Foreign suspicion is hemming in China Inc’s global rise

TEENS EVERYWHERE love lip-synching to TikTok. Parents may be less enamoured of the boppy music-video app, whose popularity has exploded of late. For different reasons, governments appear wary, too. In February TikTok paid a record $5.7m fine in America for illegally collecting data on users under the age of 13. This month an Indian court banned the app on the grounds that it abets sexual predators. Bangladesh and, briefly, Indonesia, have banned it in the past year, alleging it promotes porn.

TikTok is not the only social-media app to perturb regulators concerned about data privacy, fake news or dangerous content. But there is another reason for the attention: TikTok is Chinese. The angst surrounding its parent company, Bytedance, and China’s other tech titans is a measure of their rising global relevance. Five of the ten most popular apps used by Indians last year were Chinese. Two in five TikTok users live in India, Bytedance’s largest market outside China, ahead of America. Baidu, Alibaba and Tencent—technology behemoths collectively known as the BATs—hold stakes in 150 companies abroad, according to Abacus, a research arm of the South China Morning Post, a newspaper. Alibaba has 56 data centres overseas. Tencent owns 17.5% of Snap, creator of a popular American messaging app, and 7.5% of Spotify, a Swedish music-streaming service.

No firm has animated worries about China Inc’s overseas forays more than Huawei, its most successful global company. Governments worry that its telecoms gear might enable spying on behalf of the Chinese state (see article). Scrutiny of Huawei is understandable, given the strategic importance of 5G. But “the Huawei effect”, as Samm Sacks of New America, a think-tank in Washington, DC, calls it, is infecting internet and consumer-electronics firms hitherto viewed as innocuous, because their technologies were regarded as less important and their links to the Communist party looser.

In foreign eyes, both of these mitigating factors appear to be weakening. The BATs in particular have moved beyond their core businesses of internet search, e-commerce and gaming, respectively. They control and crunch flows of data, at home and abroad, and manage cloud-computing services. This allies them to the state-led “Made in China 2025” scheme to dominate advanced technologies such as artificial intelligence.

Meanwhile, a two-year-old security law compels firms to participate in intelligence-gathering when the party asks them to. Since November the police can enter the offices of any Chinese internet-services provider to copy data deemed relevant to cyber-security. Hard as it is to imagine Chinese companies refusing requests from their authoritarian government even in the absence of formal rules, these developments highlighted the risk. Now, observes Ms Sacks, “if you pair the words ‘China’ and ‘tech’, red flags go up”.

As a result, more Chinese acquisitions that involve the transfer of sensitive technologies are being scotched. Last summer America’s Congress beefed up the screening regime for foreign investments, making life harder for acquisitive firms from China. On April 1st Beijing Kunlun Tech, a gaming company, said that it was in talks with American government officials over its ownership of Grindr, a popular gay dating app that it acquired last year. The Committee on Foreign Investment in the United States (CFIUS), an American agency that vets foreign deals for national-security risks, has reportedly ordered it to sell. CFIUS fears, it is thought, that personal data submitted by the app’s users, which include messages, location and even HIV status, could be used by the Chinese government to blackmail American officials.

In a similar case this month PatientsLikeMe, which helps connect people suffering from the same illness, was reported to be looking for a buyer after CFIUS had forced iCarbonX, a Chinese health-data analytics firm backed by Tencent, to sell its majority stake in the American platform. Last year CFIUS blocked the $1.2bn purchase of MoneyGram, a money-transfer firm, by Ant Financial, an Alibaba affiliate, on national-security grounds. Investment by Chinese firms in America fell below $5bn last year, from $46bn in 2016, according to Rhodium Group, a consultancy.

Authorities are beginning to restrict not just Chinese companies’ investments, but their products. In 2017 American officials warned that those of DJI, a leading drone-maker, were probably sending data on critical infrastructure back to China’s government; the US Army barred DJI drones from its bases. In 2018 American government agencies were banned from using cameras made by Hikvision, the world’s biggest manufacturer of CCTV kit. Some large American funds have quietly sold their stakes in the firm, which also risks sanctions in America for supplying technology that aids repression in parts of China.

It is not just America picking on its chief geopolitical rival. Defence ministries in Australia and India have prohibited staff from using WeChat, Tencent’s messaging app. The Australian Strategic Policy Institute has urged the app’s 1.5m Australian users to beware of propaganda and censorship. In March India’s ruling Bharatiya Janata Party complained to the election commission that Bytedance’s social-media apps were interfering in elections. It wants to ban a Bytedance news aggregator called Helo. Fearing Chinese propaganda ahead of its own general election in 2020, Taiwan may ban Baidu’s iQIYI, called China’s Netflix, and stop Tencent from launching its own video-streaming service on the island (which China views as a part of its territory). Israel, where Chinese investors accounted for 12% of tech deals in the first nine months of 2018, is thinking of creating a CFIUS-like oversight body.

As China’s businesses push overseas, its all-powerful president, Xi Jinping, expects more loyalty at home. After the government nixed its popular six-year-old jokes app last year, Bytedance’s founder, Zhang Yiming, apologised publicly. The firm’s news app, Jinri Toutiao, has devoted a channel to party pronouncements. According to Reuters, a widespread app launched in February called “Study the Great Nation”—a little red book for the digital age—was built by Alibaba (which declined to comment). The firm has 200-odd Communist-party branches; 600 party members reportedly join its workforce yearly. A recent revelation by a state newspaper that Jack Ma, its boss, was a party member stunned outsiders, who viewed him as the embodiment of a market-driven China.

Chinese companies are doing “a lot of persuading” to show they have no political agenda, says William Chou, vice-chairman of the China practice at Deloitte, a consulting and accountancy firm. Alibaba and Tencent have spent lavishly on their foreign holdings, but would relish a bigger global footprint. Barely 10% of Alibaba’s revenues come from outside China.

In China’s “socialist market economy” it is hard to tell which firms are closer to the party, and so more deserving of suspicion. Assuming they are all an arm of the state, as some foreign politicians urge, carries its own risks. Blacklist too many Chinese firms and you hurt your own. China can retaliate by blocking access to the world’s biggest market. Even if it doesn’t, spurning Chinese advances deprives foreigners of opportunities. PatientsLikeMe hoped the iCarbonX tie-up would grant it access to Chinese machine-learning technology.

Treating all Chinese companies alike also underestimates the vibrancy of China’s private sector. Ms Sacks reckons that the new cyber-security laws may be a tacit recognition by the party that the BATs have grown powerful—more so, even, than some government ministries. If Mr Xi really wants Chinese firms to succeed abroad, he should cut them some slack at home.

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