China’s Internet trio a force to be reckoned with

There is an overarching force in China, with tentacles reaching deep into almost everybody’s life. That force is not the Communist Party, whose influence in people’s day-to-day affairs — though all too real — has waned and can appear almost invisible to those who do not seek to buck the system.

The more disruptive force to be reckoned with these days is epitomised by the three large Internet groups, Baidu, Alibaba and Tencent, collectively known as BAT, which have turned much of China upside down in just a few short years.

Take the example of Ant Financial. Two weeks ago, it completed fund-raising that values the company at between US$45 billion (S$60.6 billion) and US$50 billion. It operates Alipay, an online payments system that claims to handle nearly US$800 billion in e-transactions a year, three times more than PayPal, its US-based equivalent.

That system, an essential part of China’s financial and retail architecture, and one familiar to almost every Chinese urbanite, is no brainchild of the Communist Party.

Instead, it was the creation of Mr Jack Ma, the former English teacher who founded Alibaba. Mr Ma established the system a decade ago as the backbone for Taobao, his consumer-to-consumer business. The name literally means “digging for treasure”, something that Mr Ma, one of China’s richest people, has clearly found.

Alibaba handles 80 per cent of China’s e-commerce, according to iResearch, a Beijing-based consultancy. That is a monopolistic position that even the Communist Party, with its 87 members, out of a population of 1.3 billion, can only dream about.

True, the party still regulates where people live (in the city or the countryside), what they publish (though less what they say) and how many children they have (although the one-child policy is fast fading).

China’s Internet companies, on the other hand, hold an ever-greater sway over how people shop, invest, travel, entertain themselves, and interact socially. The BAT companies, which dominate search, e-commerce and gaming/social media, together with other start-ups such as Xiaomi, a five-year-old company that pioneered the US$50 smartphone, are upending how people live.

When we think of the Chinese Internet, we tend to think of the overweening influence of the state through censorship. Yet, the Internet is also a liberating force that is unleashing entrepreneurial energy, bringing market forces to bear in diverse corners of the economy and expanding the role of the private sector at the expense of entrenched state enterprises.

In China’s nominally controlled economy, the private sector has long outstripped the state as the engine of growth. According to Mr Edward Tse, a management consultant and author of China’s Disruptors , this has resulted in the “emergence of a new group of entrepreneurial business leaders ... most operating with little direct government influence or support, and all transforming their industries”.

Mr Tse estimates that privately run businesses account for three-quarters of national output. By 2013, there were 12 million privately held and 42 million family-run businesses in China, against 2.3 million state-owned firms.

HOW TO REGULATE THESE COMPANIES?

At the forefront are technology companies in general, and Internet companies in particular. As elsewhere, the online and offline worlds in China are colliding.

Taxi apps such as Didi Dache, backed by Alibaba and Tencent, have brought market forces to bear where prices were previously set by the state. They are threatening lucrative local taxi monopolies, provoking crackdowns and protests by drivers in several cities.

In finance, where deposit rates are regulated by the state, the BAT companies and others are offering savings and investment products with much better rates. Yue Bao (meaning “leftover treasure”), a money-market fund distributed by Alibaba over Alipay, has accumulated assets of nearly 600 billion yuan (S$130 billion) in less than two years. Beijing, which wants to gradually liberalise banking, is allowing this crop of private companies to catalyse change.

However, in important respects, even the fiercest of China’s Internet pioneers do not operate in a free market. For a start, they conduct their business behind the Great Firewall, a politically motivated barrier that has protected them from the likes of Google, Twitter and Facebook.

In practice, the BAT companies are so close to the government they often behave like quasi-state-owned enterprises, even to the extent that they help form regulation. The government’s e-commerce strategy, announced in March by Premier Li Keqiang, was originally conceived by Mr Pony Ma, chairman of Tencent.

The authorities are not always sure about how to regulate these powerful new companies. When the State Administration for Industry and Commerce criticised Alibaba for the prevalence of counterfeit goods sold on its websites, Mr Ma’s company threw its weight around, forcing the government regulator to retreat.

However, if the authorities really want to fight commercial disruption, they have the tools to do so. Last year, for example, the central bank suspended “virtual” credit cards issued by Alibaba and Tencent, blocking their path into online credit.

One must assume that, if push came to shove, the authorities could cripple even the biggest private company. Yet, so embedded are the likes of Alibaba and Baidu in people’s lives that even the mighty Communist Party may have cause to pause.

THE FINANCIAL TIMES

ABOUT THE AUTHOR:

David Pilling is the Asia Editor for The Financial Times.