Valdai Club

The most impactful companies around the world, from Apple and Tesla to Blackrock and others, are increasing their exposure to and investment in China in ways that will act as a channel for promulgating CAC-based standards around the world, write Andy Mok and Hao Jiabei.

Introduction

Water was central to life in ancient China, as it was the source of life and prosperity but also brought calamity. Not surprisingly, the ability to control water became the central task of China’s rulers, as it was central to the nation’s survival as well as their political legitimacy. This dynamic has also given rise to a saying: “Nine dragons trying to tame the flood,” which refers to multiple entities fighting to solve a single problem but falling short because of an inability to coordinate and cooperate.

Today, digital data plays a similar role as it has become the central source of economic life and, as we move towards the realisation of the ‘Internet of Things’, even physical survival. But, like water, digital data also holds enormous destructive potential. As a result, the Communist Party of China (CPC) has made the construction of a comprehensive and effective digital data management regime one of its top priorities.

The Cyberspace Administration of China (CAC) plays a leading role in these endeavours and has become a ‘super dragon’, tasked with taming and bring order to the flood of data in China. In this article, we explain why the CAC is not only a preeminent government agency in China but, because of the borderless nature of the digital revolution, rapidly becoming a globally influential one.

“Nine dragons taming the flood”

While the Internet boomed in China and unlocked choice, convenience and wealth for its people and companies as it accelerated the country’s drive towards national rejuvenation, the government’s regulation of the Internet suffered from what the Chinese call “nine dragons trying to tame the flood.” This traditional idiom refers to multiple government entities ineffectively trying to solve a policy problem because of the challenges of cross-sectoral coordination and inter-jurisdictional cooperation.

Initially, authority for regulating the digital economy in China was dispersed across four ministries  : the State Council Information Office (SCIO), the Ministry of Public Security (MPS), the Ministry of Industry and Information Technology (MIIT), and the Ministry of Propaganda (MoP). However, this fragmentation of authority was seen as preventing the government from playing the guiding role necessary for such as vital, growing, and potentially destructive force. 

Through a series of bureaucratic reorganizations, CAC emerged as the top agency with the jurisdictional power to formulate, implement and enforce policies and regulations across the increasingly broad range of activities related to digitization and data. Moreover, CAC reports directly to the Central Commission for Cybersecurity and Informatization (Chinese: 中央网络安全和信息化委员会; pinyin: Zhōngyāng Wǎngluò Ānquán Hé Xìnxī Huà Wěiyuánhuì), which is headed by Party General Secretary and State President, Xi Jinping.  With its broad jurisdictional mandate and its position at the apex of political power in China, CAC has the political authority to direct the development, implementation, and enforcement of a comprehensive set of policies and regulations over the most vital resource in China today. Instead of four dragons trying to tame the digital flood, there is now only a single overarching one.

Launched by a “policy entrepreneur”

The term “policy entrepreneur” was coined by John W. Kingdon, an American political scientist, to describe those "advocates who are willing to invest their resources - time, energy, reputation, money - to promote a position in return for anticipated future gain.” Crucially, innovative ideas and non-traditional strategies are used to create opportunities and realize desired policy outcomes. Successful policy entrepreneurship occurs in three phases: Recognition of demand in the political landscape for some form of innovation involving a public good; Proposal of an innovative policy instrument to satisfy that demand; Coalition building and charismatic evangelism to ensure innovation is placed on the agenda and ultimately implemented.

According to Giandomenico Majone, Emeritus Professor of Public Policy at the European University Institute whose expertise is regulatory governance within the European Union (EU), policy entrepreneurs must possess three basic qualities: first, they must be taken seriously either as experts or as leaders of powerful interest groups, or as authoritative decision-makers; second, they must be known for their negotiating skills; third, and probably most importantly, they must be persistent.

Lu Wei, CAC’s founding director, can be seen as the quintessential policy entrepreneur as defined by Majone. First, early in his career, Lu was recognized by Xi Jinping for ability and drive as can be seen in the positions of increasing importance Lu held which culminated in serving as Vice Mayor of Beijing and Beijing CPC Standing Committee Member. Also, his negotiating and other bureaucratic skills were evident in his rise. Moreover, Lu’s forceful personality and flamboyant approach allowed him to stand out and seize attention for his policy and personal ambitions. So it was perhaps no surprise that Lu was selected as the first head of CAC by Xi Jinping only five months after Xi took office. 

Lu’s most important legacy involved not just setting the direction of CAC but providing the initial visibility for the agency to achieve lift-off and escape velocity. As the chief evangelist for CAC, he seized the spotlight both domestically and internationally. For example, he was courted by US tech titans like Mark Zuckerberg, CEO of Facebook, with Time Magazine naming him one of the world’s 100 most influential people in 2015. He also oversaw the launching of the World Internet Conference which draws the world’s top technology leaders such as Tim Cook of Apple and Sundar Pichai of Google. Domestically, he oversaw the formulation of numerous laws and regulations including the Cyber Security Law, the Encryption Law, and the e-Commerce law. Like a booster rocket, Lu provided the powerful and necessary initial thrust for CAC. Moreover, after lift-off, his legacy through setting its initial policy agenda, direction, and key relationships continues to guide this regulatory rocket ship.  

Data as a factor of production

Achieving the rejuvenation of the Chinese nation  not only requires increases in efficiency but also entirely new conceptual approaches.

In 2020, a State Council Opinion was issued that specifies general principles of how this will be done.  Note an opinion is an official normative document that has a coercive force and its instructions must be implemented by all subsidiary governmental agencies. As the State Council is the highest government unit, this means every government entity will implement these directives. 

Section 20, the first of three sections pertaining to data in this opinion calls for the government agencies to “promote opening and sharing of governmental data. Governmental agencies must optimize their databases for economic management, and make data-sharing responsibility lists to promote data exchanges among different governmental agencies from various regions. Also, they must establish public data opening rules and regulations in fields such as registrations, transportation, weather, etc.” We understand this section to focus on data created and controlled by various governmental agencies and the main result will be the provision of real-time transaction-level data to the universe of government decision-makers. This will result in faster and higher-quality decision-making.

Next, section 21 requires relevant government units to “enhance the value of social data. Relevant governmental agencies must cultivate digital economic new industries, new formats, and new models to promote the standardized data exploration and utilization in agriculture, industry, transformation, education, security, city management, public resources trade, etc. With the help of industries, associations, chambers of commerce, the governmental agencies will promote the standardized data collection in artificial intelligence, wearable gadgets, Internet of Vehicle (IoV), and Internet of Things (IoT), etc.” This section of the opinion creates a similar dynamic to that of the financial service industry where the main driver of innovation is governmental regulation. For example, government rules regarding what types of entities may engage in various types of financial services and the regulations on their business operations can give rise to new businesses and industries. Interest rate regulation is an example. Similarly, these new regulations should give rise to a number of new types of business and new ways of doing business. For example, in agriculture, ag-analytics has been a hit, which is based on software to boost crops yield and save water and energy.

Finally, section 22 states the government agencies should “strengthen data resources integration and security protection. The governmental agencies should explore and establish a standardized data management system to improve data quality and standards and enrich digital products. Based on the research on data’s nature, the government agencies should establish data privacy protection system and security scrutiny system, and promote the data classification security protection system which can be perfectly applied in big data, to enhance the protection for governmental data, commercial and corporate secrets, as well as personal data.” This unprecedented data standardization project will lead to much easier communication and integration across a wide range of industries and applications. This type of standardization is not unlike Mao’s introduction of pinyin and simplified Chinese characters (简体字 in Chinese), which not only created a single national standard across what was a fragmented country linguistically but was also designed to be easier to learn thereby making adoption and usage more likely. Similarly, this unified data standardization may become a common global “data language” that can be easy to learn and widely adopted by the international community.

As the requirements of this opinion are implemented as detailed laws and regulations, they will affect and even undergird every part of China’s economy and society. Since CAC is the lead agency for supervising data and the other associated elements of digitization, this means that CAC will have a voice in every part of Chinese society and its economy.

The irresistible magnetism of China’s economy

Not only is China’s economy big and growing quickly, but the development of its tertiary economy, and in particular the knowledge economy, is another powerful force compelling more foreign countries and companies to increase their investments there.

Apple is a good example. As has been recently reported, it committed to investing $275 billion over a five-year period    which includes shifting from suppliers like Foxconn in Taiwan to those on the mainland, building relationships with Chinese software companies, partnering with Chinese universities such as Tsinghua in research and development and investing directly in Chinese tech firms such as Didi. These initiatives have played a key role in powering Apple’s rise in market capitalization to more than $2 trillion. But there is more going on here than just increased sales. The development of China’s tertiary sector has created a deep pool of app developers and other technical talents  that have played a key role in creating apps used around the world that Apple distributes on its App Store and make important contributions to the company’s profits and market capitalization. Apple, like many other foreign companies, is increasing investment in China not just to take advantage of market opportunities but also increasingly vital resources provided by China’s tertiary sector.

Tesla is another example. According to Elon Musk, Tesla CEO, speaking at this year’s World Internet Conference organized by CAC, “My frank observation is that China spends a lot of resources and efforts applying the latest digital technologies in different industries, including the automobile industry, making China a global leader in digitalization. Tesla will continue to expand our investment and R&D efforts in China.” Like Apple, the rise of the tertiary sector in China provides Tesla with not just an enormous market powered by rising incomes and consumer expectations but also access to critical resources that only a world-class knowledge economy can provide. The most important component for electric vehicles is the battery with Fujian-based CATL (Contemporary Amperex Technology Co., Limited), Chinese: 宁德时代, the global leader in lithium-ion battery development and manufacturing. CATL has been compared to Huawei because of the high percentage of revenue it invests in R&D. As a result, it is a global technology leader and one of Tesla’s most important suppliers and partners. 

Blackrock is the third and final example. China represents an enormous opportunity for foreign financial service firms, especially in investment management, which was started twenty years ago and has experienced meteoric growth. According to KPMG, AUM (assets under management) grew from RMB10.4 billion (US$1.27 billion) in 1998 to RMB12.6 trillion (US$2.0 trillion) in 2018 and is expected to hit RMB36.3 trillion (US$5.6 trillion) by 2025, which would make it the second-largest asset management market in the world. Reasons for this growth include China’s rising wealth as well as recognition of the need to provide pensions for its aging population and the growing financial sophistication of retail and institutional investors. With US$9.5 trillion in assets under management, BlackRock is the world's largest asset manager and has made China a top priority, especially as China has accelerated opening its financial services market to foreign competition.

On Aug. 30 Blackrock raised $1 billion from Chinese consumers while also recommending that foreign investors triple their allocations in Chinese assets. “The Chinese market represents a significant opportunity to help meet the long-term goals of investors in China and internationally,”   BlackRock Chairman Larry Fink wrote in a letter to shareholders.

As can be seen from these examples, many of the most globally significant companies are increasing their exposure to and investment in China, especially in technology-based and data-based industries. Given the size of China’s market and the discipline and coherence with which China’s government is formulating and implementing relevant policies and regulations, the Chinese regulatory regime will likely affect countries around the world and CAC will be at the center.

Conclusion

CAC is poised to be one of the most important and influential government agencies in the world.  It resides at the highest echelons of political power in China and it has consolidated its authority as a single super dragon where once there were several. Moreover, its founding under a charismatic policy entrepreneur has provided it with momentum and a clear sense of mission. 

To realize the Chinese dream requires more than just governmental efficiency but theoretical and conceptual breakthroughs. One of the most important ones is treating data as a factor of production. This vastly expands the scope of CAC’s mandate.

Finally, the most impactful companies around the world, from Apple and Tesla to Blackrock and others, are increasing their exposure to and investment in China in ways that will act as a channel for promulgating CAC-based standards around the world.

And so, CAC is rapidly becoming the super dragon taming the flood of data not just for China but for the world.