The Chinese Communist Party wants (a bit) less consumer internet

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IINVESTORS IN CHINESE tech stocks could resemble characters in an online “party game,” a type of multiplayer activity that has become all the rage in 2023. The latest addition to the genre is “DreamStar,” launched Dec. 15 by Tencent, the largest Chinese digital giant, with a major gaming company. Players race around a track as cartoon sheep and pandas, dodging cannonballs and grabbing magical clouds, sometimes diving into chasms only to end up back where they started.

Tencent's stock price surged on hopes that the game would rival the wildly popular “Eggy Party,” a similar offering from rival developer NetEase. A week later, it collapsed, as did NetEase, after the National Press and Publication Administration (NPPA) published draft rules capping spending on online gaming. The next day, the NPPA ” seemed to offer one of those magic clouds, declaring that he wanted “prosperous and healthy” development for the online gaming industry. Tencent and NetEase shares are back almost to their initial levels.

The incident suggests that President Xi Jinping has little appetite for another harsh tech crackdown of the type that torched an estimated $1 trillion in shareholder value between early 2021 and late 2022; On January 2, Reuters reported that an official who originated the draft gaming rules had been fired. But it's also a reminder that the government doesn't like the big presence of Chinese big tech in citizens' daily lives — and that it would prefer entrepreneurs and investors to focus on serious things like manufacturing chips, cloud computing and artificial intelligence (AI) for industry.

The signal from Beijing, as cacophonous as it may be, is being heard. On January 1, Baidu, the Chinese search giant, announced that it had abandoned its $3.6 billion purchase of a local live-streaming platform called JOY. Baidu said only that the conditions of the agreement, initially signed in 2020, were not met. These could include regulatory approvals for expansion, insiders believe. Tencent and Alibaba, China's largest e-commerce company, have sold certain assets. (On December 29, a court also ordered Alibaba to pay 1 billion yuan, or $140 million, in damages to Alibaba., a rival e-tailer, which had accused the company of banning sellers from using other platforms.)

The difficulties of China's digital darlings contrast sharply with the rise of “hard technologies” favored by the state. Companies that try their luck in sectors that the government considers essential to its strategic rivalry with America can count on helpful policies and generous subsidies. They are also flush with cash. Over the past three years, even as capital for the consumer Internet has all but dried up, hardware technology developers have collectively raised about 550 billion yuan through IPOs.

No company embodies this trend more than Huawei. The telecommunications equipment maker appeared doomed after the United States blacklisted it in 2019 over fears that Chinese spies could use its equipment to eavesdrop on Western mobile communications (an allegation Huawei vehemently denies) . U.S. sanctions have deprived it of components, including advanced semiconductors, needed for its handsets and data centers. In September, Huawei shocked the world, including security hawks in Washington, by unveiling a 5g sophisticated silicon-powered smartphone made by minimum wage, China's largest chip maker. Huawei and SMIC are also shipping equally advanced server chips for data centers, which could be used to train AI models. On December 29, Huawei announced that its revenue in 2023 would reach nearly $100 billion, 9% higher than the previous year. Mr. Xi could not have hoped for a clearer signal about where there is money to be made.

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