Share prices of companies including Baidu Inc. at the Exchange Square complex in Hong Kong, China, on Tuesday, March 23, 2021.
Paul Yeung/Bloomberg via Getty Images
July 13, 2021 5:10 AM EDT

Back in July 2014, China’s top business regulator summoned executives at Alibaba to a meeting. The State Administration for Industry and Commerce (SAIC) accused the e-commerce giant of selling illegal, dangerous and counterfeit goods, dealing with unlicensed vendors, and offering misleading sales promotions, among other alleged misdeeds.

Two months later, Alibaba debuted on Nasdaq with a world record $25 billion IPO. The substance of the SAIC’s allegations weren’t published until the following January—and when they were disclosed, billions were shaved off the firm’s valuation, albeit briefly. An investigation was also launched into whether investors had been misled by the failure to disclose, on the firm’s prospectus, the SAIC’s concerns.

A war of words then erupted between the SAIC and Alibaba’s charismatic founder, Jack Ma. In the end, to believe well-sourced reports, the Chinese Communist Party’s top leadership stepped in and smoothed things over, mindful of the damage the spat could do to investor confidence in China’s nascent tech industry. The SAIC—which admitted not going public with complaints earlier to avoid upsetting Alibaba’s IPO—quietly buried its probe. In the battle between big tech and regulators, Ma had emerged victorious.

How times have changed. Today, Ma is no longer in public view and China is in the middle of a multi-pronged, regulatory crackdown on its previously untouchable tech giants. The battle took a dramatic twist this month, after the world’s largest ride-hailing firm Didi—boasting 493 million annual users and 15 million drivers across 15 countries—was probed by regulators for alleged data privacy and national security breaches. This took place just two days after Didi’s $4.4 billion IPO in New York.

Far from smoothing things over, this time the authorities ordered Didi—and the operators of three other apps who had recently listed in the U.S.—to stop accepting new users and remove their products from app stores. Didi’s share price tumbled by a quarter, losing some $21.5 billion in market value. Shareholders meanwhile launched two class-action lawsuits, accusing the firm of failing to disclose concerns held by the Cyber Administration of China (CAC)—and the fact that the regulator had advised Didi to delay its IPO. In response, Didi said in a statement that it would “strive to rectify any problems.” The promise mattered little. On July 9, the CAC added another 25 apps operated by Didi to the ban.

“This is a show of force from the Chinese government, saying, ‘We’re going to reel in these tech giants and their unruly behavior,’” says Prof. Michael Sung, founding co-director of the Fudan Fanhai Fintech Research Center at Shanghai’s Fudan University. “Because now they’re big enough to have systemic risk.”

Of course, the crackdown poses a threat to the way that China’s tech sector has historically enlarged itself—using capital to subsidize aggressive market-share grabs—and has potentially serious consequences for wider investor confidence and therefore China’s development goals. Other than Didi, last year Alibaba was fined a record-breaking $2.75 billion for antitrust violations, while the IPO of its fintech arm, Ant Group, was nixed. Dozens of other firms have been fined or sternly warned.

Illuminated office windows at the Didi Global Inc. headquarters at night in Beijing, China, on Monday, July 5, 2021.
Yan Cong/Bloomberg via Getty Images

China’s new data regulations

So what has changed? Like many other nations, China is waking up to the fact that data is the new gold and it needs explicit rules to govern how it is accumulated and shared. In April 2020, China released a policy document that significantly listed data as a “factor of production” alongside the four traditional factors of socialist economic policy: land, labor, capital and technology.

The new importance attached to data reflects the fact that the digital economy made up 38% of China’s GDP in 2020. By 2025, the proportion is expected to be 55%. As the traditional drivers of China’s overall growth slow down, the digital economy will become even more vital. Because the digital economy is fueled by data, it is important to have clear rules on how companies can gather, store and sell it.

Increasingly, the Chinese government has been coaxing its big tech companies to share data with state and other parties for the greater good. “That effort would usually start with sweet coaxing and if that doesn’t work then out comes the stick,” says Mark Natkin, founder of Beijing-based IT research firm Marbridge Consulting. “Now we’ve passed the sweet coaxing period and the stick cupboard has been unlocked.”

Read more: How China Is Cracking Down on Its Once Untouchable Tech Titans

China is in the process of implementing new regulations in three key areas: to restrain monopolies, govern fintech firms (some of which are accused of acting like unregulated banks) and protect data privacy. The Cybersecurity Law (enacted in 2017); the Data Security Law (already released and comes into effect in September), and the Personal Information Protection Law, which just underwent its second draft and is expected by the year’s end, are the result of this effort.

Kendra Schaefer, head of tech policy research at consultants Trivium China, tells TIME that a crackdown was expected only when all three laws were on the books. “So the speed and timing [of what happened to Didi] was a surprise.”

Most recently, the crackdown has shifted to firms listed, or preparing to list, in the U.S., owing not least to new U.S. regulations that require Chinese firms to hand over customer data to auditors. In a Weibo post, Didi vice president Li Min insisted that “Didi stores all domestic user data at servers in China. It is absolutely not possible to pass data to the United States.” On Saturday, China’s cyberspace regulator proposed that any company with data on more than one million customers—for China, an extremely low bar—must go through a cybersecurity review before listing overseas.

“What we’re reading over and over again is people saying, ‘excuse me, Didi, your priorities are backwards,’” says Schaefer. “First you need to get compliant with local regulations and then you can go abroad.”

Chinese online retail giant Alibaba founder Jack Ma (C) rings a bell to start the trading of his company's stock on the floor at the New York Stock Exchange in New York on September 19, 2014.
JEWEL SAMAD/AFP via Getty Images

Investor confidence in Chinese tech firms

What does this mean for investor confidence in China? Despite Sino-U.S. relations spiraling to a historic low, a record $12.5 billion has been raised in 34 U.S. offerings made by Chinese firms so far in 2021. But in recent weeks, five Chinese tech firms have nixed their U.S. IPOs—a combined value of over $1.4 billion—and the 17 others scheduled for this year are now clouded in doubt. On Monday, the Wall Street Journal reported that TikTok parent ByteDance—valued at some $180 billion—was pausing its IPO plans while it gets to grips with the new regulations.

China’s tech stocks have lost over $800 billion in combined value since February, and some argue the boom is officially over. CNBC’s Jim Cramer, who had urged investors to snap up Didi shares prior to the IPO, dramatically changed tact on Tuesday. “You’re a moron if you buy a Chinese deal after this,” he said. “Why do you need to put your capital at risk?”

The question is whether this cooling also extends to private investment. Deal values from venture capital and private equity-backed buyouts in China reached $74.3 billion in the first quarter of 2021, according to financial information provider Preqin. But “With India and Southeast Asia coming on strong, private equity investors have already been turning there and reducing their China venture investment in favor of these next, emerging markets,” says Rebecca Fannin, author of Tech Titans of China. “I think this trend will continue given the uncertainty from China.”

This is not just bad news for investors. After all, China requires capital if it is to upgrade its industrial production and meet myriad other development goals. President Xi Jinping’s stated aim to go carbon neutral by 2060, for one, requires an estimated $15 trillion investment over the next decade or two. “China can’t do that by itself,” says Sung.

The ball, of course, is in Beijing’s court. Schaefer says the next two to three years of cementing this new regulatory framework are going to be “rough and tumble, breaking some eggs to make this omelet.” But on the plus side, China’s regulators don’t operate on an election cycle, and are typically looking 10 years, 20 years, or longer into the future.

“Investors are rightly wary at this time,” says Schaefer. “But we’re also hearing that smart money buys the dips.”

Write to Charlie Campbell at charlie.campbell@time.com.

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