China needs to rethink its regulations and governance of the platform economy

The Chinese economy is facing the triple pressures of shrinking demand, supply shock and weak expectations. The situation will probably take a long time to ease, as these pressures are mainly due to the impact and effects of the pandemic, rapid shrinking of property demand and the overall tightening of the platform economy under tough regulatory measures.

In terms of the pandemic, while the policies are being adjusted and improved and the overall situation is easing up, there is still a lot of uncertainty.

As for shrinking demand for residential property, looking at the figures for commercial bank loans released in May this year, the take-up rate for mid- to long-term individual loans is extremely low. Residential property demand is still weakening, with the effects expected to continue in the short term.

So, rebuilding China's prosperous platform economy has become the most important measure to stabilise the economy.

For nearly 20 years, the Chinese economy has grown steadily because of the rapid growth of the digital economy.

For example, a study showed that between 2001 and 2018, the digital economy sector contributed 74.4% of GDP growth. Also, from 2008 to 2021, online transactions went from 130 million RMB to 13.09 trillion RMB, an increase of over 100 times.

One might say that it was during this time that China became the second largest economy in the world, with its digital economy also second in the world. Its enormous achievements to match the US have much to do with the rapid rise of large-scale technology platform companies such as Tencent, Alibaba, JD.com and Meituan; platform vendors are the main entities in the digital economy.

But in the year or so since late 2020, the strong anti-monopoly regulatory measures taken on platform companies have quickly led to a shrinking platform economy, with share prices of listed platform companies taking a plunge and market value shrinking by nearly 10 trillion RMB at one point.

This situation would lead to the rapid weakening of platform companies' financing abilities. Platform vendors would also reassess their growth strategy and speed amid weakening motivation for investment and innovation.

As operations and profits shrink, and with little hope for new sources of income, most platform companies can only choose to reduce spending. With salaries an important cost for the platform industry, retrenchments are an option, showing that the shrinking platform sector will not just affect the stability of China's economic growth, but also affect employment for the people.

So, amid the tough economic situation, the Politburo meeting on 29 April called for adjusting the anti-monopoly policy on platform economies, while item number 17 of the State Council's array of moves to stabilise the economy proposed measures to support the healthy growth of the platform economy; it also said platform companies should stabilise employment and take the lead in easing the plight of small and medium companies.

Recently, the Chinese Academy of Social Sciences released a report saying that the platform economy theoretically is naturally suited to push for "common prosperity". The State Administration for Market Regulation also released its 2021 annual report on anti-monopoly enforcement, which focused on the number of anti-monopoly cases investigated, fines collected, and what kind of monopolistic behaviour was stopped.

Several market analyses say this means the Chinese government's year of targeted adjustments to platform companies is nearly at an end, and there are starting to be major shifts in the strong regulatory policies on the platform economy; the harsh winter for platform companies is all but over, and spring is coming.

However, these documents and reports only addressed what the platform economy could or would be able to do, without questioning why it has developed this way?

Similarly, the SAMR's annual anti-monopoly law enforcement report only focused on the number of anti-monopoly investigations launched into platform companies without mentioning the impact and effectiveness of such moves on the digital economy over the past year.

Hence, it is impossible to understand the basic characteristics and operating mechanisms of the platform economy. And without that understanding, it would be impossible to effectively govern and regulate platform companies.

As humanity enters the big data era, the development of the platform economy is not only a trend that will bring about unprecedented economic prosperity, but also the driving force of economic development in modern countries and the main manifestation of their core competencies. Thus, the development of the platform economy is inevitable.

However, its importance is not because of superficial reasons such as stabilising employment and promoting common prosperity, but the fact that digital technologies centred on the platform economy are bringing about a new epoch in human society.

The new factors of production, transaction tools, resource allocation and industrial organisation methods brought about by digital technology will increase economic efficiency, which will lead to fundamental changes in the way society operates and behaves, and in the development of corporate business models. Platform vendors are the main vehicles of this fundamental change.

At the same time, the rules of competition and monopoly among these vendors are different. They neither follow the traditional price mechanism nor the traditional bureaucratic organisational structure but have instead formed curatorial and governance mechanisms based on positive network effects.

Thus, the competition and monopoly game that platform vendors play is multi-layered and complex. That is to say, platform companies need to have positive and strong network effects - if not, they cannot survive.

But possessing network effects does not guarantee success - as long as there is competition, platform companies with network effects could also be replaced by new platform companies. Hence, platform companies must grow in size. But being large and occupying a huge market share does not guarantee success either.

In China's anti-monopoly law enforcement blitz last year, the authorities used traditional economic theories such as market structure, market share and market dominance to ascertain the monopolistic nature of platform companies, leading to questionable conclusions and effects.

But both the government's anti-monopoly law enforcement report and the new measures implemented to develop the platform economy did not reflect on this issue. Neither did the authority revise the now obsolete anti-monopoly law on the basis of such reflections.

The government's perception and policies on how to govern and regulate platform companies can only undergo significant changes after some deep reflections. Only then would platform companies be clear about what to expect from the government's anti-monopoly policy.

In addition, the rapid development of the platform economy comes with pros and cons. Market behaviours that are not conducive to orderly development will inevitably emerge. But these unhealthy market behaviours are not the monopolistic practices of platform companies and it is thus necessary for the government to delink general unhealthy market behaviours from monopolistic practices when governing and supervising platform companies. For example, under the conditions of the platform economy, the "choose one out of two" (二选一) policy should not be abolished in one fell swoop - its behavioural characteristics should be studied instead.

In sum, whether spring has come for China's platform economy depends on whether the current ambiguities can be removed to give a clear answer to these fundamental issues.

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