Angela Huyue Zhang
HONG KONG – 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 signaled 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 abrupt 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 golden-share 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 toward 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 ride-hailing 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. Didi ignored the CAC’s advice, and raised $4.4 billion in its initial public offering in June 2021.
Within days, the CAC announced that it had launched an investigation into Didi. The regulatory pressure continued over the ensuing months, and Didi was ultimately driven to delist from the NYSE, sending its share price plummeting and triggering a global selloff of Chinese internet stocks. With a golden share in Didi, the government representative might have vetoed the firm’s initial decision to list on the NYSE, averting all the subsequent tumult.
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, including ByteDance (which owns Douyin and TikTok), the popular video app Kuaishou, the podcast firm Ximalaya, the artificial-intelligence start-up SenseTime, and the truck-hailing company Full Truck Alliance. 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 day-to-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. There is precedent for this. Though a CAC-backed entity has held a board seat at Weibo since 2020, the CAC imposed 44 fines on the platform, totaling just over $2 million, between January and November 2021. In December, the CAC summoned Weibo executives to impose another fine and reprimand them for their content-moderation failures, in what was apparently a deliberate attempt to inflict reputational damage. The firm’s stock fell by almost 10% on the day the new fine was announced.
Likewise, the CAC’s indirect investment in Full Truck Alliance did not spare the firm from a surprise cybersecurity review last July. The CAC’s move sent the company’s shares plunging, just two weeks after its IPO in New York.
Golden-share arrangements might serve the Chinese government’s interests, but those who believe they will protect tech firms from the costs of continued regulation are likely to be disappointed. And this is to say nothing of the risks of state ownership, such as the corruption and regulatory capture that have long plagued China’s bureaucracy. Far from saving China’s tech golden goose, golden-share arrangements are likely to tarnish it further.
Angela Huyue Zhang, a law professor, is Director of the Center for Chinese Law at the University of Hong Kong and the author of Chinese Antitrust Exceptionalism: How the Rise of China Challenges Global Regulation (Oxford University Press, 2021).
C: Project Syndicate