Internet giants replace Communist Party as China’s powerbrokers

There is an overarching force in China with tentacles reaching deep into almost everybody's life. That force is not the Communist Party of China, whose influence in people's day-to-day affairs – though all too real – has waned and can appear almost invisible to those who do not seek to buck the system.

The more disruptive force to be reckoned with these days is epitomised by the three large internet groups: Baidu, Alibaba and Tencent, collectively known as BAT, which have turned much of China upside-down in just a few short years.

Take the example of Ant Financial. Last week, it completed fundraising that values the company at $45 billion to $50 billion. It operates Alipay, an online payments system that claims to handle nearly $800 billion in etransactions a year, three times more than PayPal, its US equivalent.

That system, an essential part of China's financial and retail architecture and one familiar to almost every Chinese urbanite, is no brainchild of the Communist Party. Instead, it was the creation of Jack Ma, the former English teacher who founded Alibaba.

Monopolistic position

Alibaba handles 80 per cent of China’s ecommerce, according to iResearch, a Beijing-based consultancy. That is a monopolistic position that even the Communist Party, with its 87 million members out of a population of 1.3 billion, can only dream about.

The BAT companies, which dominate search, ecommerce and gaming/social media, together with other upstarts, such as Xiaomi, a five-year-old company that has pioneered the $50 smartphone, are upending how people live.

When we think of the Chinese internet, we tend to think of the overweening influence of the state through censorship.

However, the internet is also a liberating force that is unleashing entrepreneurial energy, bringing market forces to bear in diverse corners of the economy and expanding the role of the private sector at the expense of entrenched state enterprises.

Colliding

In China’s nominally controlled economy, the private sector long ago outstripped the state as the engine of growth. At the forefront are technology companies in general and internet companies in particular. As elsewhere, in China the online and offline worlds are colliding.

Taxi apps such as Didi Dache, backed by Alibaba and Tencent, have brought market forces to bear where prices were previously set by the state. They are threatening lucrative local taxi monopolies, provoking crackdowns and protests by drivers in several cities.

In finance, where deposit rates are state-regulated, the BAT companies and others are offering savings and investment products with much better rates.

In important respects though, even the fiercest of China's internet pioneers do not operate in a free market. For a start, they conduct their business behind the "Great Firewall of China", a politically motivated barrier that has protected them from the likes of Google, Twitter and Facebook.

In practice, the BAT companies are so close to the government they often behave like quasi-state-owned enterprises anyway, even to the extent that they help form regulation. The government's ecommerce strategy, announced in March by premier Li Keqiang, was originally conceived by Pony Ma, chairman of Tencent.

Baidu, Alibaba and Tencent have turned much of China upside-down in just a few short years

Authorities are not always sure how to regulate these powerful new companies. When the state administration for industry and commerce criticised Alibaba for the prevalence of counterfeit goods sold on its websites, Jack Ma’s company threw its weight around, forcing the government regulator to retreat.

Commercial disruption

If the authorities really want to fight commercial disruption, however, they have the tools to do so. In 2014, for example, the central bank suspended “virtual” credit cards issued by Alibaba and Tencent, blocking their path into online credit.

One must assume that, if push came to shove, the authorities could cripple even the biggest private company. Yet so embedded are the likes of Alibaba and Baidu in people’s lives that even the mighty Communist Party might have cause to pause. – (Copyright The Financial Times Limited 2015)