ChinaIndia Networked is a newsletter by me, Dev Lewis, highlighting the networked relationship between the two regions at the intersection of technology, society, and politics. Find me on Twitter @devlewis18 or write to me at devlewis@protonmail.com.

Welcome to issue 21 of ChinaIndia Networked.

This newsletter took an unscheduled break. For some months I struggled to find any optimism in post-COVID politics and border standoffs.

Observing discourse in Chinese and Indian media largely based on a cocktail of ignorance and nationalist xenophobia took a toll. Without a sense of optimism, my motivation to build a platform on the premise of exchange and dialogue evaporated. I felt like I needed to take a step back from writing and re-orient myself. I don’t know if this is the right platform to share these thoughts. But I’d like to be honest with anyone who subscribes and supports this endeavor.

Whatever your politics are it is undeniable that India needs to find new and better ways of working with China. This needs to involve dedicating more resources and pathways to engage with China and equipping Indians with better information. I’ve long argued for more organisations, media, and companies, to deepen cross-border networks. Beyond the bilateral relationship itself, there are a number of areas where there will always be a need to exchange experiences, ideas, and research. This is where I find my source of motivation.

The focus of this newsletter issue is a great example of one such shared challenge:
tech platform governance.

The problems are universal: protecting personal privacy, maximising societal benefit, mitigating against ill-effects of monopolies such as stifled innovation, etc. One of the recognised policy responses to monopolies that span industries is to break them up into smaller companies.

The modern discourse of breaking up monopolies has its origins in the US. The breakup of Rockefeller’s Standard Oil, aka “Big Oil”, in the first half of the 20th century was among the first landmark cases in anti-trust legislation. The breakup of telecommunications giant AT&T into smaller companies in the 1980s is one of the most recent major breakups, thrillingly documented by Tim Wu in his masterful book The Master Switch: the Rise and Fall of Information Empires. The Bell company’s desire for maintaining the status quo was so entrenched it even shut down its own research lab because it made breakthroughs in core technologies that would one day lead to the invention of the Internet. Today, “Big Tech” is at the front and center of American discourse and policy agenda (the Biden administration even brought onboard Tim Wu to its National Economic Council). India too is paying more attention than ever before to the role of large technology platforms and their ill effects. Ultimately, the fate of Facebook, Google, etc. will be decided in Washington DC their home market. The only other country in the world home to large platform companies of a similiar scale is China which is undergoing its own version of a campaign against “Big tech” (covered in issue #20).

In February, the State Council finalized an updated set of anti-monopoly rules aimed at tech platforms. Separately, the People’s Bank of China released a draft set of rules aimed at fintech companies. One company, in particular, has been at the heart of these investigations: Alibaba and its affiliate Ant Financial.

As I write this news broke that Alibaba has been fined for monopolistic behaviour. Mathew Walsh for Caixin reports:

China’s market regulator said Saturday it has fined Alibaba Group Holding Ltd. a whopping 18.2 billion yuan ($2.8 billion) for violating antitrust laws, a major development in the Chinese government’s efforts to rein in online platforms.

The State Administration of Market Regulation (SAMR) issued the penalty, equivalent to some 4% of the tech giant’s domestic sales revenue in 2019, after concluding (link in Chinese) that Alibaba unfairly squeezed out competition among online retail platforms by forcing vendors to choose between its services and those of its rival

Pei Li @teamlipei

i know it someone will make a meme on this

April 10th 2021

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While this is a record fine under the anti-monopoly law in the larger scheme of things it is just an ant bite compared to what is happening to Alibaba affiliate Ant Finacial. WSJ’s Lingling Wei, one of the best reporters on this story in any language, broke this in January:

Not only are authorities set to regulate Ant’s lending business like a bank, which would cause it to supply more of its own funds when making loans, they are also planning to break what they see as the company’s monopoly over data, according to officials and government advisers with knowledge of the regulatory matter…

One plan being considered would require Ant to feed its data into a nationwide credit-reporting system run by the central bank, the People’s Bank of China, the people familiar with the matter say. Another option would be for Ant to share such information with a credit-rating company that is effectively controlled by the central bank.

This highlighted paragraph is what intrigues me the most. This is about an effort that may shape how we think about data and its equation with companies, citizens, and the state. It could have major implications for tech companies’ global expansion but also global best practises for how platforms are regulated.

This is what this issue’s focus article is about.

But before you go there I’d like to use this opportunity to flag two narratives in global discourse on China: ‘private companies = CCP’ + ‘all data is handed to Beijing’. As these developments attest the reality is far more nuanced and we need to bring this into our thinking—even if the CCP is on a mission to remove all the nuance.

How to Nationalise Ant Financial’s Data 如何让蚂蚁的大数据国有化？

This is the subject of a long (4000+ word) speech by Xiamen University professor Zhao Yanqing 赵燕菁 delivered at the CPE 40 Forum 中国政治经济学40人论坛·2020. I first spotted it on the Yuandian源点 Wechat account but it was taken down in a couple of days. Later I found it published on the China Credit website.

Zhao’s speech is worth reading because he touches on two legitimate challenges societies world over are grappling with:

1. how to unlock the substantial social gains from data that is held behind a proprietary lock and key by platforms?

2. How to prevent firms that aggregate large amounts of data become monopolies?

Zhao proposes the following solutions/arguments:

• Break up platforms (e.g.Ant Financial) into two types of entities: An ‘application’ entity (e.g. Tmall/Taobao) and a new ‘big data’ platform entity

• The State play a more decisive role in the operations and leadership of platforms (公进民退) through various forms of shareholder participation in the newly carved out ‘big data’ platform entities. The ‘application’ entities remain privately owned.

• Platforms have the right to provide services and develop applications but the data itself belongs to the people.

• A monopoly should not be determined based on market share but based on possession of certain types of data.

These solutions at first glance appear pretty radical, especially breaking up the platforms into a state-owned entity. They would have very significant implications not just for Chinese tech giants but the innovation ecosystem in general. It is hard to say how representative these ideas are of government thinking. If you’ve been following anonymous Twitter persona You Shu’s alarms last year that the CCP is coming from the private sector you may not be very surprised. Recent draft rules on monopolies by the PBOC says this:

Any of these providers could be subject to an investigation by the State Council’s antitrust enforcement agency, according to the draft, which didn’t name the agency. If an investigation confirms a monopoly, the PBOC can then recommend a range of corrective actions ranging from a suspension of a particular service to the breakup of an institution “by business type,” the draft says.

Zhao begins his speech by discussing why data is important to platforms and how society should think about ownership of data. In my translation below i’ve mainly focussed on sections where he goes into the specifics of Ant Financial and how platforms should be broken up and reformed (if you want the full package I suggest checking out the original).

One final word. My focus is on his speech is not because I think his analyses is great. Far from it. There are several problematic points in his arguments that can be unpacked, from the perverse innovation incentives to his failure to recognize the obvious problems that state-owned platforms would face in global markets. His equation of data = land, oil, etc is also flawed. There is a growing body of economic literature that explains how data is very different from physical goods, chiefly that data is non-rivalrous i.e. it can be used an infinite number of times and by many parties simultaneously. I included the speech because it touches on a challenge societies world over are dealing with and has a very clearly articulated solution that might hint at directions Beijing is seriously considering. If you have your own thoughts and critiques please leave a comment i’d like to hear them.

Leave a comment

Who does Ant Financial’s Data belong to?

Strictly speaking, "big data" is a joint by-product of an exchange between platforms and the public. But irrespective of whether it is a developed capitalist country or a developing socialist China, the property rights to the "big data" are arbitrarily handed the platform companies. The reason being that if these initial property rights were not given to platforms there would be no platform to speak of at all. The real question is must the platform company itself be private? To answer this, one must touch on a topic that is often discussed: public ownership.

Ant Financial cannot exclusively enjoy the big data "bonanza"

Although the initial property rights of resources are defined to the platform provider, which is conducive to the creation and development of the platform, this does not mean that the owner of the platform (i.e. the shareholders) should exclusively capture all the benefits brought by the value of big data.

In the case of Ant Group's listing, should those investors (some who were revealed only just prior to the IPO) be the legitimate benefeciaries of the premium from the platform’s sky high data volume? Operating a platform inevitably involves bundling a large amount of people’s natural resources and the premium from these resources is reflected in the excess income of the platform company. The ownership of platform companies inevitably involves the distribution of huge social wealth. The same is true for the digital society. Whether it becomes a fair society or a society divided between the rich and the poor depends on the ownership of the platform company.

Big data = coal, radio spectrum, land

Big data is a brand-new resource created by modern economic activities. Maxwell and Marconi discovered the use of radio, which made spectrum resources scarce and expensive. Watt invented the steam engine which doubled the value of coal resources. Imagine if Marconi’s company owned all the radio spectrum and Watt’s company owned all the coal, how high would the market value of these companies be? Big data is like the frequency spectrum in the era of wireless communication and coal in the era of steam engines. Data platform companies pull extremely high valuations is that they are staking the ownership of big data, a public resource, as their own.

Some people may question this assertion under the thinking that individuals use the services provided by the platforms for free, and they sign an agreement consenting to platforms using their data. In the eyes of ordinary people, data is a basic production factor for data companies. Under the premise of legality and compliance, accumulating and using data through various channels is a part of normal business activities, just like traditional enterprises using capital and talents.

How to break up the platforms

Separate “big data” departments from “application” units

First, anti-monopoly policies should be adopted to separate the platform’s big data departments and application departments. For example, this would be seperating (Alibaba owned) Taobao and Tmall from the big data department, or seperating JD.com and JD.com’s self-operated big data department. This is a bit like the government’s withdrawal from the non-public product sector. This is to ensure that ordinary e-commerce companies cannot gain an additional competitive advantage over other ordinary enterprises by relying on their platform edge.

Bring in state representation and taxes for data

After the separation of the platform part, from supervision to operation, from investment to distribution, more representatives of public interests must enter. It is necessary for the state to advances and private sector to retreats（公进民退).

The non-platform part can remain completely privatized following the principle state retreats and private sector advances (公退民进). For those Internet business models where data resources cannot be split apart, they can be taxed based on their data, with these taxs returned to the public. For a long time, companies like Google with an annual profit of more than $160 billion have been enjoying a single-digit effective tax rate for their non-US profits, which is only about a quarter of the average tax rate in their overseas markets. For example, Amazon, which has a market value of close to 790 billion US dollars (which once exceeded one trillion US dollars) and a net profit of 11.2 billion US dollars in 2018, not only did not pay any federal taxes, but received a tax rebate of 129 million US dollars. This is obviously very unreasonable. In contrast, Alibaba's total tax payment in 2018 reached 51.6 billion yuan.

In response to this problem, countries have begun to study the levy of digital taxes on Internet giants. From April 2020, the UK will take the lead in levying a 2% digital tax on companies such as Facebook, Google and Amazon. The essence of taxation is to compulsorily participate as a "platform enterprise government" in the dividend distribution of a "platform enterprise dependent on the enterprise", and then use this income to provide public services.

State investment in data platforms through PPPs

A more effective approach is for the government to participate in the investment of data platform companies on behalf of the public through PPPs and to represent the public’s public interest in holding part of the data resources. Now when it comes to PPP, many people think it is a unilateral "State retreats and private sector advance." In fact, the correct way for the PPP is that in the platform sector “the State should advance the private sector retreat”. The does not necessarily mean that the government personally builds a platform but to invest in platform companies when they start up, like venture capital, and to play a role similar to that of Sun Zhengyi when Taobao was founded.

The state as a seed investor and/or before an IPO

Platform companies, at the very beggining, start out as ordinary companies, before gradually developing into a platform. At what stage should the government enter a platform?

One option is in the venture capital stage. State funds conduct VC investments in companies that may become platforms. This is risky but with the potential of high returns. The second option is before an IPO, it can be made compulsory for a platform to negotiate with social enterprises that represent the public interest (such as the Human Resources and Social Security Bureau, the Housing Provident Fund Management Center, etc.), and hand over part of its share (For example 30% ) at the to these State owned companies, and these public institutions will then sponsor the listing. In the future, whether through the company's dividends or the profits from continuing operations all ordinary people will be able to get a part of it.

In the case of Ant Group, prior to its listing, private investors (such as private equity, investment banks, and investors like Zhao Wei) who attempt to profit from the private possession of data wealth should be kicked out as original shareholders, and the original shares should sold at a fair market price and allocated to public funds such as pension funds (correspondingly, the government can grant certain tax relief to platform companies that hold public shares). With the gradual increase in the share of public funds, platform companies will gradually transition from private to State ownership (similar to the government transition model of a constitutional monarchy). In 2016, Professor Yinggang Zhou and I published the article "Redesigning China's Capital Market: Based on Fairness and Efficiency, and Thinking of Enriching the People and Strengthening the Country" in the "Financial and Economic Think Tank". We proposed that public capital dominate the primary stock market through the sponsorship system . This suggestion does not seem outdated now.

Making platforms more state owned

In the ongoing enterprise reform, a relatively large debate is whether to allow the market to play a decisive role in the economy as per the principle ‘state retreats and private sector advances’ (公退民进).

Traditional economic theory is not able to distinguish platform companies from dependent companies, the ownership of companies must either be fully state owned or fully privately owned. Only when you introduce a stratified structure you can have a platform and a non-platform chose different structures to combine.

Socialism and capitalism can also be redefined. In a socialist economy platform companies are state owned, even if ordinary companies may be privately owned. Conversely, in a capitalist economy, platform companies may be privately owned, regardless of the ownership of ordinary companies.

Only state ownership of the platform can "tame" capital

Data platform companies are the core assets of China's "corporate community" and are of systematic importance for ordinary companies relying on the platform to reduce costs and participate in global competition. Whether a country can succeed internationally depends on whether its platform companies can win in competition with platform companies in other countries. In this sense, China must cultivate and protect all key data platform companies, including Ant Group, as the core of its national development strategy. The evolution of a data enterprise into a big data platform is a process. If the State ownership reform of a platform company is implemented before big data is ‘discovered’, due to the lack of effective incentives, platform companies fail to emerge. At this time, it is necessary to support platform companies. Suppressing platform companies means suppressing their "corporate community". It is necessary to prevent the irreversible polarization between the rich and the poor that will inevitably be caused by the privatization of platform companies, and to prevent platform companies from being held hostage by private capital. Whether it is socialism or capitalism does not depend on whether you tax capital, but on whether you own the capital.

Thomas Piketty has already demonstrated that Taxation on income does not help alleviate the gap between the rich and the poor. Only if the platform is State-owned can it "tame" capital. Why is China's real estate market far better than other countries' capital markets with stocks as the core in terms of the average degree of wealth distribution, the speed of households' wealth, whether it is to hedge market fluctuations or respond to the impact of economic crises? The reason is that the state ownership of the primary land market makes the city a platform to provide a fair basis for wealth distribution. China's urban platform based on land wealth provides a useful reference for the management of an Internet platform based on digital wealth.

Identifying a monopoly should not be based on market share but the concentration of data resources

Thinking about platform companies and monopolies, and the polarization between the rich and the poor caused by market competition requires a brand-new economic theory. If regulations uses market share as the standard for monopoly it would be a directional error in anti-monopoly policies. Monopoly is determined by the nature of the platform. What supervision should really focus on is whether there is "dimensionality reduction" in the operation of the platform, especially the data resources of Chinese people on which platform companies rely, and those shareholders behind listed companies that try to take the "big data" of the public as their own. Once the discussion on the platform economy shifts from monopoly to property rights, we will identify the right path for the new economy to lead to equal wealth and fairness.

Outlook for Ant Financial

According to informed information, after the IPO was suspended, Ant Group is intensively carrying out restructuring planning under the guidance of relevant departments.

The more credible result is that it will be split into two large business groups: A business group will be a financial holding company, which will include various financial businesses such as payments, loans, insurance, and wealth management. These businesses already have relatively complete laws and regulations in China. Financial companies will be subject to compliance supervision by relevant departments in accordance with laws and regulations. Another business group will be technology companies, which will include cloud computing, big data, intelligent risk control and other technology "enabling" businesses. These businesses theoretically belong to the category of technological innovation, so they will not be subject to excessive supervision. However, the prospects of technology companies may not be very good. According to relevant information, new technology companies will be required to share their big data assets.

These personal data originally enjoyed by Ant Group alone will be used by licensed financial institutions across the country. Institutions and credit reporting agencies share to serve the entire society. Regardless of the final result, the market value of Ant Group will no longer be the "world's largest IPO" as previously hoped

Go deeper

• The Rise of Data Politics: Digital China and the World by Liu Lizhi

• The Ant Group IPO by Lillian Li

• Why China Faces Handicaps in Antitrust War With Tech Titans (Caixin)

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🧠👂🏼🔌Ears and Minds Networked

One album from the independent music scene around the region—because if you’re interested in China and not listening to music coming out of here you’re not doing it right.

Omnipotent Youth Society - Hebei

Omnipotent Society released their second album a decade after their first in January. I shared their first album previously and I have to share their second album. Why? I’ll let Krish Raghav and Josh Feola describe it:

Their 2010 album remains, to this day, singular and unparalleled but also unimitated. It was the (perfect) end of a road.

In 2020, Omnipotent Youth Society released their second album—in the works for a decade. The pre-orders were off-the-charts, nearly half a million fans paid 22RMB each upfront to listen.

How do you top a towering achievement? How do you follow up an album that defined a generation?You don’t. You go inwards and backwards. You sing about absurdity and disillusionment, about debilitating change. You make a second excellent album that is ultimately, tragically, still all about the first.