If you’re a longtime subscriber to this newsletter, you know that I talk about China’s tech policies all the time. To me, it’s always a challenge to understand and explain the government’s decisions to bolster or suppress a certain technology. Why does it favor this sector instead of that one? What triggers officials to suddenly initiate a crackdown? The answers are never easy to come by.

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. 

What the agency did at that time was deliberately inflict reputational damage on [Alibaba] by making this surprise announcement on its website, even though it was just one sentence saying “We are investigating Alibaba for monopolistic practice.” But they already caused the market to panic. As soon as they made the announcement, it wiped off $100 billion market cap from this firm overnight. Compared with that, the ultimate fine of $2.8 billion [that Alibaba had to pay] is nothing.

China’s tech regulators use the fact that the stock market predictably overreacts to policy signals to discipline unruly tech companies with minimum effort.

Zhang: These agencies are very adept at inflicting reputational damage. That's why the market sentiment is something that they like to [utilize], and that kind of thing tends to be ignored because people tend to fix any attention on the law.

But playing the market this way is risky. As in the previously mentioned example of the video-game policy, regulators can’t always control how significant the overreactions become, so they risk inflicting broader economic damage that they don’t want to be responsible for.

Zhang: They definitely learned how badly investors can react to their regulatory actions. And if anything, they are very cautious and nervous as well. I think they will be risk-averse in introducing harsh regulations.

I also think the economic downturn has dampened the voices of certain agencies that used to be very aggressive during the crackdown, like the Cyberspace Administration of China. Because it seems like what they did caused tremendous trauma for the Chinese economy.

The fear of causing negative economic fallout by introducing harsh regulatory measures means these government agencies may turn to softer approaches, Zhang says. 

Zhang: Now, if they want to take a softer approach, they would have a cup of tea with these firms and say “Here’s what you can do.” So it’s a more consensual approach now than those surprise attacks.

Do you agree that Chinese regulators have learned to take a softer approach to disciplining tech companies? Let me know your thoughts at zeyi@technologyreview.com.

Now read the rest of China Report

Catch up with China

1. Covert Chinese accounts are pretending to be Trump supporters on social media and stoking domestic divisions ahead of November’s US election, taking a page out of the Russian playbook in 2016. (New York Times $)

2. Tesla canceled long-promised plans to release an inexpensive car. Its Chinese rivals are selling EV alternatives at less than one-third the price of the cheapest Teslas. (Reuters $)

3. Donghua Jinlong, a factory in China that makes a nutritional additive called “high-quality industrial-grade glycine,” has unexpectedly become a meme adored by TikTok users. No one really knows why. (You May Also Like)

4. Joe Tsai, Alibaba’s chairman, said in a recent interview that he believes Chinese AI firms lag behind US peers “by two years.” (South China Morning Post $)

5. At first glance, a hacker behind a multi-year attempt to hack supply chains seemed to come from China. But details about the hacker’s work hours suggest that countries in Eastern Europe or the Middle East could be the real culprit. (Wired $)

6. While visiting China, US Treasury Secretary Janet Yellen said that she would not rule out potential tariffs on China’s green energy exports, including products like solar panels and electric vehicles. (CNBC)

Lost in translation

Hong Kong’s food delivery scene used to be split between the German-owned platform Foodpanda and the UK-owned Deliveroo. But the Chinese giant Meituan has been working since May 2023 on cracking into the scene with its new app KeeTa, according to the Chinese publication Zhengu Lab. It has so far managed to capture over 20% of the market.

Both of Meituan’s rivals waive the delivery fee only for larger orders, which makes it hard for people to order food alone. So Meituan decided to position itself as the platform for solo diners by waiving delivery fees for most restaurants, saving users up to 30% in costs. To compete with the established players, the company also pays higher wages to delivery workers and charges lower commission fees to restaurants. 

Compared with mainland China, Hong Kong has a tiny delivery market. But Meituan’s efforts here represent a first step as it works to expand into more countries overseas, the company has said.

One more thing

For some hard-to-explain reasons, every time US Treasury Secretary Janet Yellen visits China, Chinese social media becomes obsessed with what and how she eats during the trip. This week, people were zooming into a seven-second video of Yellen’s dinner to scrutinize … her chopstick skills. Whyyyyyyy?