Chinese social media app RedNote is full of cute and heartwarming moments after some 500,000 American users took refuge there last week to protest the US government’s impending ban on TikTok.
Calling themselves “TikTok refugees,” these users paid the “cat tax” to join RedNote by posting photos and videos of cats. They answered many questions from their new Chinese friends: Is it true that in rural America every family has a large farm, a huge house, at least three children and several large dogs? That Americans have to work two jobs to support themselves? That Americans are terrible at geography and many believe that Africa is one country? That most Americans have two days off every week?
The Americans also asked questions of their new friends. “I heard every Chinese person has a giant panda,” an American RedNote user wrote. “Can you tell me how I can get it?” The response came from someone in the eastern province of Jiangsu: “Believe me, it’s true,” he deadpanned, posting a photo of a panda doing laundry.
I spent hours scrolling through those so-called cat tax photos and laughed at the cute, heartfelt responses. This is what the Internet is supposed to do: connect people. More importantly, RedNote demonstrated how competitive a casual Chinese social media app can be from a purely product standpoint.
With access to an online population of a billion and an army of hard-working, resourceful engineers, China’s internet platforms are world-class in terms of design, functionality and user experience, as demonstrated by TikTok and now RedNote, or Xiaohongshu in Chinese.
But why aren’t more people outside China using Chinese apps?
For a while, China’s Internet giants seemed poised to take over the world. Remember the excitement when Alibaba listed its initial public offering in New York in 2014, when Didi took over Uber in China in 2016, when Facebook imitated WeChat, and when a partner at Silicon Valley firm Andreessen Horowitz preached the power of WeChat? At one point, five of the world’s 10 largest Internet companies, measured by market capitalization, were Chinese. Now Tencent, the creator of WeChat and the gaming company, is the only one left in those ranks.
China’s largest Internet companies still make products that can compete with anyone else in the world. Their employees work harder than their Silicon Valley counterparts. (Many work on a “996” schedule – 9am to 9pm six days a week.) Despite US bans on semiconductors, they have managed to make impressive developments in artificial intelligence. But the world seems to have forgotten China’s Internet leaders, seeing them only as part of a technological and geopolitical threat.
The industry has not kept its promises. Why? What happened?
In 2017, I wrote an article in another publication titled: “Behind the Great Firewall, China’s Internet is Booming.” I told English-language readers to think beyond China’s drive to censor and copy Western businesses because China was being digitized on an astonishing scale and speed.
That year, Tencent’s revenue grew 56%, while that of Alibaba, the e-commerce giant, increased 60%. Didi has raised nearly $10 billion in funding, mostly from international investors.
This all seems like a lifetime ago. Today, it is much more difficult for Chinese internet companies to thrive.
The country is mired in the worst economic recession since the Mao era. Few people believe the 5% growth rate announced by the government for 2024. Consumer confidence is low: Both Uniqlo and Starbucks, two consumer brands that have thrived in China for years, are losing customers to cheaper brands.
When the country’s economy suffers, it is difficult for one of its pillar industries to succeed. Technology company earnings reflect this.
As China’s population continues to steadily decline – it shrank for the third year in a row – big tech platforms are running out of new users. WeChat has about 1.4 billion accounts, more than the population of China. Even a second-tier social media app like RedNote, popular among young, urban, affluent women, has amassed more than 300 million users. For such companies, international expansion is the natural next step.
ByteDance, TikTok’s parent company, is the envy of the industry for the success of its overseas operations, which have grown at a much faster pace than its domestic operations.
But the US attempt to ban TikTok highlights how difficult it is for Chinese internet companies to expand overseas. As the Chinese Communist Party tightens its grip on the country’s private sector, it is increasingly difficult for the world to entrust its citizens’ personal data to Chinese companies, which ultimately answer to Beijing.
There are good reasons why the outside world, including the US government, doesn’t trust these companies. In a country where the government owns most everything and exercises power haphazardly and often ruthlessly, the private sector has been on the alert. Internet companies are heavily censored and must self-censor to survive. In recent years all the big guys, without exception, have had their apps removed from app stores or have been fined or disciplined by regulators.
It is well known that China’s leader, Xi Jinping, is not a fan of the digital sector unless he uses it to advance his national rejuvenation agenda.
“The real economy is the foundation of a nation’s economy and the source of its wealth,” he said in 2018. “Economic development must never deviate from the real economy into excessive dependence on the virtual economy.”
In that speech and on other occasions, Xi made clear that he places a higher priority on advanced manufacturing than the Internet and that he favors state-owned enterprises over the private sector.
This set the tone for the crackdown on the video game business of Alibaba, Ant Group, Didi and Tencent in 2020 and 2021. Harsh “zero Covid” restrictions in 2022 that crippled the country’s economy precipitated some of the biggest Internet companies in financial losses to the industry. first time in years.
Also during this period, the Chinese government’s wolf-warrior diplomacy and its alliance with Russia forced many countries to reconsider their view of China as an important part of the global economy. Some now see it as a threat to democratic systems and world peace. Perceptions of China have worsened in many Western countries, and fewer people are interested in visiting China than ten years ago.
Chinese internet companies and investors are increasingly caught between their authoritarian rule at home and suspicion, even hostility, abroad.
Most Western investors now believe that investing in China’s technology sector is not worth it due to the country’s geopolitical tension and unpredictable policies.
U.S. university endowments and pension funds have stopped providing money to venture capital firms to invest in Chinese startups. A generation of Chinese investors who helped create some of the most successful technology companies turned to golf, marathons and hiking.
Investors in global stock markets are equally uninterested in Chinese internet companies.
An investor not authorized to speak publicly told me recently that in 2017, when she joined a hedge fund that managed more than $100 billion, about 40% of the fund’s emerging market holdings were Chinese technology stocks . Now they are less than 3%.
The ecosystem that cultivated a vibrant tech sector is broken. Less investment means fewer startups, far fewer initial public offerings overseas, and much lower stock valuations than their American counterparts. RedNote, the social media app used by American TikTok users, was founded in 2013 and has yet to go public.
These companies remain competitive, the investor said. But in the eyes of the world, he added, they are no longer relevant.