Planet New Economy

Technology, Media and Telecoms

The Chinese government is introducing more assertive regulations to local internet companies as part of an effort to limit their dominance and ensure better living standards across society. In response, leading technology companies are adjusting their businesses and investing billions of renminbi into social projects, which could impact profits. The largest data center providers will also face pressure to source more renewable energy as the nation’s need for power-hungry data centers continues to rise.


Rising regulation

China introduced several new laws this year, including the Personal Information Protection Law on November 1, which gives Internet users and regulators more control over how Internet data is collected and used. Technology companies want to stay ahead of deepening regulations in areas that include social media and online gaming, and as a result will implement tighter controls over user engagement and interaction, as well as data privacy. The companies are also likely to explore the creation of new forms of online games and social interaction that are seen as healthier, or more productive for society.

Tech’s social investments

Leading Chinese tech companies are supporting the Chinese government’s focus on common prosperity via major investments to offer greater technology access and support to disadvantaged demographics. Internet giant Alibaba, for example, said on September 3 it is investing Rmb100 billion (USD15.62 billion) into 10 initiatives over five years that focus on job creation and life quality improvements, especially in lower tier cities and rural areas. CEO Daniel Zhang is personally overseeing these efforts. Rival company Tencent had earlier pledged to double its investments into social initiatives to Rmb100 billion.

Dropping fintech profitability

Several listed fintech companies have seen their valuations drop to very cheap levels (some had trailing P/E ratios of around 7x, as of late October 2021) due to concerns that regulatory tightening will hurt their profitability. In addition, while the desire of some fintech-linked companies to make big investments to support common prosperity could eventually lead to sizeable returns, over the coming year or two they could erode profitability. Such anticipated earnings drops had not (as of October 2021) been fully priced into stock valuations.

Data center growth

The ongoing demand for big data and cloud computing will drive further demand for data centers in China, but left unchecked the volume of electricity consumed by power-hungry data center and 5G towers could nearly quadruple by 2035, according to Greenpeace. In July, Beijing issued a three-year plan to sustainably build more data centers and raise the nation’s total compute from 120 exaflops in 2021 to 200 exaflops by 2023, while reducing their power usage. So, data center market leaders such as GDS, the telecom operators (China Telecom, China Unicom, China Mobile) and major users such as Alibaba and Tencent will need to shift from consuming electricity that is mostly sourced from coal to more renewable forms of energy, even while expanding data center volumes.

Automation’s rise

Automation will increasingly play a role in China over the coming five years, as a combination of self-driving ‘robot’ taxi cabs, cargo trucks and ‘last mile’ delivery vehicles are introduced to help meet rising consumer demand. Speaking at the recent UBS Disruptive Technology Summit 2021, the chief executive of a leading Chinese autonomous driving company estimated that USD1.1 trillion will be invested into robot taxis alone over the coming few years.

Governance

Most listed Chinese tech companies employ dual share structures, with their founders enjoying the majority of voting rights and thus effective control. In addition, minority shareholders have sometimes raised questions about whether the boards of some tech companies have sufficient independence from the founders. Questions around the governance of leading tech companies are likely to become more prominent, especially given the increasing regulatory scrutiny they are under, and potential drops in profitability.