China’s ban on under-18s playing video games for more than three hours per week made headlines far beyond the pages of those websites and newspapers that monitor Chinese technology regulations.

For those who have been watching closely, however, the move was not that surprising. China’s regulators launched a flurry of regulations over the summer, covering everything from working hours in the technology sector to the algorithms that tech companies use to recommend videos and other content to their customers.

But the crucial measures are strict new data laws that give the government more control of personal data and change how non-Chinese companies in particular process user data. These rules might be perceived as a threat to the country’s increased investment in research and development (R&D) to drive further advances in China’s tech sector. In fact, the new regulations are not an obstacle to the plan to establish China as a technology superpower, but are a vital part of it.

Source: Macro Keys - Key Macro Themes in China's 14th Five-Year Plan UBS Global Research, March 2021

According to the 14th Five-Year Plan, China plans to increase its R&D spending by approximately 7% each year between 2021 and 2025.

Five-year boost to tech R&D

“China has typically taken a wait-and-see approach to new industries,” says Tao Wang, UBS Head of Asia Economic and China Research. “They let the industry grow, let them innovate and then think about regulation when problems start to appear.”

That approach certainly benefited Chinese tech giants like Alibaba and Tencent, which both grew rapidly not only by rolling out wildly popular consumer experiences but also by understanding the value of data, especially in the creation of “super-apps” offering products such as mortgages. The Chinese state has also understood the power of data, using it to underpin everything from surveillance technology and digital social-security systems to the “digital renminbi”—China’s move to become the first large economy to introduce a digital currency.

China plans to keep pushing its technology forward. Since 2000, it has overtaken Germany and Japan to become the world’s second-biggest spender on R&D, behind only the United States. China has shed its reputation for beating its rivals in the rest of the world by making cheaper products and now aims to establish its own innovative, high-quality ones.

In March, China announced its 14th Five-Year Plan, which calls for an increase in R&D spending of at least seven percent every year until 2025. The spending will be concentrated on seven key areas: artificial intelligence (AI), quantum computing, semiconductors, biotechnology, brain science, clinical medicine, and space, sea and polar exploration.

However, Nicolas Gaudois, APAC Tech Strategist for UBS, says that R&D spending alone won’t be sufficient in all these areas. While China is a leader in AI, it trails the U.S. in semiconductor technology, and it will take more than increased investment to close the gap. He says: “You need an infrastructure and a mechanism to deploy capital that aligns with the right incentives. Some of the investments so far may have been more driven by abundance of capital than a more targeted approach. The approach also tends to generate competition between provinces, which may create inefficiencies.”

China’s answer to GDPR

China’s new regulatory push could be viewed as another brake on innovation, but that isn’t necessarily the case. Signs of a change in approach have been apparent since at least November 2020, when the Chinese government published draft regulations that led to the suspension of Ant Group’s planned initial public offering.

Ant Group, Alibaba’s fintech arm, has since been hit by regulatory moves to break up its Alipay payments app and split out the loans business into a separate app—with the resulting data being partly state-owned. Alipay has more than a billion users and in 2020 issued around 10 percent of China’s non-mortgage loans.

That paved the way for this summer’s legislative blitz. The new Personal Information Protection Law (PIPL), due to take effect in November, has caused particular concern for Western tech companies because it stipulates that data created in China cannot leave the country without government permission. Meanwhile the Data Security Law that came into effect in September says Chinese entities need government authorization before providing any China-based data to foreign judicial or law-enforcement agencies.

Those rules came as China’s Cyberspace Administration launched an investigation against a popular ride-hailing company over alleged non-compliance with data and network security rules, with some observers suggesting that regulators were seeking to make an example of the firm.

These moves are sometimes presented as a draconian crackdown, similar to the block on young gamers, but they could just as easily be viewed as the Chinese equivalent of data protection laws like the European Union’s GDPR. Jerry Liu, China Internet Equity Analyst at UBS, says: “The way to understand data regulation is in relation to the global trend where people realize the importance of data but see it’s being controlled by Internet companies, so regulators are setting rules for the companies and also moving toward data sovereignty.”

Rather than a brake on innovation, then, China’s new regulations fit with the country’s attempt to advance its status as a player in the global technology sector, while also placing guardrails to protect citizens from potential overreach by data-hungry businesses. The success of these moves will start to become clear over the coming months.

Views correct as at 3 September 2021.

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