Why China’s regulators are softening on its tech sector

So I was inspired after talking to Angela Huyue Zhang, a law professor in Hong Kong who’s coming to teach at the University of Southern California this fall, about her new book on interpreting the logic and patterns behind China’s tech regulations.

We talked about how the Chinese government almost always swings back and forth between regulating tech too much and not enough, how local governments have gone to great lengths to protect local tech companies, and why AI companies in China are receiving more government goodwill than other sectors today.

To learn more about Zhang’s fascinating interpretation of the tech regulations in China, read my story published today.

In this newsletter, I want to show you a particularly interesting part of the conversation we had, where Zhang expanded on how market overreactions to Chinese tech policies have become an integral part of the tech regulator’s toolbox today.

The capital markets, perpetually betting on whether tech companies are going to fare better or worse, are always looking for policy signals on whether China is going to start a new crackdown on certain technologies. As a result, they often overreact to every move by the Chinese government.

Zhang: “Investors are already very nervous. They see any sort of regulatory signal very negatively, which is what happened last December when a gaming regulator sent out a draft proposal to regulate and curb gaming activities. It just spooked the market. I mean, actually, that draft law is nothing particularly unusual. It’s quite similar to the previous draft circulated among the lawyers, and there are just a couple of provisions that need a little bit of clarity. But investors were just so panicked.”

That specific example saw nearly $80 billion wiped from the market value of China’s two top gaming companies. The drastic reaction actually forced China’s tech regulators to temporarily shelve the draft law to quell market pessimism. 

Zhang: If you look at previous crackdowns, the biggest [damage] that these firms receive is not in the form of a monetary fine. It is in the form of the [changing] market sentiment. 

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