SinoTech

Former Top Chinese Communist Party Official Linked to Jack Ma’s Ant Group Indicted on Bribery Charges

By Raquel Leslie, Brian Liu
Wednesday, April 20, 2022, 8:01 AM

On April 11, state news agency Xinhua reported that former top Communist Party official Zhou Jiangyong, was indicted on bribery charges. Zhou oversaw Hangzhou, one of China’s largest technology hubs. Prosecutors alleged that Zhou took advantage of his official positions for nearly two decades by seeking bribes in exchange for helping unidentified companies acquire discounted land in his jurisdiction. According to an investigative report by the Financial Times, one of those companies included Jack Ma’s Ant Group, which has been subjected to various antitrust investigations over the past year. Ant Group, which is headquartered in Hangzhou, has denied the bribery allegations. 

The indictment is the culmination of a months-long investigation into Zhou, which led to his expulsion from the Communist Party in January. Shortly before his expulsion, state media outlet China Central Television (CCTV) published a documentary called “Zero Tolerance” alleging that Zhou helped unnamed private companies acquire cheap land and enjoy preferential policies after they purchased shares in firms controlled by Zhou’s younger brother. In the documentary, Zhou confessed that he had colluded with his relatives to engage in “family-style corruption”—though it is unclear whether Zhou’s confession had been coerced. While the documentary did not explicitly name Ant Group, it was the only external corporate investor in one of the implicated companies, according to public records. 

The announcement of Zhou’s investigation in August 2021 also triggered investigatory scrutiny over lower-level officials in Hangzhou. After the Chinese Communist Party’s internal anti-graft watchdog, the Central Commission for Discipline Inspection  (CCDI), announced its investigation into Zhou, it ordered 25,000 Communist Party cadres in Hangzhou to engage in “self-examination” to resolve business-related conflicts of interest involving themselves or family members. In addition, the CCDI promulgated guidance stating that government officials should establish “positive and negative list[s]” of companies to engage or refrain from engagements with. 

Zhou’s indictment and these lower-level actions are part of China’s larger campaign to root out corruption tied to the “disorderly” expansion of capital. In January, the CCDI issued a communique in which it promised to “show no mercy,” saying it would “investigate and punish the corrupt behavior behind the disorderly expansion of capital.” Shortly after the CCDI’s announcement, Chinese conglomerate Tencent announced that it had fired nearly 70 employees over the past year for accepting bribes, including a top Tencent executive who was alleged to have improperly shared WeChat data with a top public security minister. 

The indictment sends a strong warning to both regulators and regulated technology companies. Hangzhou, the headquarters for Ma’s Alibaba Group, is a  city awash in cash and often touted as one of China’s competitors to Silicon Valley. Consequently, Hangzhou and its larger province, Zhejiang, have also been the site of several past major bribery investigations. In 2018, Lu Wei, the former head of the Cyberspace Administration of China, pleaded guilty in a Zhejiang court for accepting millions of dollars in bribes. In 2016, Si Xinliang, a former head of the Zhejiang propaganda and organization departments, was sentenced to 13 years for graft. 

Zhou’s indictment also bodes poorly for Jack Ma and his Ant Group. Reports indicate that as part of its inquiry into Zhou, the CCDI may be expanding its investigation to examine Ant Group’s dealings with other state parties. Ma has been subjected to intense scrutiny since regulators halted Ant Group’s initial public offering in late 2020. Shortly afterward, Ma disappeared from public view for three months, amid rumors that he had been placed under house arrest or otherwise detained. In February, Chinese banking regulators instructed the largest state-owned banks and firms to report their financial exposure to Ant. Regulators will continue to seek more information regarding the ties between Ant and Zhou, with possible future investigations into Ma.

Cyberspace Administration of China to Enforce Compliance With New Algorithm Rules

China formally launched a campaign to rein in the potential abuse of algorithms by its internet giants. On April 6, China’s state-controlled internet regulator, the Cyberspace Administration of China (CAC), announced its plans to dispatch officials to conduct on-site inspections of firms and ask them to submit their algorithms for review. The CAC stated that it would target “large-scale websites, platforms and products with big influence” but did not name any particular companies. If CAC officials decide that a company’s algorithms are flawed or illegal, the company will face unspecified penalties.

The CAC’s latest announcement is aimed at bringing the country’s biggest tech firms into compliance with the sweeping new rules that govern the industry’s use of algorithms to surface content for users. The rules were first unveiled in August 2021 and finalized in January 2022. The rules  took effect on March 1 and afford consumers the right to switch off algorithmic recommendations on apps and see or delete the keywords the algorithms use to target them. The CAC also launched a website known as the Internet Information Algorithm Filing Service in late February where algorithm recommendation service providers with public opinion attributes or social mobilization capabilities must submit their services for record-keeping.

According to Stanford’s DigiChina project, the new regulations prohibit algorithmically generated fake news and the use of algorithms to cement a monopoly. They also forbid practices that encourage online addiction, endanger national security or disrupt social order. The CAC’s intervention in algorithms represents the latest attempt by China to rein in the growing power of its major tech companies. ByteDance co-founder Zhang Yiming; Su Hua, founder of TikTok’s main rival Kuaishou; and, most recently, JD.com founder Richard Liu have all stepped down from leadership roles at their respective companies within the past two years.

But China’s tech crackdown has not come without its economic costs. Seeking to quell growing concerns about the threat of unemployment amid large-scale layoffs, the CAC released a subsequent statement on April 9 insisting that the country’s 12 biggest tech giants have hired more workers than they lost in the past nine months and are “full of confidence in future development.” The watchdog stated that it had interviewed representatives from companies including Tencent, Alibaba, Meituan, ByteDance, Pinduoduo, Ant Group, and JD.com, which reported that 216,800 people had left their jobs between July 2021 and mid-March 2022, while 295,000 people were hired during the same period.

Investors, however, remain cautious. On April 8, Tencent stock was down about 1.8 percent while video streaming firm Bilibili Inc. was among the worst performers in Hong Kong. Meituan also saw its performance suffer following news that Sequoia Capital had reduced its stake in the food delivery giant.

Tech industry algorithms have captured the attention of governments around the world in recent months. The United Kingdom in March introduced its Online Harms Bill, which targets how algorithms disseminate illegal or harmful content, while U.S. lawmakers proposed a bipartisan bill called the Social Media NUDGE Act in February to force companies to slow down the sharing of misinformation via algorithms. But while many Western governments have yet to meaningfully combat political polarization and protect user privacy in a world increasingly driven by artificial intelligence, Beijing continues to wield unmatched regulatory power at home. 

Other News

Chinese Tech Firms on High Alert to Possible Secondary Sanctions for Ties to Russia

The U.S. Treasury Department issued several new sanctions in late March on businesses with ties to Russia in a move seen by analysts as a warning to Chinese firms with exposure to the market. On March 31, the Treasury Department imposed fresh sanctions on 21 entities and 13 individuals, including Joint Stock Company Mikron, Russia’s largest chip maker, and Alexsong Pte Ltd, a Singapore-based telecommunications electronics wholesaler that allegedly facilitated transactions that helped Russia evade sanctions. The sanctions froze all of the targeted entities and individuals’ U.S. assets and generally banned American companies from trading with them.

The inclusion of Singapore-based Alexsong is significant, as it represents a potential “secondary sanction risk” to Chinese businesses with ties to Russia. Under the U.S. sanctions, any technology goods made in foreign countries using American machinery, software or blueprints are banned from being exported to Russia. U.S. National Security Adviser Jake Sullivan has previously warned that China will face consequences if it helps Russia avoid sanctions imposed for its invasion of Ukraine.

Beijing has refused to condemn Russia’s actions in Ukraine or to call it an invasion, and has repeatedly criticized what it sees as illegal Western sanctions. As a result, many Chinese firms have maintained their operations in Russia, risking secondary sanctions for violating ones already in place. Data compiled by a team of Yale School of Management researchers tracking companies’ operations in Russia has labeled 43 Chinese companies as “digging in,” including Huawei. This stands in stark contrast to the hundreds of U.S. and European firms that have suspended operations in Russia or withdrawn from the country. However, Chinese telecoms giant Huawei—already under U.S. sanctions—is reportedly preparing a retreat from Russia by furloughing some local employees and suspending new contracts with operators.

Still, enforcing secondary sanctions on other Chinese companies operating business-as-usual in Russia will likely be more difficult than in Singapore. The U.S. government may need to rely on fear to ensure self-enforcement by Chinese firms, given limited corporate transparency and government collaboration on sanctions enforcement in China.

Shanghai’s Coronavirus Lockdown Presents Crisis and Opportunity for Tech Giants

On April 11, Shanghai entered the third week of its “Zero-Covid” lockdown, with more than 25 million people forced to stay at home. The lockdown has caused a humanitarian crisis, with small riots and protests erupting due to shortages in food, medicine and basic supplies. Tech companies in Shanghai have taken the lockdown as both a crisis and an opportunity. While companies like Tesla and Chinese chip-maker SMIC have suffered from manufacturing shutdowns, others like food delivery giant Meituan and messaging platform WeChat have profited from using their networks to support the city in alleviating food shortages.

China’s software giants have played a large role in helping Shanghai residents endure the lockdown. Government officials in Shanghai called on Meituan and internet retailer JD.com to use their logistics networks to support food and supply deliveries in response to the food shortages. The support may help these companies re-earn goodwill with regulatory agencies, which have subjected the companies to intense scrutiny over the past year. In October, the State Administration for Market Regulation (SAMR) issued Meituan a $533 million fine, amounting to 3 percent of its domestic revenue. SAMR also issued JD.com smaller fines on at least eight occasions in 2021.

Conversely, hardware companies have suffered immensely under the lockdown, which has led to global shortages in vehicles, semiconductor chips and circuit board deliveries. With shortages in truck drivers due to the lockdown, much-needed semiconductors are sitting unused and undelivered in factories. Tesla, Volkswagen, Ford, Apple and General Motors, which all run factories in Shanghai, have suspended operations at their facilities during the shutdown. With Shanghai’s trade links to major East Asian import markets, the shutdown will likely impact supply chains in the region and around the world. 

China Resumes Issuing New Gaming Licenses After an Eight-Month Freeze

The Chinese government has resumed issuing new gaming licenses, ending a freeze imposed last July when the country began a broad crackdown on content, gaming and the education sector. On April 11, China’s gaming regulator the National Press and Publication Administration (NPPA) published a list of licenses granted to 45 games belonging to companies including Baidu, XD.com, Lilith Games and 37Games. However, the country’s two largest gaming companies, Tencent and NetEase, were absent from the list. 

The freeze, a few days shorter than the previous record of nine months in 2018, has dealt a heavy blow to the gaming industry, forcing many companies to downsize, pause development projects, and lay off staff—about 14,000 small studios and video gaming-related firms had gone out of business by the end of 2021. The suspension was seen as a sign of official discontent with what the government perceives as the growing scourge of online gaming addiction among schoolchildren. The pause coincided with a move by the NPPA in August 2021 to tighten time limits for gamers under age 18 after state media branded gaming as “spiritual opium.”

The NPPA’s lifting of the months-long freeze may signal that Beijing is now ready to ease regulatory pressure on the industry. The decision will likely calm market anxiety that has plagued the tech sector following a yearlong crackdown. Still, investors remain wary over a surge in Treasury yields before U.S. inflation data is due and a dimming growth outlook for China as coronavirus lockdowns continue. On April 11, the China Securities Regulatory Commission again pledged further support for the “healthy” development of listed companies in an effort to assuage investor concerns. 

Commentary

James Kynge provides a rundown of American investigations of Chinese industrial espionage in a six-part series on the U.S.-China tech race.

Mohammed Soliman argues that Chinese technology companies are winning the race against the United States for market share and influence in the Middle East.  

Gordon Chang criticizes a proposed change in patent policy that the Biden administration has published, arguing that the change would be akin to a “subsidized tech transfer to China.”  

Scott Bade argues that the United States needs a global technology doctrine to succeed in the 21st century technology race with China. 

Tim Culpan argues that China’s nine-month ban on video game licenses has been a success, as Chinese gaming companies have largely fallen in line with content moderation regulations. 

Tom Fu defends China’s tech crackdown, arguing that countries around the world are rightfully taking steps to rein in private technology power. 

Koichiro Takagi analyzes the concept of “intelligentized warfare,” a notion proposed by some Chinese military theorists that aims to incorporate artificial intelligence as a tool in psychological warfare. 

The Economist argues that Xi’s plan to build an “incubator state” by increasing government investments in homegrown startups will redraw China’s economic map, shifting investment from rich coastal hubs to inland cities. 

Aron Chen summarizes a new set of guidelines published by Chinese banking and securities regulators on non-fungible tokens (NFTs). 

Ina Fried, Margaret Harding McGill and Ashley Gold of Axios assess Google CEO Eric Schmidt’s advocacy on bolstering American technological competitiveness with China, identifying critiques that Schmidt has exerted undue influence over government tech policy. 

Matt Sheehan contends that media focus on the ties between social media networks like TikTok and China distracts from bigger picture concerns regarding tech platforms’ roles in exacerbating polarization and inequality.

Craig Singleton argues that Virginia universities like Virginia Tech and Old Dominion should sever their ties with Chinese universities that maintain ties to the Chinese military.

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