Cue the references to a “Matrix”-like dystopian future where Chinese citizens are trapped in a simulated reality managed by state-controlled computer algorithms.
It’s not too far-fetched to imagine.
The Cyberspace Administration of China (CAC), the country’s cyberspace watchdog, announced recently that it would set up governance and rules to tighten its grip on algorithms that companies use to interact with its users.
Algorithms are widely deployed, used by companies to interact with users on a daily basis. Think of them as the engine that drives our internet search results, restaurant recommendations based on our location and taste preferences, show and movie recommendations based on our viewing history, the route our GPS app takes us on based on traffic and other patterns, etc. We depend on various algorithms, whether we realize it or not. And today—when every company needs to be a technology company—investments in algorithms, artificial intelligence, and machine learning are increasingly mandatory.
For Chinese consumers, that all translates to what videos they see on Douyin (China’s version of TikTok), what recommendations they see on Alibaba’s Taobao shopping platform, dispatch decisions on platforms such as logistics apps Didi and Meituan, and the topics trending on Weibo (China’s Twitter-like application), for example.
It’s unclear how the Chinese Communist Party (CCP) intends to regulate the algorithms underpinning such technologies. But a few general guidelines have been laid out.
The announcement, which said the guidance would take around three years to roll out, comes a month after the CAC released a set of draft guidelines on how algorithms should behave.
Some of this may stem from legitimate concerns around certain tech companies using algorithms to manipulate results or rankings, and fabricate the popularity of certain topics over others, or make them more addictive to users. The CAC is careful to state that such regulations would “benefit consumers and online users.”
One particular provision will be far-reaching in its impact. It says technology algorithms must promote mainstream values (read: CCP-approved), and requires that algorithmic models demote (read: eliminate) content that may upset the economic or social order.
Similar to rules placed on China’s populace, its technology algorithms must also be censored, loyal to the CCP, and must abide by the all-important “Xi Jinping Thought on Socialism with Chinese Characteristics.”
From an economic perspective, especially for U.S. investors who hold positions in Chinese technology companies increasingly subject to these state control mechanisms, the calculus gets even more convoluted. Companies such as Didi and Alibaba are listed on the U.S. stock market, and millions of Americans hold their shares either directly or indirectly via mutual funds or ETFs. U.S. pensions—through venture capital and private equity—are also shareholders in firms such as TikTok’s parent company ByteDance.
In addition to perusing earnings reports and keeping up with the income statement and balance sheets of these companies, shareholders also must be aware of governance issues and increasing CCP control over corporate management. Shareholders must necessarily accept that the companies they “own” will be subject to follow Xi’s future agenda.
The question then becomes, should U.S. investors be complicit in this?
