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Good news! We’re not talking about crypto, Elon Musk or SaaS multiples today. We’re also not talking IPOs, global venture capital trends or the like. Instead, we’re going to talk about putting toothpaste back in the tube. Sound fun? Let’s go.

China’s technology industry

Since the Ant IPO was pulled and the Chinese Communist Party executed off a flat-wild period of regulatory action in 2021, you have probably heard less about China’s technology. That’s because the companies that tended to make the biggest splash in foreign media were concerns like Alibaba, ByteDance and the like — tech companies that touched lots of individuals, including folks outside the country’s national borders.

China’s government decided that such companies had too much influence, and thus needed to be cut down to size. This meant, variously, the decapitation of the for-profit edtech sector, social media regulation, the effective curtailment of foreign listings, punitive data reviews, video game limits along with a long pause in new titles, new rules regarding algorithms and more.

After a period of comparative freedom to innovate, compete and, yes, at times act anticompetitively, China’s domestic tech industry entered 2022 in a very different state than it kicked off 2020. (This isn’t to discount the impacts of COVID-19 on Chinese tech companies; but the move toward remote work and the like was global, and for our purposes today we care more about the regulatory environments shifts in particular.)

The result of the fusillade of regulatory action, a full nelson of top-down control, was probably about what you expected. Some recent headlines for flavor:

Those should paint a fair enough picture of market sentiment regarding the crackdown. In more monetary terms, the value of many Chinese tech companies fell sharply. After peaking at more than $300 per share in late 2020, Alibaba is worth less than $100 per share today. Didi, which got caught between the Chinese government and the American markets after its IPO, saw its shares peak at a penny over $18 per share. Today it’s worth less than $2 per share.

Stories began to crop up about layoffs and other misery from Chinese tech companies. A few more headlines for context:

Given that this was pretty much what anyone with a pulse might have expected from the Chinese government throwing its absolute control around like gravity in a rollercoaster, pushing to remake one of its key economic engines by autocratic fiat in a short period of time, you are probably not surprised. And yet it appears that the Chinese government is, at least to some degree!

How do we know that? Well, observe:

The context here is that while the rest of the world is largely figuring out a path out of COVID, China’s government is locking down hundreds of millions of its citizens as it chases an impossible goal of zero COVID-19 cases. (The government previously touted its success at keeping the pandemic at bay as evidence of its superiority; such a stance makes any retreat from the goal difficult.) The result of lockdowns and a sharply diminished local tech industry is, surprise, economic malaise.

Not that the Chinese government intends to accept that. After indicating that besting American economic growth is a priority, debt-fueled infrastructure spending is back on the table, along with more real estate speculation, and, it appears, some softening of the rules deluge that its domestic tech market has been forced to endure without complaint.

Good luck?

Can the Chinese government put the tech toothpaste back in the tube? We’ll find out, but if I was an investor or founder I would not build inside the country. Sure, it’s a big market, but not one that you can count on. More when we get Q2 2022 Chinese venture capital data.