Skip to content

Caixin Global

Tech Regulation Needs to Work in Tandem With Inclusive Growth


In 2021, China’s heightened regulatory oversight on the digital technology sector and new emphasis on “common prosperity” sent shockwaves through industries and capital markets worldwide.

After more than a decade of rapid growth, where is China’s digital technology sector going? What is the underlying logic of regulatory policies and where will they end up? Can common prosperity coexist with the market economy and entrepreneurship? These are the questions on the minds of investors and entrepreneurs.

At an internal event held by Primavera Capital late last year, the firm’s founder Fred Hu had an in-depth discussion with Michael Spence, Nobel Prize in economics laureate, on tech regulations, common prosperity and cryptocurrency. Spence is also a former dean of Stanford Business School.

The pair agreed that China’s turn toward a more heavily regulated tech sector is part of a global trend to curb data abuse and prevent monopolies, with regulators elsewhere also expected to tackle the issue sooner or later.

Meanwhile, Hu and Spence also suggested that regulation needs to provide predictability, be appropriate and balanced, protect technological innovation, help raise productivity and promote inclusive growth.

Regarding “common prosperity,” they shared the view that the Western world is overly concerned about the short-term impact of such policies on financial markets while ignoring enormous social problems caused by wealth inequality. Similar to the oversight over digital platform abuse, they said wealth inequality is another global challenge of widespread concern that is being addressed by different governments in different ways. One should not make a simplistic connection between tech regulation and the common prosperity agenda, as that could lead to misguided conclusions.

The pair believes that the intentions behind China’s tech regulations are logical, but the way that regulators communicate with the rest of the world could be improved in order to reduce the costs and side effects of the regulations.


Tech regulations should be sufficiently flexible

Fred Hu:  Since the end of 2020, China has introduced sweeping regulations on the country’s tech sector, targeting the consumer and internet sectors, from e-commerce to fintech, food delivery to ride-hailing, online gaming to after-school tutoring. In the consumer-focused economy sphere, the international media call these actions “the great tech crackdown” in China. As an economist and long-time observer of China and the global economy, how would you interpret Chinese regulatory actions? You know, the rationale behind them, and the likely medium- to long-term impact.

Michael Spence: It’s a great question. The first observation is that we’re entering an era of heavier regulation of digital technology and especially the internet and data and so on. And that’s not confined to China. I think to put the China experience in context, everybody is facing challenges associated with digital and the internet and the platforms and so on. And it’s a range of issues. One is clearly related to data privacy, security, responsible management of data and who has access to it. These are not easy questions to answer.

The second area is a clear increase in the market power of some of these entities in terms of control of access to digital ecosystems and markets. And occasionally they may abuse this power or do things that are deemed unacceptable from the point of view of competition policies.

In the fintech area, I think there’s another set of issues in addition to data and whatnot — and they have to do with what I call a level-playing field. I mean, if you have fintech players in the credit market with no capital requirements and basically total control of all the data, you have to ask yourself the question, what are the other players in the credit system going to do? Now my interpretation, therefore, is all countries have common problems that we need to address. China is no exception. It’s the most advanced country in terms of e-commerce and mobile payments and related fintech and has decided to move aggressively.

Now you can question the wisdom of specific actions, but I think what I’m seeing from the outside is, when China decides to deal with an issue, it typically moves faster than the rest of us. It moves decisively, and in a sense, it kind of moves in steps to feel its way along. I think most of what I’m seeing coming out of China, even though it came as a bit of a shock after a long period of pretty light regulation, is not that surprising. And to be honest with you, Fred, I think you’ll see the rest of us following along in a pattern that’s somewhat slower and more stumbling. I don’t think we’ll end up exactly in the same place, but we certainly have common issues.

Hu: I agree with you. I do see growing consensus around the world, not just in China, but around the world, that something must be done to curb the potential monopoly in the digital time, relaxed protection of data protection, cavalier attitude towards user privacy, especially all the fake news and misinformation spread around by the platforms, such as Facebook or its new name, Meta.

Spence: Exactly! I’m glad you brought that up, Fred. I didn’t mention that, but there’s a clear set of concerns having to do with the content on the internet and what it does in various different systems, countries in terms of political and social polarization, governance, etc. The current version of this in the West is with respect to fake news, misinformation about vaccinations, which is hampering our own pandemic containment efforts.

Hu: Indeed. At the extreme, the ubiquity of fake news and misinformation may pose threat to democracy and the political system.

So I guess there’s emerging consensus that something must be done. The question is how — how can we make sure that societies through regulation can limit big tech’s effects while allowing us to continue to reap the benefits? It seems to me the challenge is how to balance the pros and cons or benefits and cost of regulation.

Look around the world, which country or block, say the Europe Union, has done a good job in regulating the big tech? If I you were asked to offer advice, what would be the single most important piece of advice you would give to policymakers and regulators?

Spence: That’s a very good question. Let me start with the European side. Europe is in a somewhat different situation than either the United States or China because we essentially do not have the really powerful mega platforms resonant here. So Europe is running mostly on the American ones, you know, Google, Facebook, WhatsApp, and Amazon, (which) I think it’s easily the biggest e-commerce player here.

And the regulation of them is coming in multiple dimensions. But what Europe is known for is having waded into the question of how data is handled and managed. The most famous is the regulation that has been promulgated and implemented by the European Union — the GDPR general rules on data protection.

You don’t have to agree with everything they’ve done, but you have to give them credit for tackling a very difficult area and at least making some progress in it. Their incentives are a little bit different from (those) in countries that have big tech platforms and really advanced work in the artificial intelligence area using these big pools of data. Europe really doesn’t have that problem, so they don’t really have to worry if they’re sort of damaging the kind of positive forward progress on some of these fronts.

What advice would I give? The first piece of advice is we need to work out together over time principles and even regulations that have to do with the responsible use of data. And those regulations need to be sufficiently flexible to allow the kind of highly beneficial use of data that we see. And when I say highly beneficial use, I mean increasing the scope of markets, increasing their efficiency, increasing the inclusiveness of the growth patterns. And this is not in just strictly economic areas, you know, e-commerce and finance. As you mentioned before, Fred, we’re seeing tremendous potential in health care, in education — done properly, and so on.

That’s the advice I would give — maybe experiment along and try to work out principles that are generally acceptable for the management of data and then enforce them. There’s one other thing I will say, and then we can talk about it more. I don’t think the world is going to succeed if a very small number of entities have more or less exclusive access to very large pools of valuable data.

And I think what we’re seeing in China, more than in any other place, is an attempt to sort of making data something more like a public good. And by that, I mean increase access to it, so that multiple entities can use it for beneficial purposes, can use it as part of their business models, etc. And it’s not an easy task to know how to do that. But I don’t think a world in which one or two companies have almost all the mobile payments data and all the benefits you can get from using that kind of data — that’s not the right destination, I think.

And I’m watching carefully the steps that the financial regulators are taking to try to make that sort of data accessible to a larger group of companies in the finance area, the kind of level of a playing field that’s the way I think of it.

Hu: Indeed! At the early stage of the internet, one of the ideals of the internet is about opening and sharing, so economy and society can become more and more digitalized, more and more data can be collected, analyzed and shared.

Therefore, I believe that digital infrastructure is an essential part of the 21st century, enabling the rapid development of data-based AI technologies.  So, I do agree that we need to figure out how to protect user privacy, data security on one hand, but also the public good nature of data as you highlighted. It’s clear that all of us have experienced how internet and digital technology have made our life more convenient, and how they really made a crucial difference in our daily lives, whether it’s e-commerce, remote working, online education, or access to health. During the pandemic, they have enabled all of us to have a sense of normalcy, maintain the normal operations of the economy and society.

And you as a scholar have written extensively about the role of digital technology in potentially raising productivity and increasing economic growth. The bottom of the digitization I’ve seen in China and elsewhere has been largely driven by entrepreneurs and the private sector. Governments, regulators around the world do not always seem to be able to understand fully or keep pace with the rapid speed of innovation and technology changes. Thus, this perception gap more or less explains the tech industry’s complaints that politicians and regulators around the world have failed to fully recognize the enormous costs of tech regulation. So Mike, are you worried about regulators perhaps unintentionally throwing out the baby along with the bathwater?

Spence: Well, yes, I am. Actually, I think some of these sorts of divergences and lags in perception are pretty much inevitable. The notion that the tech sector would be more advanced in seeing innovation potential and commercial opportunities, including the huge set of positive ones you just mentioned, is probably kind of the normal state of affairs, but if the gap gets too big, then the regulators can do a fair amount of damage if they’re stumbling around. My sense is that problem is diminishing.

I think, back to, at least on the American side, a time when the sort of scrutiny of the business models of some of the platforms, prominently Facebook, was beginning, and the level of knowledgeability of the people, the elected officials and some of the regulators was pretty low, as it showed up in the hearings. I think that gap is closing, Fred, and with beneficial effects. So, I think there’s less likelihood that will sort of just stumble into a pattern of regulation that does real damage.

The other thing that worries me, frankly, is that, depending on where you are, the commentary, the kind of social context, if you like, shifted as you and I have discussed before, from it’s all good to it’s all bad in a very short period of time. And now most of the commentary is about how dangerous these social media platforms are and all that sort of things. It’s hard to just dismiss those concerns, but it’s not a balanced view of what the benefits and costs are.

So, yes, the direct answer to your question is that I think the mindset we need in approaching these regulatory challenges and so on is a somewhat better-balanced perception of the huge opportunities for inclusive growth patterns. For example, I may be an outlier here, but I do think there’s a potential productivity surge of enormous magnitude coming from this. That’s a longer discussion. But anyway, the bottom line is if we went into the sort of inevitable regulatory transition with a balanced view, I think I’d be more optimistic about coming out in the right place.

Hu: Indeed, the keyword is really the balance. To get the regulatory balance — the benefits, the cost, the pros and the cons. So we can continue to benefit from the advance in digital technology but limit the downside risks, such as monopoly, data security and privacy invasion, etc.

Spence: By the way, the pandemic has probably helped us. I think the pandemic, as you described before, was a pretty important element. Digital was a pretty important element of resilience, and I think it was obvious to everybody. In some sense, whether you’re in education or health care or government services or contactless payments or any one of a number of areas, the appreciation of the potential has gone up and helped with the balancing that we’re talking about.

In some areas, I think it’s really quite stark. At least in the United States, telehealth basically didn’t get anywhere before the pandemic. So this pandemic’s capacity to force us to conduct experiments and whatnot is going to have long-run beneficial effects. And you’re starting to see writings about it. Students say, yes, we do want to go back to the classroom, but no, we don’t want to give up all those things we learned about having to do with the complementary contributions of digital to our education. You see here the same things in health and ditto in business and going back to work. It’s going to be a new world, and probably we got there faster because of the forced adoption in the pandemic environment.

Hu: Indeed, so we have seen the emergence of online and offline hybrid models in education, health care, business, etc. We talked about this before. It can be expected that even after the epidemic, people are unlikely to return to the traditional office work schedule of 9 a.m. to 5 p.m., but to have the hybrid model of office work and online work instead. We’re seeing signs in China of how digital technology is changing the way people work and live, and now we’re increasingly seeing the same change around the world.

The implications of the development of digital technology are far-reaching, and the vast majority of them are positive. The mission of the regulatory authorities is obviously not to suppress technology and technological innovation, but to ensure that the development of the technology industry benefits the society, is healthier and more sustainable.


Inequality is a universal challenge

Hu: A related topical interest is China’s “common prosperity”. It has got much attention and debate. Personally, I think it’s quite an attractive development vision. In essence, common prosperity is referred to inclusive growth which shares economic growth with more people. Many commentators, especially those in the West, however, have expressed alarm at this part of the solution, fearing a bit of clash head-to-head with the entrepreneurial free market economic system. Mike, do you share such concerns at all? How could we harness digital technology to generate more inclusive growth while managing inequality?

Spence: Well, I think it’s a great question. I think you’re right about the Western commentary. It tends to kind of miss the main point. At the risk of repeating something I said before, in a different context, there are fairly powerful forces, some of them related to digital, that are making the issue of inequality a serious problem — inequality of income and wealth, and to some extent access to essential services. I don’t think it would come as a surprise to anybody who’s listening. We have that problem in the United States, but it’s not confined to one or even a small number of countries. And it doesn’t surprise me at all that some of these forces are operating in China, even though it has a somewhat different sort of economic system with a different balance between the public and private sector, and a different way of those two sectors interacting. When President Xi announced that common prosperity was going to be an important priority, that didn’t surprise me, even in the slightest. At that level, I think we’re talking again about common problems and probably somewhat different approaches to sort of dealing with them.

Having said that, there’s good and bad ways to deal with them, regardless of where you are. And so again, the challenge is a really important social priority no matter where you are. In the West, it affects cohesion, social commitment, the social contract, polarization and eventually governance. In China, I’m not a citizen of China, but I would imagine that an extended pattern of rising exclusion from the opportunities that are being presented by a rapidly growing economy, that’s about to become a high-income economy and then in relatively near future that pattern of exclusion would cause unrest and even eventually start to cause people to question the governance structure as it has happened everywhere else. So it’s not surprising that they want to tackle this now. I think, in China, when the government decides that something’s important, they tend to do something about it rather quickly. I interpret some of these more recent actions directed at the very wealthy people who have become wealthy because of their innovation in the tech sector, that sort of getting on board and do something that’s visible by way of contributing to a broader economic and social agenda in this dimension.

Probably you wouldn’t see that happen in the United States, or if it did, it would probably occur through the tax system somehow. The last thing I’ll say is if we had a problem before the pandemic in these dimensions, and we certainly did, the pandemic made it worse pretty much everywhere. And the fact that it comes up now as we struggle to emerge from the pandemic and deal with its aftermath, the fact that inclusiveness is a high priority item of the agenda in China and elsewhere is good and to be expected.

Hu: Agreed. I’d say inequality is a universal challenge across the world. China’s common prosperity is the Chinese way to respond to this challenge. Only time can tell whether China will be effective.

My understanding is China’s “common prosperity” does not mean, as many have feared, that the government will restrict private companies and cracks down on entrepreneurs through strong regulation, or simply imposes heavy taxes on the wealthy. The lesson of “common poverty” caused by the “big pot of rice” and extreme egalitarianism in China’s history should still be fresh in people’s minds. “Common prosperity” should be the use of very strong policy systems to support sustainable and high-quality growth, to further enlarge the economic pie, but also to create more opportunities for those who are lagging behind, so as to promote economic growth and wealth creation, while expanding the middle class, ensuring equal opportunities and social justice.

Unfortunately, many entrepreneurs and investors are confused and anxious, and the market has panicked.

Spence: If you take the combination of a pretty aggressive regulatory push in the tech sector along with the common prosperity agenda, there is a slight risk of sending the wrong signal, I don’t think they want to send, which is that the tech people were heroes before and now they’re sort of bad people. You know what I mean? We don’t want to send that signal. You want the young Chinese, the next generation of entrepreneurs who are coming along and you and others are investing in them. You want them to be excited about their contribution to China’s advancement, and especially it’s becoming a first-class global power in technology. So you want them to be on board with that. This is a marketing problem. I think the government needs to say, look, we have a common prosperity problem and we have a legitimate regulatory agenda. But then to say forcefully, we really do understand both in the past and in the future, the enormous benefits that our society gets from innovation and entrepreneurial activity, including in the private sector.

Fred Hu: Indeed! I think the policy’s intentions are well justified, but the communication and implementation could have been far better.

China today has reached what the IMF calls the high middle income country status. Clearly, the Chinese people aspire to transition to high income country by end of this decade. Going forward, the type of policies to make it happen increasingly has to be focused on quality. For quality, I think what the Chinese government means more productivity, efficiency, balanced, sustainable, for example, how to balance growth on the one hand and climate change on the other. I think we get the directions correctly. But I’d say if China wants to successfully achieve the second centenary goal, technology, R&D and human capital investment will continue to play the most important role. Do you agree with it?

Spence: I more than agree with it. I think that’s just crucial. I was asked recently in a webinar whether China was going to get caught in the middle-income trap. I said, given the understanding among the policymakers in China, what you just said, and the importance of advancing technology and deploying it for increased dynamism and efficiency and effectiveness in delivering a sustainable pattern of growth, the investment in human capital has gone with that. I said there’s something close to a zero chance, in absence of an enormous accident, will cause China to slow down and not reach its goal of being fully advanced high-income society.

The reason for that is basically China is, for the most part, a good investor. Every once in a while, they overdo it a little bit, then we get imbalances. But the chance that China will underinvest in these critical intangible assets that are the foundation of this, especially the last stage of this journey, it’s just not going to happen. For example, they’re well on the way to having balanced high quality growth paths. I was talking with colleagues and friends in the academic world in China, and I think there’s a widespread view that China will actually peak in carbon emissions by 2030 and maybe even before. That means, for the world as well as for China, this is just enormously important. We all know there’s a big job to do globally to produce sustainable growth paths, but China has been working very hard on it. So yes, I think that the shift that goes back more than 10 years to a different way of assessing economic and social progress, a more balanced, multi-dimensional view of it. It’s is now in the implementation process, and it’s impressive and represents real progress. So, I’m pretty optimistic actually on that front.


Cryptocurrencies cannot be widely used as a currency

Hu: And I hope you’re right. It is vital for China to continue to focus on human capital, on innovation, and really focus on the quality of growth to get where we should be, hopefully by end of this decade. Finally, Mike, I want to shift gears slightly to a particular area of technology, which is really hot. Namely, what’s your view on cryptocurrency and the underlying blockchain technology? It seems to me more and more investors are investing in cryptocurrency as a new asset class, but central banks and regulators seem to be somewhat ambivalent. Some branches even took hard-line positions. Why is that?

Spence: I’m not really sure. Let me tell you what kind of two or three thoughts I have on this. First of all, our economies and especially our financial systems, are becoming digital. So I think it’s inevitable we will have a kind of digital fiat currency controlled by the central bank. So that’s not a massive change. It’s just an adaptation to the world in which things are digital. So the layman thinks that the currency is cash. That’s wrong. The least of money supply is created by the banking system in most places that actually work, and it’ll all become digital.

So that’s not what you’re asking about, but I think it’s a piece of the puzzle. Second, blockchain does look like a very interesting collection of technologies because of two things. One, you can do secure transactions I think, at least the evidence suggests you can. And second, it produces a record, an unalterable record of what has gone on. So it’s used in supply chains. It’s used in payment systems. And I read just this morning that HSBC and Wells Fargo Bank in America have reached an agreement to use blockchains in some of their inner bank transactions.

And it’s not surprising, right? It’s a very useful technology whose applications are being explored by central banks, by other financial institutions. And so on, which brings us to cryptocurrencies, which I think we really need to change the name of these things. You referred to it correctly as an asset class, and that’s what it is. It’s not one that interests me very much. Most of these things look pretty volatile. I’m not saying they won’t play a role. Maybe if there’s a way to restrict the supply of them, there’ll be inflation hedges in the way that gold is for some investors and so on.

I don’t mean to dismiss it, but the notion that these things would be a currency in wide use just doesn’t make sense, given the volatility, these things can go down in a week by 30%. That’s not my idea of a store of value, which I seem to remember from the same economics training you and I both had that one of the functions of a currency is a store value. That doesn’t seem to pass that test.

And the other thing is that some aspects of these currencies are pretty energy intensive stuff, and that doesn’t strike me as moving in the right direction, with respect, if they were widely used, doesn’t strike me as moving in the right direction. So yes, we will have to experiment with new asset classes. Maybe some of them will turn out to be interesting. I think lots of investors wanting to know more about it will just sort of jump in and see what they think about it. Maybe allocate a small part of the portfolio to it. I don’t think that’s necessarily a bad thing. At some point, these things will have to come under regulatory review as well.

And I don’t know how that’s going to go. I think the main message, the big news I think from the point of view of impact is the arrival of blockchain in various parts of our economic and financial systems globally.

Hu: Mike, thank you for sharing these insights, I’m completed synced with you. I’m actually positive and hopeful about the promising blockchain technology, but I would be very cautious of cryptocurrencies because of the volatility and also the potential misuse by unscrupulous people, such as smuggling and money laundering. That could be harmful to society.

Spence: Just to highlight that point, as far as I can see as a currency, the only place this is really useful is in the sort of illegal part of the global economy.

Hu: I’m with you. Cryptocurrencies could be used for tax evasion, organized crimes, and even financing terrorism. Let’s watch how this unfolds in the coming years.

The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.