December 3, 2021

Xi Jinping’s Complicated Quest for the State-Corporate Technology Complex – The Diplomat

The relationship between the Chinese government and its private tech sector can appear mystifying. Beijing seems to be asserting more control over Chinese tech giants, for example, by cracking down on Alibaba and Tencent for growing too powerful. At the same time, the Chinese leadership recognizes that it must also allow some degree of independence for firms to be efficient and profitable.

To China’s leaders, this position is not paradoxical. As Xi Jinping recently remarked, “We encourage the development of private businesses. When they encounter difficulties [and] confusion arises,” the Chinese Communist Party (CCP) provides “guidance” so that “they can develop boldly and with confidence.”

What constitutes “difficulties” is up to the CCP to decide, and so are the methods for course correction when private firms are “confused.”

To put this idea into practice, the government is taking the carrot-and-stick approach. For example, in September 2020, the CCP Central Committee issued a document, signaling to private firms that they should “unswervingly follow the Party and devote themselves to development.” The following month, Xi personally intervened to block the $34 billion initial public offerings of Alibaba’s Ant Group, further tightening his grip on China’s private tech sector. Now, Ant is in talks with Chinese state-owned firms, which may result in a joint venture with access to Chinese consumer data.

Recent research from Georgetown University’s Center for Security and Emerging Technology (CSET) shows that alongside the more coercive measures, the government also uses financial incentives such as venture capital financing, tax incentives, and subsidies to ensure that private firms prioritize China’s technological goals. One government-sponsored group that distributes such incentives and facilitates public-private collaboration is the Artificial Intelligence Industry Alliance.

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The alliance has attracted hundreds of companies, including Baidu, Alibaba, and Tencent. But the distribution of power within the alliance is more telling: while state-backed members have fewer seats, they nearly dominate the alliance’s leadership and appear to influence its industry members. For example, China Aerospace Science and Industry Corporation, the alliance’s highest-ranking member, hosted a competition in 2018 to award companies with the best dual-use AI applications that can support China’s military-civil fusion strategy.

Prominent officials are betting that the alliance will help implement the ambitious New Generation Artificial Intelligence Development Plan that oversees China’s national AI strategies through 2030. But the government’s use of the alliance to meddle in China’s private sector AI industry is limited by the tension between government aims and market realities. For example, in December 2017, the government set specific product targets such as intelligent service robots and video image identification systems for advancing the AI industry. Yet many of the alliance’s AI-focused companies specialize in AI-enabled business solutions with better potential market growth, rather than in the state-backed, strategic AI products.

While the line between China’s public and private sector is increasingly blurred, observers should not mistake the controlled private sector as being equivalent to the public sector. The government distinguishes between them and tries to entice private investors to participate in government guidance funds: public-private investments used to support strategic industries such as semiconductors and photonics. The government provides financial incentives by contributing 20-30 percent of the fund’s target – and in some cases, forgoing interest payments and assuming private investors’ losses. A March 2021 CSET report found that some guidance funds are successfully raising money from private investors and investing in high-tech projects to help push China ahead in technology.

But despite the government’s enormous political and financial support, most guidance funds still have serious flaws, including challenges in raising and deploying capital, inefficiency caused by duplicated funds, poor management, nonstrategic investments, and failure to truly attract private capital.

It remains to be seen whether the Artificial Intelligence Industry Alliance and the guidance funds mechanism will successfully help China surpass the United States in advanced technology. China’s state-corporate complex may aid its strategic industry development. But the government’s pervasive intervention in China’s private sector has caused further inefficiencies; for example, bureaucrats’ participation in the guidance funds’ day-to-day operations has attracted corruption and bad investment decisions.

Whether or not the Chinese government’s efforts to steer the private sector toward desirable outcomes prove successful, the United States should not replicate China’s playbook. U.S. policymakers should instead consolidate America’s advantages in talent recruitment, higher education systems, and alliances with other democracies in order to maintain U.S. leadership in emerging technologies. At the same time, U.S. policymakers should not overlook the market-distorting industry policy that China’s government uses to increase market barriers for U.S. firms while supporting Chinese homegrown national champions.

There is no doubt that China has become a strategic competitor whose national strategies appear to threaten the free and open markets enjoyed by most of the world. However, China is not infallible; observers should take stock of the Chinese systems’ frictions and internal contradictions and continue to monitor the evolving relationship between the government and its private tech sector.

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