China's Didi Crackdown Is All About Controlling Big Data
(Bloomberg) -- Shortly after Beijing’s shock cybersecurity probe into Didi Global Inc., Chinese social media users furiously passed around a 2015 story on the Uber-like app that showed what might be spooking President Xi Jinping.
Screenshots circulated of a breezy state media report on a Didi study that revealed how bureaucrats used the company’s services on two sweltering July days in Beijing. Using playful charts, it showed that traffic at the Ministry of Public Security was among the busiest, while China’s anti-corruption agency was relatively quiet.
At the time, it looked like an innocuous peek at the potential of Big Data to make the government more efficient. Yet six years later it clearly shows the risk that an outside party—and perhaps foreign spies—could glean valuable intelligence from Didi about some of the country’s most important officials.
Didi’s listing in the U.S. last week came just as Xi is looking for ways to control the vast reams of data held by China’s tech giants, in part to ensure the Communist Party spreads the wealth beyond a small circle of billionaires. That scrutiny awoke regulators in Beijing to the threat posed by private companies, prompting them to ban Didi from signing up new users days after it conducted the second-biggest American initial public offering for a Chinese company.
More broadly, the crackdown shows how big data is quickly turning into the next major battleground in a clash of superpowers, with implications that potentially could reshape the global economy for decades to come. With the U.S. lobbying other nations to prevent China from obtaining technology like advanced computer chips and Xi undertaking a national project to develop them, stringent data security controls risk further disrupting supply chains, balkanizing financial markets and forcing countries to pick sides.
While neither the U.S. or China say they want economic decoupling, failure to come to terms on what data can safely be shared could suddenly turn any “smart device” into a security risk. Still, the costs of failing to reach some sort of deal are high: China risks losing access to deep capital markets abroad that can finance its push for technological superiority, while U.S. companies could find themselves cut off from investing in one the world’s top growth engines.
“We are in a moment where security concerns have taken precedence, due in part to changing geopolitical dynamics, as well as the ‘unknowns’ surrounding data-driven technologies,” said Tom Nunlist, a policy analyst at Beijing-based Trivium China, which advises businesses. “The trade-off, broadly speaking, is that the focus on protection will slow down economic and technological development. The question is how the U.S. and China will navigate—and negotiate—the trade-off.”
Perhaps more than any other major country, China has sought to harness the potential of data to transform its economy. Some projections show China will hold a third of the world’s data by 2025, potentially giving it a big competitive advantage in areas like artificial intelligence that need lots of information to fine-tune algorithms and improve services.
For Xi, harnessing that data is key to maintaining political control. Not only can he use it to feed a vast surveillance state to snuff out dissent, but he’s also looking to create a market for data to unleash its value throughout the broader economy. That includes pouring $1.4 trillion into digital infrastructure like server centers, preparing laws regulating data use and seeking to strong-arm tech giants into sharing their enormous databases.
His challenge is doing all that without stifling the innovation that created more wealth over the past decade than any other sector.
“There’s been a lot of lip service in China about the power of data to drive growth into the future,” said Carly Ramsey, a Shanghai-based director with international consulting firm Control Risks. “But the question is how do you walk that fine line between control and development of using data. I don’t know if China has figured that out.”
The Communist Party is just now expressing alarm at how all that data could be used by its adversaries. The expansion of cybersecurity probes beyond Didi to two other companies that recently listed in the U.S.—Full Truck Alliance Co., a similar service for trucks, and Kanzhun Ltd., which owns an online recruitment platform—showed broader concerns about data falling into the wrong hands.
Even to experts, it’s not exactly clear why China views U.S. listings as a data security threat, particularly given U.S. intelligence agencies already have the ability to spy on communications around the globe. In orders from Beijing this week, the State Council and Cyberspace Administration of China didn’t specify what information might be exposed through floats on overseas bourses.
The main trigger appears to be U.S. legislation passed last year that would allow the Public Company Accounting Oversight Board to review audits of large Chinese firms from Alibaba Group Holding Ltd. to Baidu Inc. that trade on American exchanges. Beijing officials have been vocal about the potential national security threat from allowing U.S. regulators to pore over internal company documents and accounts—and they don’t appear worried about the long-term financial consequences of shunning America.
“While China hawks in Washington are seeking to deny China access to U.S. listings, Beijing is confident that there is more than enough money around the globe chasing returns to meet all their funding requirements while playing by China’s rules,” said Graham Allison, a professor at Harvard University’s John F. Kennedy School of Government, who wrote “Destined for War: Can America and China Escape Thucydides’s Trap?”
One major Chinese concern is that the U.S. disclosure rules could result in a data leak that provides more detailed information on the world’s second-biggest economy than official releases. “Such data could directly or indirectly reflect the population distribution, business hotspots, population flow, freight flow, and business operation,” Li Keshun, deputy head of a big data lab in the coastal province of Jiangsu, was quoted as saying in an article published this week by the Communist Party’s top disciplinary body.
The warning was similar to one published in a Chinese academic journal in January: “With the free flow of data, one country could do an accurate profiling of the social situation of another country as well as targeted intelligence collection and analysis, thus threatening the latter’s national security.”
The U.S., for its part, is also concerned about how China could weaponize big data. President Donald Trump last year banned ByteDance Ltd.’s TikTok and Tencent Holdings Ltd.’s WeChat over similar fears, with Secretary of State Michael Pompeo saying “we don’t want American data in the hands of the Chinese Communist Party.”
While the Biden administration revoked the Chinese app bans last month, in part because they were challenged in court, the White House has ordered a review due later this year into what data would be considered too sensitive for China to access. That includes everything from personal health information to genetic information to “harm from access to large data repositories”—not unlike those held by China’s big tech firms.
The U.S. campaign to deny China key technology, including through export bans like the one that strangled Huawei Technologies Co.’s smartphone business, gives even more incentive for Beijing to ensure it has a way to stop IPOs from the likes of Didi if necessary. Moreover, discouraging overseas listings will help Xi keep China’s biggest companies aligned with the party’s goals, as also seen through Beijing’s move last year to scuttle Ant Group Co.’s $35 billion dual listing in Shanghai and Hong Kong at the 11th hour.
“Keeping local technology champions closer to home in domestic capital markets increases the party-state’s leverage over them and strengthens incentives for firms to align themselves with the party’s interests,” said William C. Kirby, a professor of China Studies at Harvard University.
Regulators in Beijing are now planning rule changes that would allow them to block a Chinese company from listing abroad even if the unit selling shares is incorporated outside China, a well-trodden avenue for the country’s technology giants, people familiar with the matter told Bloomberg News. LinkDoc Technology Ltd. became the first known company to halt plans for a U.S. initial public offering after China’s crackdown, people familiar with the matter said on Thursday.
In an op-ed for the party-backed Global Times, Zhejiang University’s Fang Xingdong—a former internet entrepreneur who is a key opinion leader in China—said the U.S. listings represented a “huge hidden danger for national network security” because major shareholders “had their interests lying abroad.”
“The full activation of China's cyber-security review mechanisms indicate that Chinese internet companies will officially bid farewell to the stage of barbaric growth,” he wrote on Thursday.
Alibaba, Ant, Tencent and Bytedance together employ almost half a million employees. The world’s largest food delivery empire Meituan has 569 million users covering 2,800 cities, connected by an army of one million delivery people. WeChat has a billion-plus users, and Didi has 377 million users and 13 million drivers in China.
“China is undergoing a broad sweeping review, reigning in anti-competitive market practices, maintaining financial system stability and ensuring national data security, which could impact every industry sector,” said Joel A. Gallo, chief financial officer at healthcare company ETAO International Group and adjunct faculty member at New York University.
Some investors see China’s moves as counterproductive. Thomas Hayes, chairman at Great Hill Capital in New York, said Beijing was hurting itself by restricting their best companies from raising capital abroad.
But the Chinese government sees it the other way around. Rather than hurting the economy, tighter oversight will prevent tech companies from growing too big and ultimately posing systemic risks to both the domestic and global economy, according to Chen Xi, a senior external advisor to the China Academy of Information and Communication Technology, a research group under the Ministry of Industry and Information Technology.
Moreover, he said, the U.S. and China will eventually find it’s in their interest to cooperate in reining in companies that seek to amass—and profit from—more and more data.
“China, the U.S. and other economies will benefit from these giants, but also continue to be in confrontation with them,” Chen said. “They could not deal with the problem alone. This is an important area for cooperation.”
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