China’s golden tech grab
Hopes are rising that China’s embattled tech giants will finally get a reprieve from the severe legal and regulatory crackdown that has wiped out over $1.5 trillion of their shares’ value.
Amid mounting challenges to economic growth, some Chinese government officials have signalled a possible shift to a new strategy: the acquisition of a 1% equity stake — or a so-called golden share — in major tech firms. But will this approach really brighten the outlook for China’s tech industry?
A new approach is certainly needed. The authorities’ effort to discipline Chinese tech firms over the last 18 months has been clumsy and highly costly, featuring a raft of opaque and unpredictable regulations.
The suspension of Ant Group’s initial public offering in late 2020, the record antitrust fines imposed on Alibaba and Meituan, and the surprise cybersecurity investigation into Didi Chuxing all spooked investors and sent share prices tumbling.
China’s government now seems to hope that the goldenshare arrangement will give it the information and influence it craves while avoiding the economic costs of ham-fisted regulations.
A 1% equity stake would normally enable the state investor to appoint a director to the board, ensuring insider access to important corporate decisions and the power to veto them. This would go a long way towards assuaging government fears of the “disorderly expansion of capital.”
At the same time, China’s leaders apparently hope that the arrangement would help tech firms manage their regulatory risk, as it would enable them to ensure their alignment with the state’s agenda and policies.
Any disagreement would be handled internally at the firm, eliminating the need for the state to intervene after the fact and offering greater clarity and certainty to investors.
This might have helped the ridehailing giant Didi Chuxing. When the firm decided to list its shares on the New York Stock Exchange, China’s powerful Internet regulator, the Cyberspace Administration of China, advised it to conduct a cybersecurity review first.
The golden-share arrangement thus appears to be a win-win for the government and tech firms. And steps have already been taken in this direction. In April 2020, Weibo — a social-media platform with over 500 million active users — sold a 1% stake to an entity owned by the China Internet Investment Fund, which was established by the CAC and the Ministry of Finance in 2017.
Since then, the CIIF has invested in more than 40 Chinese tech firms.
While most of these investments do not appear to be golden-share arrangements, the CIIF or its affiliates have taken a board seat in at least two companies, Bytedance and Weibo.
But, when it comes to enabling firms to avoid regulatory hassles, this arrangement is hardly a silver bullet. For starters, the golden share empowers the state investor to veto only decisions that are deliberated by the board; it would have little to no impact on the company’s dayto-day operations. Yet those are the activities that regulation tends to target.
Approaches to issues like competition with rivals, treatment of employees and gig workers, the distribution of value among platform participants, and the collection, processing, and sharing of user data are unlikely to be vetted by the firm’s board. But they all fall within the ambit of regulation.
Moreover, regulatory powers in China are divided among a number of government departments and agencies, which often engage in fierce competition with one another. Direct or indirect ownership by one government department may do little to protect the firm from intervention by other government departments, especially if the ownership stake is held by a lower-tier government entity.
A regulatory body might even target a firm in which it has an ownership stake.