China offers tech truce as recession looms

With COVID-19 lockdowns and weaker global demand stalling its economy, China has pulled on two levers to reboot growth.

One is an old favorite – tipping more cash into infrastructure, including networks and cloud. The other is a U-turn: Officials are promising to dial back their war against tech.

Details of the cash splash are vague. A meeting of President Xi and economic planners last week called for another round of infrastructure investment to boost domestic demand and spur "high-quality development."

Figure 1: Internet regulator the Cyberspace Administration of China has called a meeting with tech bosses.
(Source: Reuters/Alamy Stock Photo)

They targeted sectors such as railways, water and energy as well as the digital economy, saying it was necessary to "build a new generation of supercomputing, cloud computing, artificial intelligence platforms, broadband networks and other facilities."

The government last ramped up infrastructure investment in April 2020 in response to the first wave of COVID-19, driving state-owned operators and local governments to accelerate spending on 5G, cloud and data centers (see China's 5G answer to COVID-19? Spend, spend, spend).

While the new capital projects are expected to spark economic activity, plenty of economists caution that after years of heavy spending the country has little need for more infrastructure and instead should try once again to stimulate consumer demand.

Economists also note that the spending will be funded by raising more government debt – another change of direction after some years of trying to reduce public borrowing.

Planning to hit pause

While it is preparing to prime the pump, Beijing has also signaled it is prepared to hit pause on its 18-month-long campaign against Big Tech.

The Internet regulator, the Cyberspace Administration of China, has called a meeting with leaders of tech companies some time this week, with sources telling Wall Street Journal reporters Friday that officials acknowledge the toll the punitive campaign has had on the sector.

There's no doubting the damage inflicted on what was until recently China's economic and jobs growth engine. As reported by The New York Times, companies shed thousands of jobs, many shut down, and revenue, profits and stock prices plummeted.

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Alibaba was hit with a $2.8 billion penalty, Meituan was fined $530 million, social media firm Weibo was penalized 44 times, rideshare operator Didi was banned from adding new customers and the online education sector all but disappeared overnight (see China tech clampdown now targets edutech and market abuses).

Tech stocks have all spiked on the news, with Alibaba up 16%, Tencent 17% and Meituan 16% since Friday.

There is a price for ending the war, however: Tech companies must take on the government as a 1% shareholder and allow it to take part in corporate decisions. That looks like something they will have to live with.

Whether this will repair the damage to business and consumer confidence and restore a culture of innovation and creativity, not to mention the many interrupted careers – that's another story.

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— Robert Clark, contributing editor, special to Light Reading