao’s text message exchange about the Zhang case made it appear that Cao was speculating about how much money Zhang had gotten from Xpeng—when in fact this message was sent by his friend. Cao had responded by condemning Zhang’s actions.

Tesla’s case against Cao and the US authorities’ move to indict Zhang are two independent lawsuits, at least for now, said Lin Hang, a lawyer at Guangzhou-based F&P Law Firm. There are different parties involved in each case; moreover, Cao’s is a civil case, while Zhang’s is criminal. Xmotors is a third party in both. 

Lin questioned the grounds of demonstrating a pattern of misconduct by Xmotors in its operations and recruiting. “You can’t just say C stole from D because A allegedly stole from B,” he said.

Another counsel, who wished to remain anonymous, was pessimistic about Xpeng’s chances, as the US has increasingly treated all Chinese companies as potential IP thieves. Tesla’s move against Xpeng may trigger more US tech companies targeting Chinese competitors for intellectual property theft, he said.

Whether he wins or loses, Cao’s life has been permanently changed. Xpeng placed him on administrative leave “until further notice” in March 2019, when the investigation began. His position has since been filled by a subsequent hire. The damage to his reputation will likely last much longer.

A non-compete by any other name …

In 2014, Musk wrote that Tesla’s leadership was defined by its ability to “attract and motivate the world’s most talented engineers.” Nowadays, he’s less willing to compete for talent.

In its complaint against Cao, Tesla cited Xpeng’s pursuit of its engineers as part of a pattern of “copying,” writing that “at least five former Tesla Autopilot team members including Cao have gone to work for Xmotors.” Xpeng, and other Chinese EV startups, are known in the industry for recruiting Chinese employees from US tech giants with highly competitive salaries and stock option plans.

If Tesla wins its suit, it could have broad effects on the market for tech talent, scaring off engineers who had been considering working for Chinese companies.

Hiring away a rival’s staff is a normal part of competition, and Silicon Valley was built on disloyal employees. In the US, California is the only state that bans non-compete agreement—contracts are common throughout the rest of the US—and this fact is often credited with spurring the state’s culture of entrepreneurship.

Nevertheless, as tech giants turn into corporate behemoths, they’ve taken a more possessive attitude in regard to their employees—and the US’s Department of Justice (DOJ) has taken notice. In 2010, the DOJ alleged that companies including Apple, Adobe, Intel, and Google had made a deal not to recruit each other’s employees, limiting competition in the labor market and holding down salaries for coding talent. The measures effectively barred rivals from reaching out to potential employees at competing companies to offer them new positions.

In 2011, the companies settled with the DOJ, promising to end the practice. Subsequently, in 2015, they agreed to pay $415 million to settle a related class-action lawsuit in order to compensate around 64,000 employees.

While tech firms can’t use non-compete agreements to retain their employees, if Chinese engineers who start jobs at rival companies face probes or life-altering lawsuits, they are effectively bound by fear of repercussions from moving to better jobs.

Is Xpeng ready to leave the nest?

For most consumers, an Xpeng is still just a cheaper version of a Tesla. But as the company fights in court to prove that it’s not stealing IP, it is making moves in self-driving in an effort to find its own identity.

Xpeng has seen several changes in its self-driving team since Tesla began its legal offensive. Gu, the young Tesla hire who previously led autonomous driving, finally left the company this March due to “personal career and family reasons,” after reportedly being idle from any management roles for a couple of months.

Meanwhile, Cao’s position has been filled by Wang Tao, the co-founder of Drive.ai, the self-driving startup acquired by Apple in June 2019, according to Xpeng slides that were shared with the media last year.

Xpeng is forging on. In March, the company launched its first electric sedan model, the P7. The vehicle is equipped with Xpilot 3.0, Xpeng’s latest driver assistance system. The EV startup is attempting to follow the path set by backers Alibaba and Xiaomi—from copycat to Chinese original. It’s promising self-driving technology software and hardware that is different from Tesla, with executives claiming that its systems are optimized to better handle China’s crowded roads.

“I strongly believe that P7 will provide the best driver-assist experience in China,” Xpeng’s He said during the sedan’s launch event last month.

As the legal battle between Tesla and Xpeng heats up, the P7 could allow Xpeng to show that its days of imitating Tesla are over. But the stakes are high. EV leaders expect bankruptcies to dominate the headlines. Li Xiang, the founder of rival EV firm Lixiang, recently warned: “Given the hardship in the Chinese auto market, there is a possibility that only three out of more than 100 EV startups could survive … and I hope Nio and Xpeng can be with us.” It may all come down to a judge in San Francisco.

As China reopened cities following the Covid-19 epidemic, it relied on “health code” digital systems that divide people into green, yellow, and red based on little understood risk algorithms. Now, as the country moves toward normalcy, local authorities continue to turn the surveillance system off and then on again.

Health code has mostly disappeared in Shanghai and nearby cities. Even Hangzhou, where the system was first deployed, has largely pulled the plug on the labor-intensive network of checkpoints associated with the system.

Meanwhile, other cities are ramping up code use to head off a possible second wave, including some that largely ignored digital quarantine during the initial rollout. 

China offers the world a preview of what writer Tomas Pueyo called the “dance” with Covid-19 that will likely define post-lockdown life until a vaccine is developed. While shops and restaurants have been open across China for weeks, the continuing threat of an outbreak is driving restrictions to ebb and flow.

Shanghai drops codes

The system always varied between places—rather than a nationwide system, the health code is a patchwork of local systems. As China began re-opening, it was common to show one’s code a dozen times per day across the country—entering a market, restaurant, office building, public transport, or returning home all required displaying one’s QR code in many cities.

Shanghai’s implementation of the system was relatively lax. Even at the peak, apartment complexes inhabited by TechNode correspondents checked health codes only once or twice per resident, afterward treating them as non-risks. The system also issued codes without an initial survey of symptoms and travel history, unlike other cities. However, Shanghai office buildings, museums, and bookstores rigorously enforced the system for a few weeks.

As life returns to normal, TechNode correspondents in Shanghai have gone weeks without displaying their health QR code. Eliza Gkritsi has not used her health QR code once since returning from South Korea and Greece on March 22, shortly before China closed its borders to non-citizens. TechNode correspondents and sources have even entered the city by train without passing any kind of check.

But while most Shanghai residents have stopped using their codes, students will begin using new back-to-school codes as schools resume in-person classes. 

There are other exceptions, even in relaxed Shanghai: some office buildings are still checking, but not all. David Cohen was asked for his code when trying to use the bathroom at a co-working space.

Checkpoints are still in place at residential and office compounds, as well as public transport, with varying enforcement of temperature and identity checks. Some of these systems require a one-time registration on paper or digital forms. Smaller residential checkpoints are frequently left unattended, especially late at night. Even contactless delivery protocols have softened, with many compounds now allowing delivery drivers to enter.

Hangzhou, a health code pioneer and enthusiastic adopter, has also largely abandoned checks. Unlike Shanghai, the city closely monitors train stations. When a TechNode reporter visited the weekend of April 17, non-nationals were asked to display both their health code and mobile phone carrier-generated travel itineraries, as well as filling out paper forms. Visiting Suzhou, TecNode contributor Dev Lewis observed travelers with Hubei ID cards treated to the same extra attention. However, once past this check, the code was no longer used at apartment compounds or shops.

In Xi’an, one of the most rigorous enforcers of health code, graduate student Liu Weiqi observed the beginnings of relaxation as restaurants resumed outdoor service without any checks.

Health code strikes back

In the last week, TechNode sources in several cities described sudden ramp ups in digital controls and checkpoints, presumably in response to recent increases in case numbers.

In Guangzhou, QR codes never really fell out of use, two residents told TechNode. Public transport stopped checking codes, but they remained widely used in supermarkets, restaurants, office, and residential buildings. But on April 27 public transport checks were suddenly renewed following reports of local cases.

In the smaller city of Yantai, Shandong, TechNode Russia editor Lavrenity Klimov encountered checks at supermarkets and home for only about two to three weeks before the system fell out of use. But on April 28, checkpoints suddenly returned, with shops and residential compounds demanding the QR codes. However, Klimov said, when he had trouble registering for the code without local ID the guards agreed to let him pass.

Health codes reportedly remain essential for residents of Hubei, the province at the center of the epidemic, to leave the cities in which they were quarantined for months.

Meanwhile, the capital continues to enforce strict controls, including mandatory two-week isolation for anyone arriving from other parts of the country, although the health code takes a back seat to temperature checks and paper passes. The city of Harbin, China’s far north has also reportedly intensified controls following new cases associated with Chinese nationals returning from Russia.

Off again, on again

It’s not clear how much of a role digital systems played in allowing China to end its lockdowns safely—they were coupled with extraordinarily strict limits on movement, widespread testing, and in-person surveillance. Even the most digital systems relied on blanketing cities with guards to check the codes. This expensive—and intrusive—approach seems to fade quickly when the virus is under control.

But despite strict quarantine policies that have forbidden all non-citizens to enter the country and place the few remaining travelers in 14-day isolation, Chinese provinces continue to report new cases of the virus.

With the pandemic predicted by experts to last for months or over a year, health code is likely to come and go as local governments play whack-a-mole with the disease.

In partnership with

Editor’s note: This article is first published on TechNode Global by Shi Hui Tan in partnership with Huawei Assistant. We believe in transparency in our publishing and monetization model. Read more here.

Huawei recently showed off new, Asia-specific content that’s just rolled out to Huawei Assistant.

Keen to give it a whirl, TechNode’s editor, David Cohen, gave a review of the Chinese version of Huawei Assistant and Huawei Ability Gallery at our Shanghai office while our TechNode Global (Singapore) country manager, Shi Hui Tan, visited a Huawei store in the city-state to check out the international version.

If you can’t play the video above, click HERE.

Huawei is facing a big challenge outside of China where, as was reported in 2019, new versions of its smartphones lose access to popular applications and services including Google Play, Google Maps and the Gmail app. 

To overcome this, Huawei is launching its own version of these, including the revamped Huawei Assistant and the new Huawei Ability Gallery. It’ll be interesting to see if the big-name Southeast Asia apps will sign up for the Huawei Ability Gallery – it’ll be a crucial factor for Huawei to stand up against the competition. 

Short sellers are helping to fight a “China hustle 2.0,” experts said at a TechNode webinar held on Zoom the evening of April 23. 

The recent admission that Luckin Coffee fabricated approximately half of its sales revenue reflects a wider problem, said TechNode contributor Michael Norris. Information asymmetries between tech-focused Chinese companies and US investors makes it easy for dishonest managers to lie to investors, said Norris, who is also Research and Strategy lead at AgencyChina.

Norris spoke alongside other TechNode reporters and contributors on “Thin Ice for US-listed Chinese Tech Companies,” the first speaker event in TechNode’s new monthly “Tech After Hours” webinar series. 

We’ve been here before

Language barriers and sheer distance make it difficult for American investors to check “gravity-defying” corporate reports, Norris said. The original “China hustle” worked because few investors were willing to travel to remote northeast China towns to check on claimed production facilities, Norris said, and bought into stories about the fast-growing economy driving mammoth demand for primary resources.

In the updated version, the ingredients are a little different: the narrative is about the scale of China’s online population, and the companies are online, or online-adjacent. Digital content and advertising figures are especially hard to check for some Chinese players, Norris said—unlike traditional products, obtaining confirmation of content views and ad inventory can be like peering into a black box.

But compared to 2011, Chinese regulators are taking a greater interest in holding Luckin to account, while lawsuits by Chinese investors could set a precedent for domestic accountability for defrauding overseas markets. Key to the change is that Chinese mom-and-pop investors increasingly have skin in the game in US capital markets.

In this murky environment, short sellers can be the only actors able to reveal serious problems at listed companies. But James Hull, analyst and portfolio manager at Hullx Capital and co-host of the China Tech Investor Podcast, recommended broad skepticism over a focus on fraud scares. 

Hull took the example of another recent short report, targeting Baidu-backed online video platform iQiyi, which accused the platform of inflating subscriber revenue. Hull said he had not been able to confirm the allegations through his own sources, but was bearish on the company owing to broader concerns about its business model, calling content production a “cash incinerator.”

“When someone yells fire in a crowded theater,” Hull said,”you have two options: you can get out the door first, or you can look around and check if there’s a real fire.”

But serious problems at Chinese companies are often revealed first in Chinese-language reporting, Norris said. At Luckin, the most important red flag was the tightly networked group of insiders who drove the company to unicorn status without vetting, a story Norris first wrote in English for TechNode before the company’s IPO, based on Chinese media reports.

Tight networks also mean that more companies, including China-listed A shares, will be hurt by Luckin’s fall from grace, said TechNode reporter Emma Lee. Shares of Luckin advertising partner Focus Media have already slid on reports that Luckin overstated ad spend with Focus, renewing negative attention on a company which moved from US to China listing after a Muddy Waters report. Luckin logistics partner SF Logistics and cheesemaker Milk Ground could also be affected, Lee said.

Updated April 24.

The Olympics may have been delayed, but we got to see a gold medal dive anyway: Luckin Coffee dropped 75% in a single day’s trading as news emerged that nearly half its sales were fictional. The company claims to be investigating a scheme to falsify sales data perpetrated by the company COO, among others.

The company looks set to go out as it came in, in a wash of free coffee. Customers are flocking to its stores to cash in coupons. On the Chinese internet, commentators have already written a likely epitaph—”Hey Wall Street, thanks for the free coffee!”

Bottom line: Luckin is the most spectacular case of fraud we’ve seen in a while—and not all that surprising, coming from a company that has long had warning signs. It’s probably a cautionary tale about something—but you can take your pick of morals. 

Meteoric rise:

• October 2017: Luckin Coffee is founded in Beijing by former Car Inc COO Qian Zhiya and former CMO Yang Fei.
• June 11, 2018: The company raises a $200 million Series A from Joy Capital, the Government of Singapore Investment Corporation (GIC), Legend Capital and Centurium Capital. Joy, Legend and Centurium all have connections to Car Inc.
• Dec. 12, 2018: Luckin raises $200 million in a Series B, led by GIC and China International Capital. This round gave them a $2.2 billion valuation.
• March 12, 2019: Reuters reports that Luckin Chairman Lu Zhengyao has sought to trade a role in the IPO in return for a $200 million personal loan.
• April 3, 2019: Luckin registered RMB 45 million ($6.7 million) worth of movable assets as collateral to a Beijing-based firm, in an early sign of a cash crunch.
• April 18, 2019: The company raises $150 million in a Series B+ from BlackRock and an unnamed investor. The round put them at a $2.9 billion valuation.
• April 22, 2019: Luckin files for an IPO with the US SEC. To be listed on the Nasdaq under the symbol “LK,” the company set a placeholder amount of $100 million to be raised in the filing. Rumors from February put the IPO at $300 million.
• May 16, 2019: Luckin exceeds expectations to raise $561 million in IPO.
• Sept. 3, 2019: Luckin spins off tea business as “Fawn Tea.”
• November 2019: Luckin store count passes Starbucks at about 4,200 stores, making it China’s most common coffee chain.
• Jan. 21: Luckin announces $865 million in post-IPO fundraising to fund growth and “unmanned” vending machine strategy.
• Feb. 1: Luckin shares plunge 19% as short-seller Muddy Waters publicizes allegations of inflated sales figures and self-dealing made by an anonymous third party. Luckin denies these allegations.
• April 2: Luckin admits that it fabricated RMB 2.2 billion in sales in 2019, causing its shares to plunge 75.6%.

Growth at a high cost: Luckin was built on a simple idea: you can buy growth. The company’s celebrity CMO—and ex-con—Yang Fei even wrote a book about it, as reported by TechNode contributor Michael Norris. Everything it did cost big money: opening 4,500 stores in slightly over two years, and then handing out free coffees to bring customers in and to keep them loyal. 

In its early stages, the spending was backed up by an argument that China was on the verge of becoming a major coffee-drinking nation. But as it progressed, the quest for growth led Luckin into more and more whimsical bets: 

• Luckin pushed into fancy teas in 2019, a field so crowded that Luckin isn’t even the only player whose logo is a deer. 
• I’m honestly not sure what happened to the company’s vow to push into overseas markets.
• Most recently, Luckin raised most of a billion dollars to fund a push into vending machines—which is rather less crowded, since competitors like BingoBox have already flopped.

When did it turn to fraud? We don’t know for sure when Luckin started making up numbers, but we can see why. The company spent hundreds of millions of its investors’ dollars to buy growth, and as it went back for more, it had to show that it was on a road to profit. It is, however, very possible that fraud went beyond what the company has already admitted.

• According to the company’s Thursday statement, falsified sales began with the company’s Q2 results—its first as a public company. 
• The fake sales allowed it to claim—in the now-disavowed Q2 report—that year-on-year sales grew 698%; in Q3, it boasted that net losses had fallen from about 200% to only 30% of revenue. 
• In as-yet unconfirmed allegations, the Muddy Waters-linked report that accurately predicted false sales also claimed that the company inflated the costs in its vending machine push in order to cover up a need to raise funds for ongoing operations, and to transfer money to related parties in self-dealing transactions.

Why did they own up? Norris speculates that Luckin’s admission of fraud was forced by its own board. The company’s Q4 and annual results have been slow to emerge. Whether they are past the filing deadline is unclear, but Norris suggests that independent directors refused to sign off on the results, forcing the company to investigate.

It may be that the scheme wasn’t really meant to last: Pre-IPO, Norris argued that the company might not be intended to achieve profits; suggesting that, like a car with sawdust in the transmission, it was built only to make it to market and let sellers walk away with cash.

Expiration dates: It’s a commonplace in Chinese commentary that the company is a sort of national Robin Hood—taking money from Wall Street investors and spending it on free coffee for Chinese people. Chinese users have scrambled to Luckin to place orders, some to show their support for the company, but more for fear their coupons will expire. 

• Luckin stores were full of buyers on Friday, while its app and WeChat mini-program crashed due to a traffic spike, local media reported.
• The situation echoes the last days of ofo share bikes, when 10 million users applied for refunds as the company collapsed in 2018.

Is it a drinking lesson…: Luckin’s closest peers are fast-growing fancy tea sellers Heytea and Naixue. Like Luckin, they’re spending big to grow fast with a hot beverage. But maybe they can make a Luckin-like model work with a little more patience. After all, Norris told TechNode, even after you discount half Luckin’s sales it’s still sold a lot of coffee.

…pseudo-tech,…:  Maybe the lesson is to beware companies dressed up as tech startups. Luckin is competing with Starbucks—but it’s presented itself as a tech firm to imply Google-like prospects. Looking at its investor relations material, Luckin’s company overview mentions technology four times in three paragraphs, and coffee just twice.  

The last year has been tough on workhorses in unicorn’s clothing. WeWork’s spectacular flame-out is the most famous example, but Indian hotel giant Oyo and Chinese rental platform Danke share the essential features of high costs and decidedly finite revenue. Neither reached Luckin’s heights of fraud, but both illustrate that asset-heavy pseudo-tech firms tempt executives to cut corners. 

Some companies, to be sure, are going to see bets like these pay off. But it’s clearly long past time for investors to ask hard questions about profit, as well as growth.

…information asymmetry,…: For some US commentators, the moral of Luckin is that you can’t trust overseas-listed Chinese stock. As Josh Rogin writes in the Washington Post:  

According to the U.S.-China Economic and Security Review Commission’s 2017 report, China’s opaque financial system makes it impossible to verify Chinese companies’ financial disclosures and auditing reports. Through fraud schemes alone, Chinese issuers have stolen billions from U.S. investors with no fear of punishment inside China.

But China’s securities regulator claims that new laws, effective from March 1, give it the power to police overseas-listed stocks. Luckin executives probably won’t lose any sleep over enforcement, as their scheme likely wound up before this key date, but China’s US-listed blue chips would be well advised to push for real enforcement to protect their own reputations.

…or just dumb money? We can’t get over the suspicion that the real reason Luckin got away with its fuzzy numbers is that a lot of people were willing (or desperate) to buy into the next big thing in China tech. A few years ago, China tech was a dark horse, and betting on it was an easy way to make money. These days, you have to be pretty fast to spot something before everyone knows it—and that means you have to be a lot smarter to make money.

TechNode editor David Cohen got a surprise parcel today along with the grocery deliveries: a sneak peak at Xiaomi’s newest phone, evidently developed under cover during the virus.

The Ovoid marks a bold change in design direction from previous phones—breaking with conventions that go back to the original iPhone. We’re excited to start learning new routines—how about you?

It’s a pretty typical afternoon here at TechNode headquarters in Shanghai. I walked down the street around noon, skipped my favorite sesame noodle joint since it was full, and wound up finding a new spot for Cantonese-style rice noodle rolls. On the way back, I picked up an iced lemon tea from hip milk tea chain 1 Diandian after waiting in a long, somewhat socially distant line. But back at my desk, I found a pile of draft opinion columns about the salad days ahead for e-commerce grocery delivery, now that the coronavirus epidemic has killed off brick-and-mortar once and for all. 

I say, prove it.

There are analysts telling us the epidemic has been a big win for online food delivery—and meanwhile, here I am waiting in lines in Shanghai. Something doesn’t add up. Nobody’s told the lunch crowd that it’s the beginning of the end for physical stores.

Nobody’s told the Shanghai lunch crowd that grocery delivery has taken over the world.

Filling a bucket in a storm

What do the numbers say? If you read them naively, it does look like online groceries have won out: groceries and household goods deliveries have gone up by huge figures over the virus period, topping out around Meituan’s 200% for fresh produce. So offline grocery shopping must be reeling from the blow, right?

Almost certainly not. TechNode has visited busy vegetable markets across China—and even in the epicenter of Hubei, we’ve seen markets arrange deliveries without relying on apps like Meituan. Grocery shopping has held up just fine, and it’s fed a lot more people than Meituan and Eleme. 

What delivery triumphalists are forgetting is that the market for online grocery shopping isn’t a fixed number of people who want groceries—it’s part of a much bigger market for meals. Every time you eat a meal, you choose between cooking it yourself or getting it from a restaurant, and just about every restaurant in China was closed for all of February and a lot of March. 

China is a country with a lot of restaurants. Eating out is cheap, tasty, and popular, and ordering delivery is nearly as cheap and also popular. When people got locked in their homes, that meant nearly every meal they would normally have bought from a restaurant instead had to be cooked at home. This is, simply put, a lot of meals, probably running into many billions. 

App-based grocery delivery certainly got a piece of this action—but these apps were filling buckets in a storm, and offline groceries were right there alongside them. In my efforts to compare app-based groceries to offline vegetable markets, I’ve seen the markets hold up at least as well. Even in Hubei, when people couldn’t go to the markets, local authorities arranged deliveries. Keeping offline groceries stocked was no easy task, and the Wall Street Journal has done a great look at the challenges involved.

As China edges back to normalcy, it looks like pre-outbreak food habits are returning: every week, people are willing to sit closer to each other to get a favorite bowl of noodles, and restaurants grow more crowded. 

Doubting tech triumphalism

It’s been particularly obvious to me that stories about the death of food outlets are detached from reality because I’ve been eating all through the last few months. But there’s a moral to this story: tech has got to prove its worth in the data, just like anything else. 

I expect what’s really at the root of the ill-founded stories I keep reading isn’t bad statistics—it’s the fact the story is so damn plausible to the kind of people who write market analysis. They tend to be young, urban, and not very fond of grocery shopping. A lot of them don’t know how to buy a potato in their Shanghai neighborhood without using an app.

But the fact that you’d rather have a man in a yellow helmet bring you your food isn’t a solid basis for predicting the behavior of a billion people. No matter how much sense a tech story makes, it ain’t true til it can be proved.

This article was co-authored by David Cohen and Chris Udemans.

As China goes back to work after weeks of epidemic lockdown, it’s betting on high-tech QR code quarantines to keep the virus from spreading.

In the eastern Chinese city of Hangzhou, scanning a QR code at a checkpoint with Alipay has become a routine part of daily life. It’s essentially a health passport for the city. A mini-app embedded in Alipay or WeChat rates people as red, yellow, or green risks. To enter an apartment complex or a market, residents must scan a QR code at a manned checkpoint, letting the system know where they are and producing a one-time color code pass to show the guard.

Hangzhou, the capital of Zhejiang province, became the first to adopt the QR code system on Feb. 11, although lockdown continued for most residents until Feb. 15. Alipay announced on Feb. 16 that it was ramping up development support for a national health code system that assesses individuals for self-quarantine based on basic health information and travel history, which it is preparing to launch this week under the guidance of the State Council, China’s cabinet.

Read more: How China built its health surveillance system

In a statement provided after publication of this article, Alibaba said that ratings are provided by government, not the company, using Alipay as a platform. Referring to widespread references in Chinese media to an “Alipay health code,” the company said: “It is marketing language used for promoting usage. In reality, these are not Alipay-issued health codes, but rather are issued by governments.”

By Feb. 20, Alipay boasted that platforms it had helped develop were already in use in over 100 cities, including all cities in Zhejiang, Sichuan, and Hainan, as well as Chongqing.

But national implementation doesn’t mean a unified national system—instead, each participating city is launching a local version of the system, creating a fragmented landscape resembling local social credit system pilots. Some have versions of Alipay’s system, some have local apps—and others have both. While online tracking ended Hangzhou’s total lockdown, many other cities have not revised quarantine rules to reflect new online systems.

How QR code systems work

As of Feb. 25, sources on the ground described very limited implementation outside Alipay’s home province of Zhejiang, ranging from paper-based lockdown in Shanghai to laxly enforced digital checkpoints in Shenzhen. Talking to locals in cities that have adopted health passport systems, TechNode saw its limits: the app alone does nothing without human-based enforcement and public compliance, and few cities outside Zhejiang have overcome these human challenges.

The system shows both how much is possible with high-tech surveillance—and how much human input is required to make such systems work.

To register, individuals provide their name, ID number, phone number. The health-rating platform, asks a series of questions, including physical health condition and whether the individual has traveled to virus-hit areas or has come into contact with infected cases, to produce an initial rating. These ratings are reported to change, likely informed by where the user has checked in and new reports of infections.

According to Hangzhou rules, residents with a green code are allowed to move around the city freely. Yellow means a seven-day quarantine is required, and red requires a 14-day quarantine. Some versions adopt a slightly different color-coding system, but the general idea is the same—to track mobility and regulate it based on risk assessments. Though the questionnaires record self-reported information, public data is used for verification purposes.

Internet users have questioned the way the system analyzes health and travel data. In numerous accounts on microblogging platform Weibo, netizens said people living in the same household were given different color codes even though they had been isolated together for weeks.

Others have expressed frustration with unpredictability, saying they were initially given a green code only to have it change to red after a few days. The colors are dynamic, and some people taking what they believe to be adequate measures to protect themselves while outdoors have had their mobility limited after their code changed color.

While Alipay’s version is associated with a State Council project, local governments are not required to adopt it. WeChat operator Tencent is working with the State Information Center to develop similar QR code-passed health passports.

Tencent’s version, called “Tencent Healthcare Code,” is already available in provinces including Guangdong, Sichuan, and Yunnan.

While the system has the potential to bring a semblance of normal life back to places that have been locked down for weeks due to the outbreak, to create a surveillance system capable of tracking 1.4 billion people everywhere they go comes at great challenges and costs.

To enter market, scan QR code

Uny Cao, a resident of Hangzhou, says that he scans twice a day—once when he goes to the vegetable market, and once when he returns home. Getting on the subway, riding a bus, or going to a park would mean more scans, so he’s chosen to limit these behaviors. Many also avoid borrowing share bikes, reasoning that the apps may share data with the Health Code:

“A few days ago, they found a new case in City North. Rumor spread that if you have rented a shared bike in that region, your code might get a downgrade,” he said. “So for those few days, I avoided renting shared bikes, in case they discover a new patient in my area.”

According to our observations, there is no place that enforces the health passport system as rigorously as in Zhejiang.

Regular scans both track and shape behavior. Sources told TechNode that citizens are required to show their code to be scanned when entering supermarkets and residential areas as well as getting on the subway and buses.

For Hangzhou residents, the inconveniences are a small price for something like normal life—for the ten days before the app launched, the city was forced to stay indoors except for short trips to buy food every other day. Since the code system came in, residents have been allowed to leave their homes and even to drive to other cities.

Even here, enthusiasm has its limits: While apartment buildings and food markets appear to be rigorously enforcing the rules, TechNode correspondents have walked into banks past napping checkpoint guards. Restaurants and smaller shops are starting to re-open without check-in systems.

The Hangzhou version of the mini-app, which the national version will reportedly be based on, allows non-Hangzhou residents and foreigners to register. Other places such as Shanghai and Shenzhen’s platform only allows residents to apply for a pass.

The Hangzhou health passport works for long-distance travel. When a TechNode correspondent traveled from Shanghai to Hangzhou, train station staff checked travelers’ health codes and wrote down their ID numbers. Travelers who had applied for codes outside of Hangzhou had no problems entering the city.

Mileage may vary

Beyond Hangzhou, enforcement can be more lax. In Jinhua, a city in Zhejiang 180 kilometers south of Hangzhou, a 25-year-old city resident told TechNode that she only needs to use the system when taking public transport. Her local supermarkets and residential community do not check the color of her QR code when she leaves her apartment. The system is enforced more stringently for out-of-towners, she said.

In a rural area, quarantine guards suggested a TechNode correspondent write down an ID number on a piece of paper to save time registering with a local version of the color codes mini-app.

But other cities can enforce non-app limits far more strictly, suggesting that they do not fully trust the app: A resident in the eastern Chinese city of Ningbo says there are checkpoints set up at community complexes and supermarkets. People are being asked to show, but not scan, their QR code at public places. On top of enforcing the new health code system at the community level, the previous lockdown rules still apply, the Ningbo resident said. In her apartment compound, residents are required to show the QR code at the entrance of the complex and still adhere to the rule that every household can only send one person out every two days.

The source also said her relative purposely left out the fact that he just came back from Wuhan when filling out the questionnaire. The police called days later and ask why he didn’t report it. They found the license plate under his name had been in Wuhan recently.

For people that have returned to their work, they have to show the QR code when leaving the apartment complex and also show a document from their employer that permits them to return to work.

Active but unused

TechNode sources described health passport systems that were implemented either spottily or not at all. In some places, including Shanghai, Beijing, and central China’s Hubei, the worst-hit province in the country, apps were superseded by strict offline measures; in others, such as Guangdong, quarantine appears to be lax.

More than a week after launching a track-everything health code system, Shanghai is still very much relying on paper records to enforce a 14-day quarantine on all new arrivals. Shanghai launched health passports as a new feature within its pre-existing “Health Cloud” mini-app on Feb. 17, accessible on Alipay and WeChat. But TechNode correspondents could not find a place to scan the app inside the city, finding checkpoints at office buildings and apartment complexes relying on paper records and paper cards or stickers to identify approved residents or workers.

In Shenzhen, the headquarter of internet giant Tencent, sources say that the health code system has been mostly ignored as the city hurries to get back to work.

Henk Werner, head of Shenzhen-based hardware incubator Trouble Maker, told TechNode that he and his friends had not bothered to register for the local version unless they wanted to take the subway. Residents are being asked to show QR codes at places like the parking lot of an apartment complex, but found it possible to bypass the checkpoint. Another source in Shenzhen says she hasn’t bothered to register—and that she’s going to work by taxi every day with a paper pass.

The central city of Xi’an has used a more limited pass system that requires scan check-ins but does not display a color code for about a week. Graduate student Liu Weiqi and TechNode editor Wang Boyuan both described checkpoints at the entrances to apartment compounds, but saw mixed use of the app. While Wang saw people using the app to enter his apartment compound, Liu made a trip to the market by bus on Feb. 25, and found that in practice he was registered on paper records everywhere but the market. On Feb. 25, the city announced that it is adopting a version of Alipay’s color code-based pass app.

A source in Chengdu said even though the city implemented a health passport on Feb. 21, it’s not enforced. Residents can go out without being asked to show the code. She said it’s probably because the area she lives in is mostly locals rather than out-of-towners, who are seen as being a higher risk.

At the epicenter of the outbreak, attempts to roll out the health check system have also had limited effect, simply because no one is going out to be checked. Earlier this week Wuhan, the city at the epicenter of the Covid-19 outbreak, launched a Tencent version of the health passport. The local government now recommends residents who need to leave their apartment complex for valid reasons to apply for the pass.

Wu Chuan, a 26-year-old resident of Yichang, a city in Hubei that is approximately a four-hour drive from Wuhan, told TechNode he hasn’t stepped out of his home for close to a month and wasn’t aware of any health passport platform in Hubei.

The city has a strictly enforced health-reporting system that requires citizens to fill out an application if they plan to leave the community complex. Without official approval, they’re forbidden to do so. Wu said the health passport system does not seem to have much use in his city because, unlike Hangzhou and other metropoles that actually allow people out and go about their usual activities, it is still under lockdown.

Suizhou, a city 180 kilometers northeast of Wuhan, has also begun implementing a health passport system. People with green codes will need to have their temperatures checked before being allowed through checkpoints. Those with yellow and red codes will not be permitted to pass. The system is not yet mandatory and a resident of the city told TechNode that she is still not allowed to leave her residential community.

Big data, huge payroll

It is unclear whether the implementation will improve after the launch of the national version of the health code this week. Although it is a standardized system across the country, according to Alipay, local governments have the liberty to decide whether they want to adopt the version of not.

In order for the system to work, cities need to deploy checkpoints on highways and roads, on public transportation, and apartment complexes—which requires tremendous manpower to operate. Then they need to supervise these guards closely enough to make sure they do the work.

Hangzhou under the watchful eye of an app shows us what an extreme version of mass surveillance might look like. But it also shows how far we are from that world—it takes a lot more than the click of a button to know where people are.

This article was edited Feb. 26 to include comment from Alibaba.

Chinese consumers have made few e-commerce purchases during the first three weeks of China’s battle with Covid-19, Alibaba officials said during its quarterly earnings call on Feb. 13, during which it forecasted slower or negative growth in its China retail and local services businesses during the current quarter as a result. With takeout food orders also affected, the only exception is grocery deliveries.

Alibaba was the first major e-commerce platform to describe trends in online consumption during the virus period. Rivals JD and Pinduoduo are likely facing similar challenges. Their difficulties, however, pale compared to much brick and mortar retail. Nearly all non-essential physical stores are closed indefinitely. 

Millions of people confined to their homes might seem like a golden opportunity for online platforms to make sales. But in fact, the crisis has upended the momentum of China’s digital economy, depressing sales and sending many consumers back to local markets.

Supply-side difficulties

Alibaba said that supply-side disruptions accounted for much of the decline, as many merchants on its online marketplaces were not able to do business under quarantine conditions. Disruptions to logistics further affected business, the company said, observing that “significant numbers of packages were not able to be delivered on time.” Company executives added, “The demand is there, but the means of production have been affected.”

However, customers were not interested in buying nonessentials such as clothing and electronics during the height of the epidemic, the company said, normally among the top-selling categories on its marketplaces. It predicted a slow return to normal business, noting that many workers across China are still in their hometowns and face difficulty returning. 

E-commerce marketplaces have been dysfunctional during the quarantine period. Many listed products warn halfway through a product description that the seller will not ship orders for weeks, while orders that are shipped can get stuck in logistics company warehouses. A bag of coffee bought on Tmall on Feb. 6 has spent eight days in two Hangzhou warehouses, according to the app’s tracking information. 

Deliveries have had to contend not only with short-staffed companies, but a patchwork of quarantine regulations and checkpoints which greatly limit inter-city travel. Many cities, towns, and villages have declared themselves closed to outsiders. E-commerce platform Pinduoduo allowed merchants to delay delivery of goods ordered as early as Jan. 17 until Feb. 12, a three-week wait that reflects the limits of China’s logistics sector during this crisis.

In a statement, Alibaba competitor JD claimed that its in-house logistics network gave it a competitive advantage in fulfilling orders, but conceded that “delays are expected.” 

Consumers stock up on basics

What people have been buying are household necessities. Both data and on the ground observations suggest that consumers stuck at home have been doing a lot more cooking, and buying weeks’ worth of vegetables and other household supplies at once. Online services appear to have won some of this traffic, but brick and mortar vegetable markets have also played a major role. 

Both Alibaba and JD described robust growth in orders for groceries and other essentials compared with the same holiday period last year. JD said that orders for food products on its platform grew 154% compared with a similar period following last Chinese New Year (which follows the lunar calendar), with rice and wheat products selling a respective 5.4 and 4.7 times more. 

Alibaba CEO Daniel Zhang said on the call that the crisis is bringing in new customers for food and household supplies. “We’re seeing this epidemic cause many newly-online users in lower-tier cities and less-developed cities to begin to purchase daily necessities, which is a very good sign for the future,” he said.

Zhang described “fairly rapid growth” in these categories, noting that part of the growth was driven by deliveries from nearby shops. New retail grocery market Hema, also known as Freshippo, he said, saw increases in orders but also had difficulty making deliveries because of staffing issues. 

However, the crisis has also demonstrated the resilience and popularity of local vegetable markets. TechNode reporters in smaller cities saw people rush to these markets during the early days of quarantine to stock up. Even as quarantine measures intensified and people avoided, or were banned from, leaving their homes, they continued to buy vegetables from these markets. 

In Zhangjiagang, a modestly sized city of 1.3 million in eastern Jiangsu province, local merchants organized deliveries using WeChat groups populated by residents of neighborhoods and housing compounds. A vegetable seller at the Zhangjiagang East Wet Market told TechNode that her retail business was better than usual, although the gains were offset by the loss of restaurant trade. “I think now is the time we can really serve the people,” said another. While Shanghai has ordered most stores to remain closed, vegetable markets and supermarkets are exempt, along with pharmacies and other medical services. 

In a small city in eastern Zhejiang province where local authorities banned residents from leaving their homes, they made an exception for visits to the vegetable markets. Initially, the system relied on paper ration tickets, but on Feb. 13 these were replaced with a WeChat mini app. Residents are required to apply for approval to go outside based on a risk factors survey and to scan a QR code to report each trip to the market.

A Meituan delivery driver in the Zhangjiagang market told TechNode that he was seeing fewer overall orders than usual during the period despite the uptick in grocery deliveries.

Perfect storm

E-commerce platforms face a larger challenge than getting parcels through: keeping their merchants in business.

The timing of the quarantine measures maximized their effect on the economy: beginning as China celebrated its most important annual holiday, they caught many businesses while they were closed for a long holiday. In US terms, it’s as though Christmas Day lasted through the middle of January—only the bare minimum of businesses are open.

While e-commerce platforms have experienced disruptions, many of the merchants who populate online marketplaces have been completely closed for weeks. Without revenue, many small merchants are struggling to survive. In the face of merchant mass extinction, e-commerce marketplaces will not be able to recover supply for a long time.

They appear to be prioritizing medium-term measures to help merchants stay afloat, including subsidized loans.

E-commerce has taken a big hit from the crisis, but it could still be a long-term winner. The operational difficulties of the past few weeks give them a head start over brick and mortar rivals, who are in most cases still closed. If e-commerce can recover faster—or if an extended crisis drives alternatives into bankruptcy—they could have a clear field for rapid growth ahead.

Editor’s note: This post on tech and the coronavirus crisis originally appeared in our members’ only weekly newsletter. Sign up so you don’t miss the next one.

Over the past few weeks, novel coronavirus has transformed life across China. 

When I wrote about the ongoing epidemic last week, it still seemed possible that it would pass within a week or two, brought under containment as the Chinese public took precautions. It is now clear that we are talking months.

Bottom line: The coronavirus epidemic, and quarantine measures, will be the main news drivers for a long time. People will be staying home as voluntary and some mandatory restrictions on movement are in place throughout the country. So far, restrictions are only increasing. 

Watch what happens as businesses attempt to start work on Monday. And don’t miss the story beyond Beijing, Shanghai, and the Greater Bay Area cities.

War footing: Over the past week, local governments have deployed much stricter quarantines, with many areas moving from voluntary to mandatory measures as the country declares a “People’s War” on the coronavirus. The effects reach far beyond the city of Wuhan and Hubei province, which has been under quarantine since Jan. 23-24. The country’s largest “tier one” cities keep public transport open, and a degree of normal life continues. In Beijing, Shanghai, and Shenzhen, however, almost all residential areas are guarded by manned checkpoints. Most do not allow non-residents to enter. 

Much of China’s population is under a form of lockdown in smaller cities, towns, and villages. People can leave these places to return to homes in major cities, and deliveries still arrive, but life is severely restricted.

Trains still run, and the tier-one cities so far allow people to return. TechNode received a notice from the Shanghai government requiring returnees from seven cities, including Shenzhen, to register with local authorities and report their temperature every day for four days. 

In a small city in hard-hit Zhejiang province, my household has been issued ration cards for going outside. One person from the house is allowed outside once every two days to buy food. Zhejiang has the largest number of coronavirus cases outside of Hubei, which is under full quarantine. Contacts in small cities and villages across the country report barricade and mandatory registration or quarantine for new arrivals. More people than usual are in places like these, as many have not returned after spending the Chinese New Year in hometowns.

Travel plans are even hard to make as people don’t know whether they are allowed to enter and leave cities. In Jiangsu province, TechNode reporter Shi Jiayi says many people believe the city is closed to outsiders. Weibo users have posted photos of highway signs warning that anyone who leaves will be placed under 14-day quarantine upon returning. However, notices posted online appear to require only that new arrivals submit to a temperature check and register their presence with the government.

Of course, the greatest effects are in Hubei itself, and especially Wuhan. Later, we will bring you a full translation of a fantastic piece of Chinese-language reporting from Wuhan from GQ Reports on the coronavirus. For further reading, turn to the New York Review of Books, where TechNode reporter Lavender Au has published an essay about her experiences under quarantine in the Hubei city of Shiyan.

Back to work? Most businesses remained shut or relied on remote work over the past week. Starting Monday, businesses in Shanghai can open their offices. Companies will reopen but what this looks like is highly uncertain. Train schedules across the country are severely reduced, suggesting that many who went home for the holiday are not returning to major cities yet. But this week may give us our first look at “normalcy” under quarantine conditions.

Study at home: Unlike offices, schools are shuttered indefinitely. But children are returning to study earlier than usual through online classes. This is the world’s largest-ever experiment in online education, and we’ll learn a lot about how it works. Students, naturally, hate the app (in Chinese), and flooded its page on app stores with one-star reviews.

Outside the fifth ring: The most draconian isolation measures are happening “outside the fifth ring.” Most of China’s population lives in this less cosmopolitan world, and these areas have grown faster than the national average in recent years, driving the growth of companies like Pinduoduo and Kuaishou. Expect mixed effects from the differential enforcement of quarantines: being stuck at home may accelerate adoption of online services, and the kids who went to Shanghai for work may pass some urban habits to their hometown relatives during the extra-long period home. But the economic damage may be much greater in small cities and rural areas, limiting growth. 

Alibaba singled out—again: One major tech company lives outside the fifth ring: Alibaba, based in wealthy, but lower-tier Hangzhou. Hangzhou is under especially intense quarantine measures this week—so Alibaba’s headquarters may suffer more than its rivals. But Alibaba has been through worse. Taobao launched while the company was under quarantine for SARS (in Chinese), after a staff member contracted it at the Canton Trade Fare. 

Editor’s note: This post on tech and the coronavirus crisis originally appeared in our members’ only weekly newsletter. Sign up so you don’t miss the next one. Additional contributions by Emma Lee and Lavender Au.

It’s been a rough week in China. An epidemic like the coronavirus outbreak currently centered on Wuhan would have been a challenge any time. But an epidemic emerging just as millions were traveling home for the Chinese New Year complicated both containment and efforts to move much-needed supplies.

At TechNode, we’re safe, and remaining calm but cautious. The Chinese public has largely heeded calls to avoid visiting relatives—an essential part of the new year in normal times. These are not normal times. 

The holiday was extended to keep people at home. Across China, it appears, every housing compound or village has a manned checkpoint challenging visitors. In some cases, visitors can pass after a temperature check; in others, they turn all outsiders away. As of Monday morning, authorities appear to be intensifying calls for residents to stay inside both in the quarantine area and across China.

Last time China faced a similar challenge—SARS—the Chinese tech scene was in its infancy. What does the coronavirus mean for tech? And what does tech mean for public health? 

Bottom line: Whether you’re in China or overseas, stay calm, wash your hands regularly, and avoid crowds if there are reports of infections in your area. An extended disruption will have lasting effects on the Chinese economy. Depressed spending could be the last straw for businesses that struggled through capital winter. On the other hand, emerging online services like telemedicine and online education could see pickup as users—and especially school-aged children—are stuck at home.

Markets down: Share prices are down in Asian markets. The holiday extension means much of the Chinese economy remains shut down, as companies kept offices closed. The whole city of Wuhan, and much of the surrounding region, is under indefinite quarantine, removing a supply chain lynchpin and emerging tech hub. 

So much for capital spring? As this year began, the tech majors went on a fundraising flurry driven by buoyant share prices, suggesting the end was in sight for the sector’s long capital winter. If capital scarcity returns, the position of already-struggling companies like social e-commerce platform Xiaohongshu and, especially, travel site Mafengwo only gets worse. TechNode contributor Michael Norris says the hardest hit could be travel-oriented companies like Meituan and US-listed Trip.com.

“I am less worried about the impact on China’s tech giants, and more worried about small and medium enterprises,” says Norris. “Things were already looking grim, and this latest public health crisis will dent business confidence.”

A SARS moment for online services? When e-commerce was getting started in China in 2003, the SARS crisis provided a turning point for adoption. People avoided shops and public places, and they turned to Taobao. Today, e-commerce is entrenched, but a new generation of online services are on the threshold of acceptance. 

• Healthtech is the obvious winner: Ping’an, Alibaba, and JD all have telemedicine projects; company sources told TechNode that they saw heavy use this week.
• Online education: Companies like VIPKID have struggled to gain a foothold as user acquisition costs outstrip revenue. Many Chinese children would normally spend most of their holiday at private test prep courses and tutoring; with those shut down, edtech has a window of opportunity.
• Film: Cinema operators fear that coronavirus-prompted experiments in direct-to-streaming may herald the future, says TechNode correspondent Wei Sheng. Studios pulled plans for holiday premieres and sent films directly to streaming services. Bytedance released Comedy sequel “Lost In Russia” for free, while iQiyi and Tencent released HK remake “Enter the Fat Dragon” today.

AI finds applications: AI companies have been some of the most active corporate citizens in virus response, says TechNode correspondent Chris Udemans. Companies have scrambled to make their technology available to applications ranging from biotech to public health.

• Baidu has made RNA-folding algorithm LinearFold available.
• Alibaba has offered free access to AI computing tools.
• Qihoo 360, working with a company called NoSugarTech, has created an AI-driven public app that helps users identify whether they shared a train with someone infected.

As TechNode returns to work, we’ll be taking a look at some of these efforts in depth.

The biggest threat to privacy—gossipy officials: The epidemic also stress-tested emerging systems of online surveillance. It exposed a gaping hole: organizational culture. Across China, officials texted their friends and relatives sensitive information (in Chinese) about suspected and confirmed cases of coronavirus, including names, ID numbers, and CCTV footage. Badly implemented firewalls are one problem. But no amount of tech can solve privacy if users don’t understand or care what it means to keep data private.

Deliveries are working outside quarantine zone: From tier one megapolises to small towns, we’ve seen e-commerce and delivery services mostly return to normal. “The fact that so many people can get access to food, water, medications, and other essentials during a time of unpredictable demand is a testament to how sophisticated firms like Alibaba, JD, and Meituan have become,” says contributor Elliot Zaagman. 

“For all the hype around drones, AI, and automation, it is still real people who make this possible,” said Zaagman. Many low-paid delivery drivers forewent holiday travel to keep parcels moving. But urban centers are still relatively empty—with cities like Beijing restricting inbound travel, white collar workers returning over the next few weeks may prompt labor shortages at companies that rely on mass low-end jobs.

Popular N95 and other face masks have been in short supply both online and in stores, with e-commerce merchants promising delivery in weeks at best.

It’s another story in Hubei, however, says correspondent Lavender Au, under quarantine in the city of Shiyan. With private vehicles banned, the small city is relying on brick and mortar. Markets have remained fully stocked and surgical masks have been on the shelves in pharmacies. Disinfectant, however, has been out of stock for most of a week.

Wei Sheng had masks delivered to his sister in Wuhan itself, but an order for his parents in a smaller satellite city has been held up for days.

Social media spread awareness—and rumor: In the days leading up to the holiday, official media played down reports of the epidemic, making social media the prime vector for information. It certainly got the word out—face masks were sold out in central Shanghai on Jan. 21, and much of China spent the holiday glued to their feeds. But it’s also carried misinformation, encouraging ineffective precautions like gargling salt water. Tencent has set up a fact-checking website (in Chinese) to respond to some of these rumors. 

But a huge market isn’t on Douyin: Social media has its limits: on Jan. 21, nearly every young person in Shanghai wore a mask, while more vulnerable middle aged and older people mostly didn’t. Much early commentary was about the difficulty of persuading parents to take the virus seriously. Memes tried to reach this audience with masks Photoshopped onto images of Buddhas and Mao-era propaganda.

The power of traditional media: What actually got traction with the older and rural audience was the oldest of Chinese old media: official state news broadcasts, red banners (“To eat with others is to seek death. To visit relatives is to do harm to them.”), and shoe leather—many villages sent people out banging gongs and chanting rhymed slogans in dialect about staying home. To an older generation, this is what authority looks like—and it got people to take action. 

There’s a lesson here for marketers about over-relying on new media. Pinduoduo proved that there’s money to be made online in older and more rural markets. If you want to reach this market, it may pay to look beyond the smartphone.

Editor’s note: This post about Tencent investments originally appeared in our members’ only weekly newsletter, accompanying Elliot Zaagman’s analysis of Tencent’s global investment strategy published here. Sign up and read it first.

Tencent has an interesting investment strategy. In every sector except gaming, they spread their bets, usually taking only a 20% stake. However, as we discovered, that strategy still has room for variation. In preparation for Elliott Zaagman’s analysis of their investment strategy, we collected, cleaned, and visualized the publicly available data on how the tech major deploys its money.

One pattern was very clear: in relatively mature markets (US and India) they prefer to make a lot of small bets at the early stage. In immature markets (Southeast Asia and Africa), they go with larger players at later stages.

Our hypothesis: mature markets have already been won so it makes more sense to invest in smaller, but potentially disruptive companies. In immature markets, where they have less expertise and the market is still rapidly developing, it makes more sense to invest in companies who have already won or are about to. No matter which market, however, Tencent only likes making acquisitions in the gaming space, where it still garners the biggest proportion of revenue.

The data present is incomplete, though. We only included investments with publicly available funding data. Even then, we still don’t have exact figures on how much Tencent invested, no matter if they were led or followed-on. In addition, we don’t include the value of acquisitions, mostly of gaming companies (for gaming acquisitions, PC Gamer has a helpful overview). Elliott’s piece, the data he gathered and that we present below, is just one way of interpreting the data. If you have other interpretations, we’d be glad to hear them.

—John Artman, Editor in Chief

Editor’s note: This post originally appeared in our members’ only weekly newsletter. Sign up so you don’t miss the next one.

In my experience, if you want to get to the heart of a problem, it pays to focus on uncertainty. What don’t the experts know? What surprised them?

So when the new year got us thinking about the last decade and the decade ahead, I took the chance to ask the TechNode community about what surprised them, what they’re waiting to find out—and what they didn’t know when the 2010s began. 

The biggest themes that emerged were business models and #techwar. The last year has been hard on companies that have been putting off monetization—no matter how many users they have—and I heard a lot of questions about how far the financial carnage will go. 

Of course, geopolitics also became a big part of the story this year. As TechNode senior editor William Clegg put it, “politically charged tech news really went mainstream in 2019 and this brings suspense for what’s to come this year.” But very little coverage has managed to bridge the gap between politics and technical understanding of the issues the politics is about. I’ve seen the hunger for this in the runaway popularity of Stewart Randall’s SILICON series of deep-dives into China’s quest for IC autonomy.

What changed your view of China tech in 2019?

Yu Uny Cao, Zhejiang University Intellectual Property Exchange Center:

A couple of things.

One, China’s technology sector (chip design and manufacturing, communications, AI, to name a few) must stand on its own going forward, due to the sudden cooling of Sino-U.S. technology collaborations following the December 2018 Huawei case. 

Two, the October 24, 2019 Politburo group study of blockchain shows once again that development of technology is heavily guided by the government. And in this particular case, blockchain might arrive at a break-even price point faster because of China’s coming heavy investment in it.

Nicole Jao, TechNode: 

I was kind of surprised how determined China is in competing with the US in the tech front—that was kind of the undertone of a lot of the government’s moves in 2019, which were largely influenced and swayed by the US. For example, ever since Facebook announced plans for digital currency Libra, the People’s Bank of China can’t stop talking about digital currency. And this spirit is not only in blockchain/digital currency but also chip manufacturing, 5G, and AI. I guess it’s not unexpected, but they are more confident in competing with tech superpowers at every front.

Michael Norris, AgencyChina:

If I am honest, this has been a quiet year for China tech. The thing that strikes me this year is: we’re starting to see major players’ vulnerabilities exposed. Whether it’s Baidu’s falling ad revenue, Tencent’s video game regulatory quagmire, or Alibaba’s dipping profit margins, major players are dominant, but vulnerable. 

Wang Boyuan, TechNode: 

Nothing. Admit it. 2019 is a boring transitional year that is destined to be the dash between two milestones.

Li Li, BASF Venture Capital:

On Dec 30, 2019, China’s Agriculture Ministry said it plans to issue biosafety certificates to a domestically grown, genetically modified soybean crop and two corn crops. In the past, GM crops have not been allowed to grow in China on a commercial scale. In a country as big as China, such a signal will have profound influence on the industry.

John Artman, TechNode:

There was a real slowdown in funding starting early in the year. As the trade war got into full swing, Chinese VCs have become much more cautious in their investing. While there are big failures to point to (Ofo being the most salient), my sense is that venture capital money is waiting to see how things shake out between China and the US.

This was surprising to me because since 2017 there was tons of money pouring into not great ideas, especially in VR/AR and the sharing economy, and it seemed that the innovation boom-bust cycle would just continue. 2019 has shown that China’s investors do have a rational side.

Deborah Weinswig, Coresight Research

The bankruptcy of some tech companies in 2019, such as e-commerce startup Taojiji, suggests that burning cash to gain users/sustain growth is not going to work. Taojiji used cash subsidies and money rebates for distributors to gain 80 million MAU, and it lost over RMB 600 million (about $86 million) in the first half of 2019. The company eventually went bankrupt in December 2019. 

Emma Lee, TechNode: 

After the falls of former tech upstarts like ofo and Taojiji, China’s prevailing cash-for-market share expansion model is shattering as the capital winter continues. It’s a good lesson to be learned for other tech companies in building sustainable business models.

Jill Shen, TechNode: 

All kinds of layoffs happened in big tech companies, and some of them were done with cut-throat methods. It makes me rethink big Chinese tech companies. For me, they are no longer employers offering dream jobs with high pay and chances to learn. I will try to steer away from them.

James Hull, Hullx Capital: 

Meituan reaching profitability for two quarters in a row helped verify the local services business model. And the switch to “industrial internet” (enterprise services) is going to take a lot longer than many originally thought.

Wei Sheng, TechNode:

The rise of TikTok outside China. It is a sign that Chinese tech companies are able to expand their business into the cultural side of overseas markets, not only the hardware or tools for which they are better known. 

Lavender Au, TechNode: 

In 2019, I discovered low-speed electric vehicles, which woke me up from Tesla PR. I love the idea of mobilizing people in rural areas or small cities and enabling them to poodle around in mini cars.

Come 2020, I’m looking out for mentions of “bottom of the pyramid” markets from policymakers. Reporting from Beijing, it’s easy to forget that next serious wave of growth is going to come from third and fourth-tier China.

What are you in suspense about for 2020?

Michael Norris: 

I have some big doubts about:

• Whether Ctrip can effectively withstand Meituan’s continued push into travel
• Ant Financial’s rumoured IPO
• Pinduoduo’s ability to work out of its cash-for-growth funk

James Hull: 

Who will benefit the most from 5G: smartphones, networking tech, chip-makers, or content platforms? 

Tony Xu, TechNode: 

I’m in suspense about the fate of Bytedance’s short video app TikTok in overseas markets. I don’t think US lawmakers are going to let the potential risks posed by the platform slide, even after Bytedance moves to separate TikTok from its Chinese operations.

Bytedance probably won’t be willing to sell even part of the ownership of the app to a US firm. Completely cutting ties with China will also be very hard, with Bytedance still hiring domestically for the platform for the past few months.

Nicole Jao: 

Libra and China’s central bank-issued digital currency both rolling out this year.

What would you tell someone at the start of 2010 about China at the start of 2020?

Michael Norris: 

Bet big on China’s mobile shopping and gaming.

John Artman:

That’s an odd question that hurts my brain to think of the time logic loops.

In ten years, China’s urban centers will be some of the most futuristic human settlements. Not only can you order food easily, but getting a car in the middle of winter won’t be impossible anymore! In 2009, as an “enlightened” Westerner it was easy to look condescendingly at China for its “quaint” way of thinking of the world. In 2019, that kind of thinking is dangerously naive.

William Clegg, TechNode: 

Don’t get used to riding those yellow bikes. A lot of these convenient startup services aren’t going to last very long so enjoy them while you can!

James Hull: 

Back in 2009 people thought China couldn’t innovate and only copy. Whoops, how wrong was that? What assumptions like that do we have now?

Deborah Weinswig: 

Ten years ago, you might never imagine that a messaging app—WeChat—can change the way people use their phones and disrupt many industries, such as social media and e-commerce. Tech in ten years will bring about far more changes than this messaging app.

Carolyn Surh, TechNode: 

i need a whiskey and 3 hours.

Emma Lee: 

Forget about buying the best computer, everything is going to be integrated in your smartphone, from e-commerce, gaming, payment, social networking, etc. Start your own mobile-based project that addresses people’s everyday needs and invest in Bitcoin.

Wang Boyuan: 

Don’t spend money on fancy QQ numbers, because the company behind is going to chew you alive in the coming decade.

Eliza Gkritsi, TechNode: 

Since I have only been in China for the last year and a half, I don’t think I should tell them anything. To someone abroad, I would say that China has fully developed into its own universe, where different rules of economics apply.

Happy 2020!

Thanks for reading this column over the past year—it’s been a privilege to edit. If we’re missing something—or to tell me what you’re wondering about—write and demand some coverage from TechNode at < hello@technode.com >.

We get asked a lot what the difference is between China’s major tech hubs of Beijing and Shenzhen. Is Beijing or Shenzhen China’s Silicon Valley? Is Shenzhen really only about hardware? 

Last week, the team was in Shenzhen for the recent TechCrunch conference. This was a great chance to try to find out. I spent it asking everyone I met: “What is Shenzhen? Is it only all about hardware?”

I learned that Haidian really is China’s Silicon Valley—a tech hub that emerged from universities and concentrates basic research, the country’s biggest VCs, and most of its brand-name internet companies. Shenzhen is something the US doesn’t have—it’s built on factories the way Silicon Valley and Haidian are built on universities. 

The Chinese tech boom has built on this factory hub not only with more advanced products and manufacturing techniques but also, more importantly, e-commerce. By making the Chinese consumer the end point for most products, rather than container ships, e-commerce helped Shenzhen to outgrow its low-value export hub origins.

Bottom line: The Shenzhen hub reflects its factory roots—but factories are a good foundation for cutting-edge developments in fields including internet of things, industrial AI, and robotics. The city, however, is weak in basic research, education, software talent, and financing. The ambitious Greater Bay Area plan foresees a more Silicon Valley-like future, but don’t turn up your nose at manufacturing. The factories are a line to a future you can’t see from Palo Alto or Beijing.

The brand names: Looking at who’s headquartered in Shenzhen, there is certainly a hardware theme—with the huge exceptions of software conglomerate Tencent and financial services giant Ping’an. In no particular order, major companies with hardware roots include:

• Huawei (telecoms)
• ZTE (telecoms)
• DJI (drones)
• Aqara (smart home)

Ask someone in Shenzhen about Beijing, and a few ideas come up—basic research, branding, and “business model innovation.” It’s where you’ll find the most companies that compare well with US counterparts:

• Baidu (search, compare Google)
• Bytedance and Kuaishou (social media, compare Facebook and Twitter)
• Meituan and Didi (O2O services, compare Uber) 

The tinkerer’s Mecca: The 1980s foundation of the Shenzhen hub was small factories that produced basic electronic components—and the famous electronics market at Huaqiangbei, where those components are traded in a seemingly endless sea of small stalls. The most famous depiction of the vibe of the place is Strange Parts’ make-your-own iPhone video.

Corporate supply chains have long since moved on from the digital bazaar, and the marketplace itself has diversified into areas like wholesale electronics.

But Trouble Maker CEO Henk Werner told us that the market is still essential for startups’ hardware prototyping. Product designers at his hardware accelerator—located on the seventh floor of one of the market’s buildings—have access to two resources available nowhere else in the world: immediate access to parts for prototyping, and market knowledge not taught in electrical engineer programs about what’s available, what’s cost effective, and what will fit into actual production processes. Unsurprisingly, other hardware accelerators, including HAX, are also located in the market. (Readers interested in hardware accelerators should also check out Shenzhen Valley Ventures).

Mike Reed, Mechatronics Engineering Lead at HAX warned that going to the market isn’t always the right approach to prototyping. Sheer size makes it hard to find things, and it can be more effective to use a trusted middleman. It also focuses on standard components—for brand-name or specialty products, Reed said, the answer is, as for everyone else in China, still Taobao.

‘Hardware is software’: Factories are to Shenzhen what Stanford is to Silicon Valley—they still shape its character, but they’re not the whole story. Thomas Goletz, co-founder and CEO of tech community builder MGI, said that the factory hub has drawn in software talent as it matures:

Shenzhen is not hardware, it’s manufacturing. When we talk about manufacturing, we’re talking about e-commerce; when you talk e-commerce, you’re talking software.

At a provincial level, the government of Guangdong expects the e-commerce sector to be nearly twice as large as electronics and IT in its current five-year plan, at RMB 7.3 trillion (about $1 trillion), vs RMB 4 trillion.

Anthony Lawrance, founder of regional news platform Greater Bay Insights, said that regional and national policy is pushing tech into currently low-end factories. Instead of moving textile factories to Vietnam and Bangladesh, Lawrance said, policy-makers hope to keep industry in the region with upgrades to efficiency and value-added.

Additionally, Goletz said: “Hardware is software.” IoT, drones, and robotics are all driven by integrated software, and this software is often developed in Shenzhen. Werner said that companies like Aqara—whose products are sold as Beijing-based Xiaomi’s smart home line—and Tuya (headquartered in Hangzhou) are the future of Shenzhen. Rather than assembling other companies’ designs, these all-in-one firms design and produce complete IoT products lacking only a brand name, capturing far more of the profit. 

Nonindustrial giants: Shenzhen’s two biggest companies, Ping’an and Tencent, are not grounded in manufacturing, and Lawrance said that each has created a cluster of its own. Ping’an, originally an insurance company, has pivoted to fintech, he said; its fintech-focused incubator program is “churning out companies.” Tencent, he said, is concentrating AI talent in its own R&D, as well as co-sponsoring an AI park with the Zhuhai government. Chance Jiang, China CEO at collaborative product development platform Wikifactory, mentioned another Tencent-affiliated cluster in nearby Guangzhou, where software companies specialize developing mini-programs for Wechat (headquartered in the city).

Where are the universities?: Beijing’s tech hub spilled out of the south gate of Peking University; PKU and Qinghua remain key drivers of tech in the city, conducting basic research and fueling research-intensive business like computer vision (Mengvii, Sensetime) and the famous Beijing Microsoft Research Lab. But the whole province of Guangdong has only three national key universities—compared to Beijing’s 27—and none in Shenzhen. The government has tried to fill the gap with satellite campuses of international, Hong Kong, and top Chinese universities. But sources agreed that these do not draw top talent. 

A 2018 report on AI development by a Qinghua research institute found that Beijing dominates academic talent, with more than twice as many leading researchers as runner-up Xi’an. Shenzhen doesn’t even rate a mention in the report’s academic top ten (although the report does find that Huawei leads the corporate tables). 

Turmoil in Hong Kong, Lawrance said, could be an opportunity to shift resources across the border. All of the city’s top universities have Shenzhen campuses, and many students at the hardest-hit (and now closed for the semester) Chinese University are mainlanders and have evacuated to Shenzhen. 

If it can’t graduate research talent, the city also hopes to buy it—like in many Chinese city governments caught up in what local media call a “talent war,” Shenzhen’s pays people with advanced degrees to move to city—with subsidies ranging up to RMB 1.5 million for Phd holders, and higher for experienced researchers.

Financing: Shenzhen has a healthy VC network and its very own stock exchange, but many Shenzhen tech companies opt out. Jiang said that south Chinese entrepreneurs often prefer to bootstrap to medium size rather than trading equity for growth—the typical local tech firm, he said, is built around a sales opportunity and grows off revenue without ever going to VCs or the markets. A few strike a rich vein and grow big, but most are content at the middle.

From an official perspective, Lawrance said, this is a weakness—the state wants champions, not small-is-beautiful SMEs. Officials have laid out plans to encourage more companies to raise money for growth.

The Shenzhen VC world is smaller than Beijing’s—and nearly all USD funds with a China presence are in the capital—but some sources described VCs who have experience at companies like Huawei and are more patient on long hardware development times. Yongxi Li, investment manager at Tamarace Capital, told TechNode that: 

Beijing venture capital has a state-owned background, and likes heavy capital investment and rapid IPO listing. Shenzhen venture capital is looking forward to the development of intelligent manufacturing projects because of the developed manufacturing industry in the pearl river delta.

Other sources, however, said over Wechat that Shenzhen VCs could be even more impatient—many have individuals as limited partners, who demand returns on their money in as little within five to seven years.

What about the GBA?: Shenzhen is at the heart of one of Beijing’s favorite initiatives—the Greater Bay Area, meant to knit 11 cities and a population of 80 million into one border-spanning supercity. Policy details are thin, and mostly cover transportation infrastructure. But Lawrance said the plans speak to a very familiar question Shenzhen’s future: Is it only about hardware?

Shenzhen, he said, is getting expensive, and many factories have to move out. The question is whether they stay in the region—plans call for them to move to Dongguan and the suburbs of Guangzhou—or move out of China entirely. Policy-makers, Lawrance said, don’t want to follow the Silicon Valley path, which left hardware behind—they want to keep it while mastering software.

For now, Shenzhen’s tech hub exists on all levels of the value chain at once. But to keep moving up, it will need to solve the financing, research, and education problems—and to avoid losing its hardware edge, it will need to figure out how to square rising salaries and rents and low-value production. I don’t know if we can imagine it doing both. 

A version of this article first appeared in our members-only newsletter. Freely available on our site now, it soon won’t be. Become a member and make sure you don’t miss out.

A move to ban exports of US technology to Huawei is by far the most serious blow against the company yet. Key suppliers, including Google and ARM, have announced plans to suspend business with the company, and experts are speculating about the company’s survival. As the TechNode community gathered in Shanghai for our first Emerge conference, I had the chance to ask the $105 billion (in 2018 revenue) question: Can the company survive without US technology?

Bottom line: The consensus view is that losing access to US technology would mean Huawei is living on borrowed time. While the company can continue to produce present-day products indefinitely, it cannot design new microchips without access to critical architectures. This will leave the company’s products stuck with today’s designs, making the company increasingly uncompetitive if the ban lasts. The key unknown is whether it will last.

What’s banned: Huawei has been placed on the US “entity list,” declaring it to be “involved in activities contrary to the national security or foreign policy interests of the United States” and requiring companies to seek special licenses to sell it US technology.

• Speaking at Emerge, the New York Times’ Paul Mozur compared the list to “a death star that can destroy any company it is pointed at.”
• Key non-US companies, most significantly the UK’s ARM, have also announced plans to suspend business with Huawei because their use of US intellectual property and/or US-based R&D meets the enforcement standard of 25% US content.
• Germany’s Infineon, however, says that it will be able to continue supplying Huawei with most of its products.
• A March 15 executive order also clears the way for Huawei to be banned from supplying telecoms equipment in the United States, but its relatively small market share limits the effect of an imports ban.

Achilles’ semiconductors: What makes substitution impossible, Emerge attendees said, is semiconductors. Two key types of microchip architecture licenses are needed for all of Huawei’s main business lines.

• ARM’s CPU architectures are dominant in mobile devices and used in all HiSilicon CPU designs.
• Attendees told me that ARM is irreplaceable for high-end mobile devices
• Huawei’s semiconductor subsidiary HiSilicon holds a license from ARM for existing products and will be able to continue to use it. But Stewart Randall, head of electronics and embedded software at Shanghai-based consultancy Intralink, told TechNode that ARM is not enough to keep HiSilicon going: “For arm, yeh, but not for other bits of IP. Hundreds of different suppliers for an SoC [system on a chip].”
• Mozur predicted that under a protracted ban, smuggling and dummy purchasers will be used to evade controls.
• Some speculated that Huawei could reposition from high-end to mid- and low-end devices.
• Intel’s x86 architecture is similarly critical to servers and telecoms infrastructure.
• In an extreme case, some noted, the US could demand that foundries—mostly Taiwanese companies—stop manufacturing HiSilicon chips, citing US-designed machines and software.
• Over the long term, US threats to cut off semiconductors will further motivate Chinese efforts to achieve IC independence, but this goal is years or decades off.

Huawei OS? The loss of Google’s Android operating system is also a major challenge. However, Huawei says that it may be able to deploy aproprietary operating system by the end of 2019. Attendees were skeptical of a quick replacement—but did not see the Android loss as a death blow.

• This OS is rumored to be named Hongmeng. According to TechNode reporting, Huawei’s “next-generation OS” research goes back to at least 2016, and the project has a large team that includes several prominent Chinese OS experts. Chinese reports date Huawei OS work to 2012.
• Stewart Randall, head of electronics and embedded software at Shanghai-based consultancy Intralink, told TechNode that, at best, Huawei OS phones will be competitive only in China.
• Like Microsoft’s now-defunct Windows phone OS, Huawei will face ecosystem challenges owing to network effects.
• Google apps such as search, YouTube, and Gmail, while not relevant in the Chinese market, are beloved in Huawei’s European and Indian markets.
• With political support and subsidies, Huawei could probably overcome the ecosystem barrier in China—if it has chips to run its OS on.

Slow damage: If the ban remains in place for a long time, expect a whimper, not a bang.

• With some new chips already designed but not deployed, Huawei can update phones for some time.
• Randall estimated that a three-month ban would leave the company mostly unharmed.
• TechNode editor in chief John Artman warned, the company’s bottom line will quickly collapse without new products. As competitors release updates, the price of older phones falls quickly.
• Huawei is feeling some immediate pain as potential customers anticipate trouble: British carriers Vodafone and EE have already dropped Huawei phones from 5G launch plans, citing uncertainty associated with the bans.

Will it last? Huawei’s situation echoes the ZTE crisis from last year; when China’s second-largest telecoms equipment maker was placed on the US entity list, it was forced to shutter production lines during May-June 2018.

• The mood at Emerge was surprised. Observers expected the US to challenge Huawei’s market access, not its survival. Many suggest that the ban may be lifted after serving its purpose as trade war leverage.
• But Artman said that this time could be different. “ZTE was a great show of force, an amazing show of force, from the US side, but it hasn’t been the same kind of whipping boy as Huawei has. Huawei is the center of a lot of technical tension, because it’s a serious competitor in infrastructure to US companies and an alleged security threat.”
• Randall said: “If the ban continued we would see Huawei disappear as we know it today but it would be propped up.”

What’s next? American media report that the US government is considering both import and export bans on other Chinese companies, especially in surveillance and facial recognition.

• Bloomberg reports that five Chinese surveillance companies, including industry leader Hikvision, are in the crosshairs.
• However, it is not clear if these companies are as vulnerable as Huawei, writes the Wall Street Journal:

For Hikvision, it isn’t clear that the loss of access to American suppliers would deal a devastating blow. The company is a heavy user of chips designed by China’s HiSilicon, a unit of Huawei Technologies Co.However, the company does stand to lose access to more sophisticated machine-learning chips, like those made by Nvidia Corp., the Silicon Valley maker of graphics processing units, said Rex Wu, technology analyst at investment bank Jefferies. Such chips are required for more advanced surveillance techniques drawing on artificial intelligence, such as facial recognition technology, experts have said.

—Wall Street Journal

• DJI, the Shenzhen-based company that is the world’s largest drone maker, has also been named as a possible import ban target. Unlike Huawei, DJI has a large US market to lose.

Read more:

• CNET: Huawei ban: Full timeline on how and why its phones are under fire
• Intralink: The Huawei predicament: a problem for China and opportunity for others?
• The Verge: Huawei’s Android and Windows alternatives are destined for failure
• Frontline: Donald Trump’s Trade War

Additional reporting by Rachel Zhang.