China vs USA – Another own goal

China strikes another blow benefitting Team USA.

• It looks like further draconian measures are coming which will cause the largest source of capital for technology start-ups to dry up in yet another move that will hinder China’s efforts to become both self-sufficient in technology as well as a global technology powerhouse.
• Very much like its move against cryptocurrencies and (by default) the blockchain, even more of its entrepreneurs may leave China for greener pastures, taking their technology with them to the other side.
• According to a number of sources in China (see here), the Cyberspace regulator is drafting new rules that will mean that any company with a platform and over 100m users or $1.6bn in revenue (RMB10bn), will have to seek permission before making any investments.
• This restriction is expected to have a large impact as ByteDance has pre-emptively dismantled its investment arm which has been very active in recent years.
• This effectively means that investing in start-ups will now become very difficult for all of China’s large digital ecosystems which I think is highly problematic.
• This is for two reasons:
  • First money: It is the big digital ecosystems in China that have been generating the vast majority of profits for the technology sector.
  • Hence, when it comes to funds available to make investments, these companies probably represent the largest pool of funds available.
  • With this hurdle in place, there is going to be less capital available for investment which in turn will mean slower development of technology.
  • Second expertise & reputation: While the big digital ecosystems mostly make investments that benefit their business in the long run, there are advantages to be had with having them on board.
  • These companies will usually take a board seat and can help with their own experience as well as opening doors that the company would be unable to do on its own.
• The companies that fall foul of the new regulation will still be able to make investments but the barriers being erected seem certain to make life much more difficult which will greatly reduce the incentive to invest.
• It comes as no surprise that ByteDance has moved first as it is now effectively a state-run enterprise with a representative from the government on its board.
• Hence, it should have very good visibility on exactly what is coming, and its actions are likely to herald a huge slowdown in investments from all of the other large digital ecosystems.
• This can be nothing but bad news for China’s aspirations as a slowdown in investment will be followed by the slower emergence of new technologies.
• It is its ability to produce cutting edge technology before anyone else that China is relying on to provide its technology independence as well as increase its influence overseas.
• This move will hurt that long term aspiration handing yet another advantage to team USA.
• In the long-term struggle, the USA is now comfortably ahead as China is continuing to do its work for it.
• Team USA 2. China 0.