THE CHINESE COMMUNIST PARTY ENTANGLES BIG TECH

In China, a national identity card is required for almost everything, from buying a train ticket, to opening a bank account to using an internet café.

They are also now part of a pioneering experiment in the use of facial recognition technology. In a scheme that started last year in the southern city of Guangzhou, the Chinese government is allowing users of WeChat to link their ID cards to the ubiquitous social media app created by tech titan Tencent.

By scanning their faces with the WeChat app, users can obtain a digital ID that they use to register for a variety of services. For Tencent, there is a further upside to the scheme: the owner of WeChat is becoming the repository for another vast store of data about Chinese citizens.

The pilot project, due to be rolled out around the country, highlights one of the most intriguing aspects of China’s headlong push into the world of artificial intelligence and other frontier technologies: the relationship between the Chinese Communist party and the country’s ambitious and enormous tech companies.

Even after four decades of market- based economic reforms, the party places a high priority on maintaining state control over the strategic uplands of the economy — from finance to energy and media.

While large private companies have emerged, the party has often looked with suspicion at high- profile entrepreneurs who might present a challenge to its hold on society. As part of a recent crackdown on a group of private companies, the chairman of insurance group Anbang, Wu Xiaohui, was sentenced to 18 years in jail for fraud.

Yet the high priority that has been given to becoming a leader in new technologies means that the party is — for now — placing a large bet on a small group of private sector companies such as Tencent, Baidu and Alibaba, whose founder Jack Ma is probably the only Chinese public figure whose global fame gets close to that of President Xi Jinping.

Given the party’s chequered history with the private sector, the global prominence of some of the big tech groups could become a source of considerable tension in the future, say observers.

However, as the WeChat-ID card program shows, the stakes on both sides are higher than ever before: the nominally private-sector tech companies are inextricably linked with the Chinese state and its security apparatus, and the authorities retain the upper hand in the relationship.

The tech groups, says Duncan Clark, chairman of consultancy BDA and author of Alibaba: The House That Jack Ma Built, “are increasingly co- opted into national policy.” They have even been assigned roles in government strategy documents, including a directive on AI that was published last year. “The party is still in charge and the party is going to use them,” he adds.

Close ties with Beijing mean that Chinese tech companies often appear to their international rivals as effective arms of the state — something that has on occasion attracted the attention of the Committee on Foreign Investment in the United States. And as one Beijing based lawyer puts it, US and European companies believe they are competing “not with a company, but with a country.”

Fast growing internet businesses like Tencent and Alibaba, as well as the likes of Xiaomi, the smartphone maker that listed this month, and ride-hailing app Didi Chuxing, have changed the way people in China work, pay and play. With their gleaming headquarters and asset- light models they bear no comparison to the sprawling monolithic state-owned enterprises.

If the more than 50,000 state- owned enterprises controlled by central government and employing more than 20 million people, according to OECD data, are symbolized by plants churning out steel for the price of a cabbage, the 2018 tech company is about turning data — nominally a free commodity — into cash. Its main asset are the employees, who are sweated assiduously: working “996” or 9 a. m. to 9 p. m., six days a week.

Today, China’s top nine tech companies, both listed and privately held, have a combined market value of around $ 1.5 trillion. Alibaba and Tencent, the biggest — and in many cases the financial taproots of China’s tech universe — generate billions of dollars of free cash flow.

But for all the surface differences, the new face of corporate China shares socialist characteristics with its state- owned forebears. Fraser Howie, a longtime follower of China’s markets and author of Red Capitalism, dubs them “state overseen enterprises.”

“Being non- state does not mean you are private,” he says. “It was always a blurred line and it’s become ever more so.” It is not a huge change, he adds, because the state-owned companies have operated in much the same way.

According to one former banker who now runs a tech start- up: “The government realizes you cannot just create monopolies through policies; you have to encourage them to be stronger themselves.”

He adds: “This is the only chance China has to truly excel and become [ home of ] worldclass companies.”

Homegrown tech groups have become an integral part of the modern, urban economy in China. Just as gig economies have sprung up in the west, seeded by the likes of Uber and Deliveroo, so Alibaba and Tencent have spawned a generation of self- employed, small- scale entrepreneurs: couriers and app developers. They have also given life to small- time merchants selling their goods on Alibaba’s shopping platform Taobao or wannabe stars singing or offering make-up tips via live streaming on platforms like Douyin.

A study last year by Renmin University’s School of Labour and Human Resources calculated that by this measure Taobao had created a total of almost 37 million jobs in China.

“If you look at [ units like] Alipay or WeChat Pay they are now systemically important to the China economy,” says Mr. Howie. “The private sector guys know the way they are going to survive and keep their duopolies is to play along with the state,” he adds. “You’ve got a pretty acquiescent set of billionaires there.”

Relations between the party and the private sector have always been sensitive, says Bruce Dickson, professor of political science and international affairs at George Washington University. From the 1990s, local officials tasked with promoting growth found ways to encourage small entrepreneurs in their areas — often one of the main sources of new jobs. Over time rhetoric and policy have gradually become more supportive.

However, the attitude towards the private sector began to shift with the financial crisis of 2008, when fear of bankruptcy among state-owned companies — and attendant loss of jobs — prompted the new mantra of “advance of the state, retreat of the private.”

“Now under [ Mr.] Xi, the party seems to [ be] moving back to more Leninist origins where it is not just keeping an eye but [is] deeply involved and guiding where the party wants to go,” says Prof. Dickson.

Beijing has several pressure points to exert control over the private tech groups. For one, all private companies — domestic and foreign — are obliged to have their own party committee. “This way a dialogue can be maintained — ‘unified leadership of the party’ in traditional jargon,” says Feng Xiang, professor of law at Tsinghua University. “This arrangement helps the party, which also means the state, to monitor what happens in private companies.

“In return [ they] can claim some kind of help from the government. It becomes a tradition that private companies and entrepreneurs are all dealing with government officials in their business. In a sense they grow up like that.”

As Beijing pushes ahead on AI and other technologies, it is working together with its appointed champions. For instance Baidu, Alibaba and Tencent — the BAT tech trinity — all have joint labs for research and development with government entities. Alibaba, as well as telecoms group Huawei, is working with local governments on smart city initiatives to keep traffic flowing and the streets crime-free courtesy of surveillance cameras.

Ties are further cemented by two-way financing flows. At Xiaomi’s initial public offering, six of the seven anchor investors were state-owned entities. Early last year, plans were circulated for the government to take a “golden share” in the three big tech companies. Although China Investment Corp., the sovereign wealth fund, already has a small stake in Alibaba, the broader idea of Beijing holding a controlling share appears to have run aground.

‘WHY WOULD THEY NEED TO?’ SHRUGS ONE INSIDER.

State funds are still washing up in the tech sphere. However, one tech lawyer says this is partly the result of surplus cash from state companies that is chasing better returns. China Money Network, which tracks these funds, counts more than 1,000 seeking to leverage up to Rmb5.3 trillion ($787 billion) in capital, equivalent to a third of all assets managed by the global

private equity and venture capital industry.

Various models are deployed: special investment vehicles; coinvested funds alongside professional private equity groups; and funds of funds. Many are targeting tech.

For its part, Beijing turned to its cash- rich tech groups when it wanted an $ 11.7 billion infusion for ailing telecoms carrier China Unicom last year.

The state can also pull in private sector resources. The most graphic example is the special economic zones and corridors dotted around the country as evidence of tech prowess. The newest and biggest, Xiongan New Area, is designed to showcase Mr. Xi’s vision of a state-led “digital city”. Alibaba and Tencent were the first among the anchor tenants to hang up their banners.

A third strand relates to rules and regulations. Across the globe regulators are grappling with a tech sector that is taking rapid strides into previously unimaginable areas: driverless cars, troves of personal data and an outpouring of unverified content.

But Beijing carries a heavier stick. It keeps the landscape broadly free of foreign competition: Facebook, Twitter and Google are all blocked. The great firewall also hands Beijing far greater control of the internet than western leaders could ever dream of: offending material, and sometimes whole apps, are swiftly removed and apologies are suitably abject.

Toutiao, the high- flying news feed and video platform, offered a stark example earlier this year when it was obliged to close a hu-

morous account on the grounds of vulgarity. Apologizing for “walking the wrong path”, founder Zhang Yiming offered a far humbler apology than that tendered by Facebook’s Mark Zuckerberg in the wake of the Cambridge Analytica scandal.

“We didn’t realize that technology has to be guided by the core values of socialism, so that it can be used to spread positive energy, meet the requirements of the times and respect public order and good customs,” Mr. Zhang wrote on an official Toutiao social media account.

For Mr. Clark, Toutiao “is a sign that if you stray you are going to be

made an example of but if you play ball you are going to get richer”.

It is not just about protecting morality. At various times private companies have been tapped to help on foreign exchange policy and to promote Beijing’s set pieces — such as the Belt and Road Initiative, now widely touted by tech heads such as Alibaba’s Mr. Ma.

“This is very different from the west,” says Tsinghua’s Prof. Feng. “Because the government can say to the private companies that a certain level of co- operation is legally required — it’s the law actually.”