September 27, 2022

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China Sharpens Its Vision for the Digital Economy

China’s State Council published a blueprint on Jan. 12 for the development of the digital...

China’s State Council published a blueprint on Jan. 12 for the development of the digital economy that aims to increase the contribution of core digital economy industries to 10 percent of gross domestic product (GDP) by 2025. The document’s targets were drawn up in line with the country’s 14th Five-Year Plan that runs from 2021 to 2025, capturing China’s ambitions to boost its global competitiveness in advanced technologies such as semiconductors and artificial intelligence.

The plan defines the digital economy as a form of economic activity in which the key factor of production is data resources, the main carrier is the modern information network, and the principal driving force is the integration of information and communication technology as well as the digital transformation of all factors of production.

Expected growth in the digital economy’s share of GDP will be driven primarily by next-generation technologies like 6G internet and big data. According to the plan, China anticipates users of gigabit broadband, the current fastest internet connection speed, to increase from 6.4 million in 2020 to 60 million in 2025. Alongside promoting the commercial deployment and large-scale application of 5G, China will boost support for 6G research and development and aim to play a more central role in shaping international standards surrounding the nascent technology. 

The blueprint continues themes of self-sufficiency in areas such as semiconductors and highlights efforts to be made by China in accelerating “the construction of the information network infrastructure, and a national-level integrated big data center system coordinating computing power, algorithms, data, and application resources.” To promote “digital transformation,” large companies will also be encouraged to focus on the integration of new technologies such as 5G and artificial intelligence with China’s real economy.

Shortly after the State Council document was released, Chinese President Xi Jinping outlined his vision for the digital economy in an essay published on Jan. 15 in Qiushi, the Chinese Community Party’s (CCP’s) main theoretical journal. Xi called for improved regulation and governance of China’s digital economy to guard against its “unhealthy” development. He argued that the country should “cultivate a number of enterprises with international competitiveness, and leading ecological firms with control over industrial chains, to create world-class digital industry clusters,” focusing on key areas such as integrated circuits, displays, communications equipment and intelligent hardware. 

Xi notably called for regulation and standardization to address regulatory loopholes and prevent “monopolies and disorderly expansion of capital” in the tech industry. “In the course of rapid development,” he wrote, “China’s digital economy has also displayed some unhealthy and irregular seeds and trends that not only affect the healthy development of the digital economy, but violate laws and regulations and pose a threat to national economic and financial security.”

Xi’s Quishi essay places the government’s year-long antitrust crackdown on the nation’s tech giants into context within Xi’s larger plans for the development of the digital economy. In line with this vision, the State Council blueprint stated that it would explore establishing governance methods that are compatible with the “sustainable and healthy development of the digital economy,” as well as clarify the responsibilities of various state authorities in order to strengthen collaboration on regulatory oversight of the tech industry.

“Blockchain With Chinese Characteristics”

China’s Blockchain Services Network (BSN), a state-backed blockchain company, announced in January that it plans on launching infrastructure to enable the trading of nonfungible tokens (NFTs). NFT, a blockchain-based technology, allows users to stamp a certificate of authenticity on their unique digital products. The news was surprising to many observers because China banned public blockchains in 2021, citing fears that the pseudonymity offered on blockchains would enable fraud and money laundering. To address this, BSN will reportedly launch its NFT infrastructure on modified blockchains that will require verification of real user identities and create a backdoor for Chinese regulators.

Beijing’s historically negative treatment of decentralized cryptocurrencies should be distinguished from its active promotion of blockchain technology and government-backed digital currencies. While the Chinese government banned transactions using decentralized digital currencies like Bitcoin and Ethereum, it has been eager to promote the underlying blockchain technology. In 2021, blockchain was included in China’s 14th Five-Year Plan, labeled as a “key digital technology” along with artificial intelligence, big data and cloud computing. China’s central bank has also embraced centralized digital currencies, rolling out a digital currency often referred to as the “digital yuan.” 

NFTs, built on blockchain technology, exploded in popularity in 2021 with sales exceeding $40 billion. So far, NFT sales have been concentrated primarily in the digital art industry: Art house Bored Ape Yacht Club, for example, surpassed $1 billion in sales of NFTs on the Ethereum blockchain. Celebrities have also cashed in by selling NFTs of items ranging from Twitter founder Jack Dorsey’s first tweet to a sitcom featuring Snoop Dogg and the Harlem Globetrotters. Analysts have predicted use cases in other sectors: to safeguard the confidentiality of health records, or to help verify college diplomas.

Prior to BSN’s announcement, NFTs were regarded as a legal gray space. Though Chinese authorities never officially declared NFTs illegal, companies operating in the space sought to distance their product from the crypto-based NFTs in the rest of the world. Tencent, Alibaba and other tech giants quietly launched their own tokens in late 2021, labeling them “digital collectibles” rather than NFTs. Shortly after BSN’s announcement, online marketplace Taobao announced that it would launch its own NFT platform for digital artworks. Other companies have deemphasized the use of NFTs as investment products to assuage Beijing’s concerns with the financial volatility of crypto products. Alibaba and Tencent banned the reselling of NFTs on second-hand markets in an effort to stop price gouging.

Some commentators question the viability of China’s NFTs without crypto. In an interview with Protocol, Kelly Pu of Bain & Company noted the challenge of drawing a “clear line” between NFTs and crypto technology without compromising the underlying value proposition of NFTs, like pseudonymization and freedom from government-issued currencies. Unlike the rest of the world, NFTs and digital collectibles in China have been denominated in Chinese yuan rather than in cryptocurrencies. Still, Chinese consumers have demonstrated high demand for crypto-less NFTs, buying out 20,000 NFTs issued by the organizers of the 2022 Asian Games in Hangzhou in under a second. 

China’s treatment of NFTs and blockchain technology fits into a broader pattern of Beijing’s effort to build an “internet with Chinese characteristics.” Libertarian activists often tout blockchain as a tool for advancing privacy, free speech and freedom from government interference. China’s adaptation of blockchain and digital currencies to conform with CCP political imperatives cuts against that narrative and shows that Chinese regulators are able to thread the needle between cracking down and co-opting potentially subversive technology. 

Other News 

China Finalizes Rules Governing Use of Recommendation Algorithms

In an unprecedented move, China has finalized a regulation that governs the way technology companies can use recommendation algorithms. The provisions, which were first drafted last year, were published in their final version on Jan. 4 and take effect on March 1. They were issued jointly by the Cyberspace Administration of China, the Ministry of Industry and Information Technology, the Ministry of Public Security, and the State Administration for Market Regulation.

In essence, the new rules require companies that use algorithm-based recommendations in their services to offer more transparency on how they work and affect users. The regulation directs major platforms including Alibaba, Tencent, ByteDance and Meituan to “promote positive energy” and ensure that their algorithms are “for good.” Most notably, it requires firms to give users the choice to decline algorithmic recommendations and to allow them to select or delete tags that are used to power recommendation algorithms and suggest things to them. A separate provision prohibits algorithmic recommendation services that provide news information from pushing out fake news, while another bars tech companies from designing models that encourage users to engage in “excessive spending” or develop an addiction to the platform—a demand that seems at odds with the business models of many social media and e-commerce companies. 

Companies can be fined anywhere from 10,000 yuan to 100,000 yuan (between about $1,570 and $15,740) for violations of the rules. But enforcement of the algorithm regulation could invite conflict between regulators and tech companies, as it remains unclear what level of access the government can demand to these valuable and protected assets. Despite the seemingly sweeping reach of the provisions on paper, however, some observers argue that their impact may be less severe than anticipated since they only require opt-out rather than opt-in for recommendation services.

Nevertheless, China’s new rules represent one of the most advanced frameworks for regulating algorithms in the world to date. Many Western governments share China’s concerns about antitrust and data privacy and have sought to draft legislative proposals to contain the power of tech giants whose algorithms have been accused of recommending posts that promote hate speech and worsen political polarization. Unlike China, however, the U.S government’s ability to order private companies to remove certain types of content is limited by the First Amendment. 

Chinese Investment in U.S. Plane Maker Scrutinized for Potential National Security Risks

The Wall Street Journal published an exclusive report on Jan. 18 revealing that the FBI and the Committee on Foreign Investment in the United States (CFIUS) are investigating a Chinese investment in a U.S. aircraft startup following allegations of improper technology transfer to China. 

Icon Aircraft Inc. is a California-based company that produces a carbon-fiber plane with foldable wings capable of land and water takeoffs and landings. In a memo to CFIUS reviewed by the Wall Street Journal, American shareholders in Icon stated that the aircraft is designed for recreational use but could be modified to function as a militarized drone. The shareholders accused investor Shanghai Pudong Science and Technology Investment Co. of amassing a dominant stake in Icon and using it to hollow out the company and transfer its technology to China. 

CFIUS, an interagency panel that can recommend that the president block or unwind deals on national security grounds, began its review of the deal in late November 2021 after the American shareholders urged it to intervene, according to documents reviewed by the Wall Street Journal. The FBI has also reportedly initiated a separate probe into possible criminal violations related to the deal and the alleged transfer of technology. 

The CFIUS review underscores the U.S. government’s heightened scrutiny of Chinese investment in U.S. firms amid strained relations and ongoing technological competition between the two nations. The Biden administration is also closely reviewing Chinese technology companies’ dealings with U.S. consumers. Reuters reported on Jan. 18 that the Commerce Department’s Office of Intelligence and Security has launched a probe into e-commerce giant Alibaba’s cloud business to determine whether it poses a risk to U.S. national security. The focus of the probe is on how the company stores U.S. clients’ data, including personal information and intellectual property, and whether the Chinese government could gain access to it. 

6G Speed World Record Broken by Chinese Government-Backed Laboratory 

Chinese-government backed Purple Mountain Laboratories announced on Jan. 5 that it broke a world internet speed record, marking a breakthrough in 6G technology. Purple Mountain’s chief scientist, You Xiaohu, stated that the lab achieved a speed of 206.25 gigabits per second. If accurate, that would mark the world’s fastest real-time transmission for terahertz wireless communication, approximately 10 to 20 times faster than the average 5G transmission speed, and a major accomplishment in China’s bid for 6G dominance. 

6G wireless communication technology is the next standard for wireless communication technology currently under development, and the putative successor to 5G. According to the Institute of Electrical and Electronics Engineers, 6G could enable users to operate millions of connected devices seamlessly with low latency and high bandwidth, potentially upward of 100 times faster than 5G. 

Though 5G technology is still being rolled out, the United States and China have already begun competing to develop 6G technology. In a statement from October 2021, Evelyn Remaley, the acting administrator for the National Telecommunications and Information Administration, stated that the Biden administration is looking ahead to laying the groundwork for 6G. Earlier in April, Biden agreed with then-Japanese Prime Minister Yoshihide Suga to jointly invest $4.5 billion to develop 6G technology. 

China has also made major steps in advancing 6G development despite U.S. sanctions against the telecommunications company Huawei. In 2020, China launched into orbit what was described as the “world’s first 6G test satellite.” In 2021, according to the Tokyo-based Cyber Creative Institute, China filed 40.3 percent of international 6G patent filings, followed by the United States with 35.2 percent. While the sheer quantity of patent filings has been critiqued as an imperfect measure of a country’s technological innovation, China’s boom in patent applications points to a serious competitive threat for the United States. 

Commentary

Jacob Carpenter argues that China’s tech clampdown will stifle Chinese innovation and benefit the United States. 

Lei Wang predicts that China’s stock market will rebound in 2022 through the green energy sector rather than technology. 

David Ignatius criticizes Biden’s failure to advance the U.S. Innovation and Competition Act, aimed at improving American competitiveness in critical technologies, through the U.S. House of Representatives.

Jared McKinney and Peter Harris argue that Taiwan should destroy its chip infrastructure if China invades. 

Ginny Wilmerding points out that while China’s tech sector remains attractive for Chinese youth, tech firms face hiring challenges due to concerns around the “996” working hour system. 

Anjani Trivedi posits that CATL, the world’s largest electric vehicle battery maker, may fall victim to Beijing’s antitrust crackdown. 

Ian Bremmer predicts that digital space will become increasingly ungoverned as governments prove unwilling to bear the economic costs of cracking down on tech firms. 

Tetsushi Takahashi assesses corporate Japan’s fears that Prime Minister Fumio Kishida’s proposed economic security bill will impact trade with China. 

Shen Lu argues that China’s consumer tech economy will continue to flourish, with Beijing pouring more investment into “hard tech” as well as small and medium-sized tech companies.

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