SinoTech

Layoffs in China’s Tech Sector Stoke Larger Unemployment Fears

By Raquel Leslie, Brian Liu
Friday, April 1, 2022, 5:07 PM

China’s tech sector, which has in the past decade been one of the strongest job-creating sectors in the world’s second-largest economy, is now laden with stories about frozen headcounts and mass layoffs as tech giants grapple with regulatory crackdowns and a cooling economy. Chinese e-commerce giant JD.com has reportedly begun laying off at least 400 employees, primarily out of its group-buying unit Jingxi, while Alibaba, another e-commerce giant, is said to be considering axing at least 15 percent of its staff this year or around 39,000 people. Tencent, which has around 86,000 employees and owns the popular messaging platform WeChat, is also considering cutting 10 to 15 percent of its staff from its cloud and smart sectors as well as its platform and content business groups.

Though job cuts in the tech sector are not uncommon, this round of layoffs is the first major one since Beijing’s crackdown on tech giants. The crackdown has been criticized for killing the entrepreneurial spirit that made China a tech power over the past decade and the companies and profits that used to attract China’s best and brightest. Even though the country reported 8.1 percent growth in gross domestic product (GDP) last year, its fourth-quarter growth was only 4 percent from a year before, a marked slowdown from 4.9 percent in the third quarter and 7.9 percent in the second. 

As a result, China’s tech giants have been posting disappointing results in recent earnings reports. JD.com reported its worst revenue growth in six quarters, while Alibaba marked its slowest increase in revenue since listing in the three months ending in December 2021. And Tencent’s sales grew at their slowest pace in 18 years during the third quarter of 2021.

Desperate for a way to put a positive spin on mass layoffs for an increasingly skeptical young workforce, some of China’s Big Tech firms are said to be sending congratulation notes for “graduating” to employees they’re axing. Social media users have started sharing images of a cheery note titled “Graduation notice” allegedly issued by JD.com’s human resources department. The note, generically addressed to an unnamed employee or “JDer,” reads: “Happy graduation! Congratulations for having graduated from JD.com! Thank you for the companionship!”

Despite these damage control efforts, the destruction of tech-related jobs from content creation to private tutoring is translating into larger fears of an unemployment wave in China that could rival the 2008 global financial crisis or the state sector reforms of the late 1990s. While there are no accurate state-published statistics available to measure the true extent of job losses in recent months, an earlier report by Chinese recruitment site Zhaopin.com found that half of the people surveyed said their company had laid off staff in 2021 while a quarter said they were directly affected. 

Headcounts have also frozen at companies such as Alibaba, whose total workforce doubled in 2020 but remained barely changed in 2021. ByteDance, one of China’s prized unicorns, experienced rapid growth over the past decade, but the company closed education services and retreated on multiple fronts in the past year in the face of tougher regulation. 

With 200 million people—roughly one in every four workers—in a status of “flexible employment” from ride-hailing to food delivery, China’s gig economy is particularly vulnerable to volatility in the job market. Additionally, there is early evidence that the reduction in private tech sector jobs is pushing young people back toward job security in the state sector. At Tsinghua University, nearly 70 percent of students graduating last summer took a job in government agencies, publicly funded institutions or state-owned enterprises.

China’s year-long tech crackdown has not just taken a heavy toll on the employment market. It is now driving away global investors, a development at odds with the government’s goal of creating economic prosperity. President Xi Jinping’s campaign to curb the “disorderly expansion of capital” resulted in punishing losses for shareholders whose trust the government must now regain. Capital flight and general wariness toward Chinese assets have only increased since Russia invaded Ukraine in late February.

The Chinese government was able to briefly halt a rout in Chinese stocks listed on overseas exchanges by vowing to ensure stability in capital markets, support overseas listings, resolve risks around property developers and complete the crackdown on Big Tech “as soon as possible.” But Xi’s pledge to reduce the economic damage of his “zero-Covid” strategy is looking increasingly challenging as lockdowns in cities like Shenzhen and Shanghai cost the country an estimated $46 billion a month, or 3.1 percent of GDP, in lost economic output. Such volatility poses a risk to Xi ahead of a key party meeting later this year at which he is set to claim a third five-year term. 

Chinese Microblogging Giant Weibo on Notice for Delisting From U.S. Stock Exchanges 

On March 23, the U.S. Securities and Exchange Commission (SEC) added Chinese microblogging platform Weibo to a “pre-delisting” watchlist for failing to comply with financial disclosure requirements. Citing violations of the Holding Foreign Companies Accountable Act (HFCAA), a financial disclosure law for foreign companies listed in the United States, the action requires Weibo to furnish any evidence to dispute the listing by April 13. While placement on the HFCAA list would not lead to an immediate delisting, if Weibo fails to furnish evidence by the April 13 deadline, it would be formally designated as a Commission-Identified Issuer (CII). If Weibo remains as a CII for three consecutive years, the SEC would be required to delist Weibo from all U.S. stock exchanges. 

The Weibo action is part of a long-standing fight between U.S. regulators, accustomed to demanding in-depth access to regulated entities, and Chinese regulators, who have barred Chinese companies from providing these disclosures on the basis of national security concerns. The HFCAA, passed in the aftermath of a high-profile scandal involving Chinese coffee chain Luckin Coffee, was meant in part to address that tension. After the SEC finalized its implementation of the HFCAA in December 2021, SEC Chair Gary Gensler called out China and Hong Kong specifically for enforcement action, noting that the two jurisdictions had historically failed to allow the Public Company Accounting Oversight Board (PCAOB) to perform their inspections. Since then, the SEC has added at least 273 companies to its pre-delisting watchlist. 

Despite the three-year timeline, the preliminary delisting has cast a pall on a Chinese market already suffering from lackluster financial performance. The NASDAQ Golden Dragon China Index of U.S.-listed Chinese stocks dropped 52 percent in the past 12 months. The SEC’s action on Chinese companies in the United States also had ripple effects in China’s domestically listed companies, with JD.com, Baidu, and Alibaba down between 5 to 11 percent in the Hong Kong-listed stocks in early March, after the SEC took action against five other Chinese tech, pharmaceutical and fast food companies to the watchlist. 

Weibo’s addition to the HFCAA list bodes poorly for other Chinese internet giants listed in the United States. In total, 248 Chinese companies are listed on the NASDAQ, New York Stock Exchange and NYSE American, with a total market capitalization of $2.2 trillion. More than 200 of these companies may be subject to delisting under the HFCAA. While Chinese investors would bear the brunt of the financial loss, American institutional investors would also be significantly affected. One Goldman Sachs estimate showed that U.S. institutional investors hold an estimated $200 billion of exposure to Chinese company stocks in the United States. 

To avert the risk of delisting, Chinese regulators have shown some willingness to budge on their hard line. Chinese securities regulators are reportedly weighing a compromise that would allow U.S. regulators some limited audit disclosures. Additionally, on the same day the SEC announced Weibo’s listing, Reuters reported that China’s securities regulator had called on Alibaba, Baidu and JD.com to prepare for audit disclosures to the United States. For its part, the U.S. has publicly taken a hard line, with the PCAOB stating that full access to relevant audit documentation “isn’t negotiable.” 

Other News

EU Warns China Not to Export Critical Technology to Russia

In a summit with President Biden in Brussels, European Union leaders raised concerns that China may be preparing to send semiconductors and other critical hardware to Russia to help soften the impact of sanctions on the country. Russia has historically imported the majority of its semiconductors and consumer electronics devices from China, and high-end semiconductors are crucial to powering advanced weaponry and technologies like 5G, artificial intelligence and robotics. In continuing to send semiconductors to Russia, China may run afoul of U.S. sanctions enforcers, who have promised to “absolutely” enforce export controls against China if they send semiconductor chips to Russia. 

China’s continued sales of semiconductor chips to Russia may help ease some of the immediate impact of the sanctions. As Russian firms have taken a plunge in their financial performance since the invasion, Chinese firms have filled in the gap, with China-Russia trade increasing 38.5 percent in January and February, compared to the same figures in 2020. Chinese tech companies in particular have deepened their roots in Russia to fill the space left behind by Western firms. However, there may be limits to this cooperation, as Moscow has been reluctant to rely excessively on other Chinese technology in sensitive areas like telecommunications out of fears of becoming captive to Chinese high-tech firms. 

While China’s continued sales of semiconductor chips may help ease the harsh effects of sanctions, analysts argue that it won’t fully plug Russia’s high-tech gaps caused by the sanctions. Most high-end chips—necessary for certain advanced weapons systems—are produced by Taiwan’s TSMC and South Korea’s Samsung. Both companies have already stopped deliveries to Russia to comply with U.S. export controls. The restrictions on high-end semiconductor exports may also affect Russia’s ability to sell arms abroad. Russia is the world’s second-largest arms exporter, and semiconductors are crucial in certain military applications that require specialized materials and circuit design. 

In addition to semiconductors, leaders in Ukraine have also called on Chinese tech companies to stop drone exports to Russia. On March 16, Ukrainian Vice Prime Minister Mykhailo Fedorov called on Chinese drone maker DJI Global to stop doing business with Russia, noting that DJI drones were used to kill innocent civilians. While DJI has denied the allegations, they noted that Ukraine can formally request that DJI impose a “geofence,” ordinarily used to prevent drones from flying near airports and other sensitive areas, which would shut off DJI drones being used in the entire country. As of March 29, according to DJI’s own map, DJI has not imposed that restriction.

Chinese Regulators Target Influencers, Cracking Down on Short Videos and Livestreaming 

The Cyberspace Administration of China (CAC), China’s top internet watchdog, announced on March 17 that it would “clean up chaos” in China’s short video and livestreaming service platforms this year. The announcement came three days after the CAC released draft regulations to extend time restrictions for children on apps, which had previously been applied to online gaming platforms, to video streaming and online messaging services as well. The draft regulations would require that companies engaged in audio, video and livestreaming platforms set up a “youth mode,” which would restrict the number of hours minors can spend on these platforms per day and cap the amount of money youths can spend on in-app purchases. 

The regulations came a week after delegates at China’s “Two Sessions” meetings convened to set their political priorities for the year. While the two bodies—the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC)—have no formal role in overseeing policy, the conference helps set the political agenda for the year. Some of the delegates at the session provided recommendations to curb video game addiction. Xu Jin, a CPPCC delegate, suggested that in order to curb workarounds to the gaming restrictions, internet companies implement facial recognition technology to verify user identities. Li Jun, an NPC member, recommended a complete ban on video gaming for minors. 

It is unclear how the video streaming regulations would take effect. The draft rules on video platforms mirror the rules the CAC introduced last year limiting youths to spending no more than three hours per week on online gaming platforms. While online gaming companies have largely complied with the rules, Chinese youths have found workarounds, including “renting” gaming accounts from adult vendors for use. While many major tech platforms have mandated official ID verification as part of their user creation process, a black market has sprung up to rent adult in-game IDs for as little as 50 cents per hour. If the CAC cracks down on video streaming services, it is foreseeable that Chinese users will continue to find workarounds as they have done for other rigid policies, like the private tutoring bans. 

Biden Administration’s Proposed Defense Budget Remains Trained on China

With an eye toward Russia’s invasion of Ukraine and the competitive challenges posed by China, Biden released a $5.8 trillion budget proposal on March 28 aimed at tackling U.S. security and economic concerns. The White House asked Congress for $813 billion for national defense, including $773 for the Pentagon—$30 billion more than approved by Congress for this year. 

Biden remarked in an address introducing his proposed budget that “[t]he world has changed,” stating that the U.S. is “once again facing increased competition from other nation states—China and Russia—which are going to require investments to make things like space and cyber and other advanced capabilities, including hypersonics.” Earlier on March 28, Adm. Christopher Grady, vice chairman of the Joint Chiefs of Staff, said in a briefing that the budget request “remains in line with our strategic approach and prioritizes China as the pacing challenge,” while also highlighting the “acute threat posed by Russia.” The budget states, “We are at the beginning of a decisive decade that will determine the future of strategic competition with China, the trajectory of the climate crisis and whether rules governing technology, trade and international economics enshrine or violate our democratic values.”

The Biden administration’s priorities include $4 billion to shore up U.S. alliances and leadership to “effectively compete with the People’s Republic of China (PRC) and Russia.” Nearly $1.8 billion would go “to implement the Indo-Pacific Strategy to support a free, open, connected, secure, and resilient Indo-Pacific Region,” with another $400 million earmarked for the Countering the People’s Republic of China Malign Influence Fund. The budget provides an additional $682 million for Ukraine “to counter Russian malign influence and to meet emerging needs related to security, energy, cybersecurity issues, disinforma­tion, macroeconomic stabilization, and civil soci­ety resilience” and $6.9 billion “to enhance the capabilities and readiness of U.S. Forces, NATO allies, and regional partners in the face of Russian aggression.”

At home, Biden’s budget request seeks to bolster U.S. exports and supply chains. It provides the Commerce Department’s Bureau of Industry and Security with a $30 million increase “to advance national secu­rity and secure trade by bolstering the bureau’s ability to implement and enforce export controls.” The budget also seeks an 11 percent increase in cybersecurity funding across civilian government agencies. Finally, Biden’s proposal supports the Defense Department’s focus on building “integrated deterrence” by modernizing the military across all domains of warfare through increased funding for research and development. 

Commentary

Tim Culpan explores in Bloomberg how global electronics suppliers looking to diversify their manufacturing footprint beyond China are turning to electric vehicles as a catalyst for expanding capacity around the world. 

Michelle Toh recounts Huawei executive Meng Wanzhou’s return to the corporate stage on March 28 as sanctions continue to slam the business. 

David Dorman details China’s plan for digital dominance in War on the Rocks. 

Cybersecurity company Trellix and the Center for Strategic & International Studies examine security professionals’ mindsets toward nation-state actors, particularly Russia and China, in a global report entitled “In the Crosshairs: Organizations and Nation-State Cyber Threats.”

Xinmei Shen explains in the South China Morning Post that the Chinese Communist Party’s top training school is tapping the metaverse concept to train cadres. 

In Reuters, Robyn Mak analogizes the exposure of Chinese tech giants and their once-enthusiastic investors after years of flattery and hype to the duped emperor in a Hans Christian Andersen’s fable.

Ina Fried of Axios cautions that global tech standards may be another potential casualty of the Russia-Ukraine war. 

Micah Maidenberg describes the aftermath of the China Eastern Airlines crash that killed all 132 people on board, including the granting of approval for U.S. crash investigators and technical advisers to travel to China for the probe.

Liqian Ren analyzes the market reaction to the readout released by China’s State Council of the financial stability and development committee meeting chaired by Vice Premier Liu He. 

Stuart Rollo charts the future of the quantum tech arms race for The Conversation.

Chen Aizhu, Julie Zhu, and Muyu Xu report for Reuters that China’s state-run oil company Sinopec Group has suspended talks regarding proposed projects in Russia amid concerns over the impact of international sanctions.