The way China regulates its tech industry can seem highly unpredictable. The government can celebrate the achievements of Chinese tech companies one day and then turn against them the next.

But there are patterns in how China approaches regulating tech, argues Angela Huyue Zhang, a law professor at Hong Kong University and author of the new book High Wire: How China Regulates Big Tech and Governs Its Economy. The way Chinese policies change almost always follow a three-phase progression: a lax approach where companies are given relative flexibility to expand and compete, sudden harsh crackdowns that slash profits, and eventually a new loosening of restrictions. 

Take Alibaba and Tencent as examples. Since the 2000s, the two tech giants have made hundreds of mergers and investments, as a result of which their business empires expanded to include almost every aspect of digital life in China. This insatiable expansion came at the expense of users, who faced higher prices and less choice, but Chinese regulators let it slide. Then, suddenly, the government started a tech crackdown in 2020. All of a sudden, past mergers and acquisitions were under investigation, and hefty fines were meted out to punish the companies for antitrust violations, including a $2.8 billion fine for Alibaba. 

MIT Technology Review recently spoke with Zhang about her new book and how to apply her insights to China’s tech industry, including significant new sectors like artificial intelligence.

The pendulum swing

“There’s this saying I also cited in my book: 一放就乱, 一抓就死 (loosening causes chaos; tightening up causes death),” Zhang says. The Chinese expression perfectly captures how the regulators dramatically yet predictably oscillate between doing too little to police the tech sector and doing too much. 

In the book, Zhang argues that Chinese tech platforms have long been accused of obstructing competition, infringing on privacy, and violating the labor rights of gig workers—but regulators accommodated them in all three areas until suddenly putting the companies under scrutiny in late 2020. And after the peak of enforcement in 2022, the regulators slowed down on all three fronts and reached a compromise with Chinese companies. 

Outside the examples in the book, “I think [the pattern] fits almost every sector,” Zhang says. From financial innovations like peer-to-peer loans in the mid-2010s to online tutoring, which exploded in popularity during the pandemic, they all went through similar shifts in experience with the regulators.

The government can be a helping hand

Western observers of Chinese policies often focus on the crackdown phase. Historically, it’s involved some dramatic moments—for example, the government forcing the ride-hail giant Didi to delist from the New York Stock Exchange or slapping antitrust fines on Alibaba after its former head, Jack Ma, made a public speech against regulation. 

But Zhang warns that these high-profile crackdowns mask the symbiotic relationship between tech companies and the government. “We tend to see [Chinese tech regulations] as very predatory,” she says, but “regulations actually give a helping hand to these firms.”

COURTESY OF ANGELA HUYUE ZHANG

For many government officials, especially at the provincial and local levels, tech companies are the most important contributors to tax revenues and employment. They are often referred to as “local champions” or “little giants,” and their business interests are directly tied to the interests of local governments. In turn, the governments often go to great lengths to protect these companies. 

Zhang found, for example, that Chinese local courts spend tremendous judicial resources helping tech firms resolve online disputes. In a six-year span from 2016 to 2021, three local courts in the southern city of Guangzhou processed over 130,000 cases where the Chinese fintech company Lakala sued its users for defaulting on microloans. At one of the courts, each judge on average ruled on about 1,400 Lakala disputes in 2019 or 2020, meaning the court was essentially turned into an outsourced dispute arbitrator for the company. And the result? Lakala won almost all the cases.

When interests align on AI

Currently, AI is making the case that the interests of the government and the Chinese companies are aligned even more closely. 

That’s because the technology is seen as crucial to achieving China’s goals of technological supremacy and self-sufficiency, Zhang says. 

During China’s post-2008 economic slump, consumer tech startups and the platform economy were seen as a way to inspire new growth; the same is happening with AI today. At China’s annual parliamentary meeting last month, President Xi Jinping coined the term “new quality productive forces,” meaning the new sectors that are expected to counter China’s current economic slowdown. And a campaign focused on AI was explicitly mentioned in this connection.

“It’s a business that the Chinese government is deeply involved in from the start,” Zhang says. The Chinese government has taken multiple roles in the development of AI, functioning as policy maker, incubator, investor in AI startups, supplier of research, customer of AI applications, and more. “And now behind every successful Chinese AI firm, there is a local government,” she says. “That powerful backing will offer more political protection for Chinese AI businesses.”

The AI honeymoon phase today

The government’s deeply embedded interest in China’s AI industry means that the industry will stay in that initial phase of lax regulation for a while, Zhang says. And she argues that AI regulations in China today are looser than those in the US and Europe.

This claim may seem a little counterintuitive at first. While the EU has indeed led the world in passing AI regulation, China has reacted much more swiftly than the US, including passing some sweeping regulations about generative AI, deepfakes, and recommendation algorithms in the past two years.

But Zhang believes that these regulations are strict only when it comes to freedom of speech and content control, areas in which the Chinese government has been increasingly stringent. Other than that, the recent regulations offer vague principles and few enforceable measures to prevent the AI from causing harm, including harm to Chinese people’s human rights.

The Cyberspace Administration of China (CAC), an internet regulator that has a close relationship with the Communist Party’s propaganda bureau, has been in charge of reducing the risk that generative AI models will produce politically damaging content. Some of its restrictive measures, like requiring language models to reflect socialist values and asking for real-identity verification for users, will no doubt make it harder for Chinese companies to innovate and compete. But the CAC’s work often clashes with the priorities of other Chinese government agencies like the Ministry of Industry and Information Technology, which are more focused on boosting China’s technology capabilities.

Judging from Chinese AI regulations so far, the pro-growth faction has prevailed, says Zhang. “At least you [in the US] have the FTC open an investigation into OpenAI. In China, did you see the CAC open an investigation into Baidu or ByteDance? No. And I predict they are very unlikely to do that in the future, unless something really bad happens,” she says.

How bad would it have to be to trigger the switch to regulatory crackdown? Zhang says it would take a big AI misuse that sets off wide-ranging controversies and threatens social stability. If that happens, then the Chinese regulatory pendulum will dutifully swing to the harsh side again.

When it happens, it will be quick. “It will be quite random and quite sudden,” Zhang says, “and it will be a surprise.”