How Badly Is China’s Great Firewall Hurting the Country’s Economy?

Beijing's paranoia is about to kill the country's booming live-streaming sector — and it won't be the only victim.

Technicians sit in a control room at the State Grid vehicle battery recharging and exchange station in Beijing on May 30, 2012.  According to government sources, China is to set aside around two billion yuan (320 million USD) as part of drive to cut carbon emissions and produce energy-saving vehicles.        AFP PHOTO / Ed Jones        (Photo credit should read Ed Jones/AFP/GettyImages)
Technicians sit in a control room at the State Grid vehicle battery recharging and exchange station in Beijing on May 30, 2012. According to government sources, China is to set aside around two billion yuan (320 million USD) as part of drive to cut carbon emissions and produce energy-saving vehicles. AFP PHOTO / Ed Jones (Photo credit should read Ed Jones/AFP/GettyImages)

Beijing’s strict control over the internet doesn’t come cheap. The Chinese government created its censorship regime, bulwarked by the “Great Firewall,” to keep pernicious political ideas out of the country. To the extent that discussions of color revolutions, the Tiananmen massacre, and domestic political intrigue are almost universally blocked, its overseers might consider it a success. But the economic ramifications of policing the internet are as important as the political ones.

It’s not just that, by some accounts, Beijing employs some 2 million people to police the imperfectly socialist thoughts of the public. The regulatory and policy whims of Beijing create constant dilemmas for Chinese business: Nobody knows where the line is or when they might cross it. China’s ability to innovate in the digital age is thus held hostage to a government that’s paranoid about the possibilities of change.

In the most recent development, the Ministry of Industry and Information Technology has been forced to deny widespread reports that it planned to ban virtual private networks (VPNs), a tool that allows users to surf the web unblocked, by February 2018. Chinese and international firms with operations in China actively work to segment tech functions to avoid the Great Firewall and the slowdown in speeds needed for major tech firms. Beijing has been shutting down major audio and visual content services, drawing up Maoist enforcement language, and ordering websites to engage in “thorough rectification.”

This will, in all likelihood, strangle the rambunctious digital economy that has developed once more in China since the last wave of mass crackdowns on political content in 2012-2013. Streaming content has especially exploded as a business. In a country where the alternative was the stultifying dullness of Chinese state TV, with 30 percent of prime-time shows dedicated to reliving the War of Resistance Against Japanese Aggression, this should be no surprise.

Individuals have gone live doing everything from playing video games to eating dinner, with even moderately popular entertainers making three times as much as a new college graduate. Studios sprang up to support such entertainers, even lending money for plastic surgery and providing acting or presentation training. The popular streaming firm Momo, which started as a dating app, now gets 80 percent of its revenue from video streaming and saw fourth-quarter revenue jump 524 percent last year. Major Western firms have also piled into the video-streaming market. The entertainment media giant BMG has been scouting talent in China.

Some uniquely Chinese factors played into the timing of this explosion. Only in early 2016 did China begin rolling out widespread 4G services, with mobile internet traffic jumping 121 percent beginning in January 2016 and accelerating to 129 percent growth in April 2017. Per user monthly mobile data usage jumped from under 300 megabytes in January 2015 to nearly 1.5 gigabytes in April 2017. The rollout of improved internet infrastructure helped give video streaming the necessary bandwidth to grow.

Then, for a while, there was the sweet tang of government approval. Investors were encouraged by Beijing’s stated interest in transitioning the economy and nurturing start-ups. Video platforms that combined entertainment and news began receiving large investments from established players like Tencent, which owns one of the largest social media apps in the world, WeChat. Even personalities turned themselves into brands to receive investment as venture capital sought out the next big thing.

It helped that major Chinese internet firms like Tencent and Alibaba facilitated micropayments allowing consumers to give small amounts of money to entertainers, news presenters, or even doctors for medical advice. In the first three months of 2017, electronic payments in China equaled 35 percent of GDP and are continuing to grow at more than 50 percent annually. Studios and entertainers split the revenue from small payments or gifts made to the streaming personalities.

But what ultimately doomed the sector was that online media exploded faster than regulators could manage. Playing catch-up, Chinese censors began cracking down. Platforms, facing the removal of their business licenses for hosting content deemed inappropriate, now employ more people to police content on their platforms than they do to manage the platform.

But even self-censorship hasn’t been enough, because the definition of what’s inappropriate has recently expanded far beyond what it was before. China now censors not just subversive political content but pornography, movie reviews, LGBTQ content, Western values or luxury, and general celebrity gossip. Regulators have even ordered movies, including those that stream online, to show Communist Party propaganda videos prior to the main attraction to promote the “Chinese dream.” The Chinese censorship regime is now determined to be an all-encompassing (and self- appointed) guardian of socialist morality, even if that comes at the expense of business innovation.

The new line in the sand has created enormous uncertainty in what was supposed to be a driver of the new economy envisioned by Chinese President Xi Jinping. As one online media producer asked, “Is it that celebrity gossip is banned, or is it that [we] can’t criticize domestically made films? Is there any certainty?” Absent regulatory certainty, China’s long-touted rebalancing to a service economy based upon high-tech skilled jobs will never happen. China has already fallen back on credit-fueled infrastructure growth to drive economic progress, with investors abandoning new areas of the economy subject to political whim for old staples like real estate.

Beijing may publicly encourage its entrepreneurs’ creativity, back state-funded venture capital firms, or laud openness at global conferences, but the reality is that choking the flow of information suffocates a modern economy. The public demand for inventive new content and technology stands in sharp contrast to the crackdown on the freedoms that would make it work. Beijing is already struggling to persuade Alphabet to make Google Scholar available on the mainland while leaving the rest of its services blocked. Meanwhile, professors from elite Chinese universities are leaving for employment at universities in the West, citing constraints on research in hard science areas like biology.

This censor-driven climate of business uncertainty has taken shape amid a broader political crackdown that has witnessed a significant tightening on all expression. Under Xi’s crusade against corruption, Beijing has assumed the power not simply to censor political speech but to destroy companies and industries that fail to conform to ill-defined core socialist values that are offended even by April Fools’ Day. This may help Xi achieve political stability. But if the party wants to hit its own economic objectives, it is going to have to loosen up.

Photo credit: ED JONES/AFP/GettyImages

Christopher Balding is an associate professor of business and economics at the HSBC Business School in Shenzhen and author of "Sovereign Wealth Funds: The New Intersection of Money and Power." Twitter: @BaldingsWorld

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