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China protectionism creates tech billionaires who protect Xi

[HONG KONG] China's tech giants will add star power to the country's political festivities this week, paying homage to President Xi Jinping and endorsing constitutional changes for him to remain president indefinitely.

Amid the annual legislative meetings, the luminaries have important business: Preserving their grip on a 1.4 billion-person market protected from global competitors.

The government's censorship rules often look to the outside world like a burden Chinese tech companies have to endure just like foreign players, but the country's Great Firewall has also been a boon for homegrown internet players.

The system of control and outright blockades effectively keeps Facebook, Twitter, Snapchat, YouTube, Google and others locked out of the world's biggest tech playground. 

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That's helped create thriving domestic giants, including Tencent Holdings and Alibaba Group Holding, now two of the 10 most valuable companies in the world. Alibaba co-founder Jack Ma is the richest man in China. Tencent chief Ma Huateng is No.2. There are dozens of other beneficiaries, who may draw scrutiny if a debate over US tariffs escalates into a full-blown trade war.

So tech leaders won't use the National People's Congress to question the tightest-ever censorship rules that go into effect March 31 or Mr Xi's unprecedented push to remain in power. Instead, they're voicing support for the president and his policies.

Baidu founder Robin Li, the billionaire gifted a near-monopoly in search when Google's refusal to censor results got its core services blocked in China, signalled his backing by saying he'll list his US-traded stock in mainland China "as soon as" he can.

"A close working relationship with China is part of the business model for companies like Tencent," said Victor Shih, a University of California at San Diego associate professor who studies the interaction between China's elite and politics. "The fact Google, Facebook and others can't be in China basically affords these tech companies a domestic oligopoly, which compels and incentivises these companies to work closely with the Chinese government."

President Donald Trump has sought to crack open the China market for US companies, part of a broader campaign against trade practices that spurred him to threaten steel and aluminum tariffs.

In an interview with Bloomberg Television in December, US Ambassador to China Terry Branstad voiced concern about market access in China and cited how China blocks Facebook while the US allows Americans to use Tencent's WeChat service.

Prospects for a trade war surged on Tuesday in the US as the Trump Administration considers broad curbs on Chinese imports and takeovers, and Gary Cohn, the chief economic adviser who has opposed protectionist measures, said he will resign.

China's tech companies have used the protection to great benefit. Alibaba and Tencent have invested billions in a new generation of startups, from ride-hailing leader Didi Chuxing to food-delivery giant Meituan Dianping. 

At the end of 2017, China had 124 unicorns worth a collective US$615.5 billion - almost 1 in 2 of the world's billion-dollar startups - according to the Chinese brokerage CICC.

The industry is morphing from copycats to true innovators. Tencent's WeChat is a prime example. What began as a straightforward messaging service has evolved into a true super app, the indispensable portal for payments, news, shopping and food delivery. In China, it's Facebook, Twitter, Square, GrubHub rolled into one.

Tencent, with a billion users in China, has found little luck in the rest of the world, where Facebook and WhatsApp dominate. But that could change as the country's tech companies plunge billions of dollars from their profit haven into South-east Asia, India, Latin America, Africa - and the US.

"As long as they remain protected in the China market, they'll dominate and use that money to fund their global expansion," said Mark Natkin, managing director of Beijing-based Marbridge Consulting.

This year at the NPC, tech companies are supplanting real estate and other tycoons as political advisers, with chiefs from Tencent, Baidu and smartphone maker Xiaomi among a slew of entrepreneurs who came to advise on policies. Showcasing their commitment to the party is crucial.

"It signals to lower-level officials, who still have the ability to give these companies a hard time, that officials should back off their companies," Shih said.

President Xi has made it clear that wealth won't protect even the best-connected tycoons. Consider Wu Xiaohui, founder of Anbang Insurance Group whose high-flying dealmaking included buying New York's Waldorf Astoria. Last month, China seized the insurer and detailed plans to prosecute Mr Wu for fraud.

The nation's internet companies haven't escaped the government's tightening grip.

In the last year, China implemented stringent regulations dictating how data can be shared and stored, introducing criminal sanctions for breaching its new cybersecurity law.

It cracked down on virtual private networks used to bypass restrictive web filters. And it slapped fines on Tencent, Sina Weibo and others for web content that doesn't "meet national standards".

Indeed, tech is deeply involved in the censorship machinery. Tencent, Alibaba and other online players regularly scrub their services of undesirable content - from porn to criticism of the Party.

In 2017, images of dissident Nobel laureate Liu Xiaobo were abruptly cleansed from WeChat, which experts attributed to AI-enabled censorship. Baidu is building a system to allow cybercops to spot and fix "online rumors," letting authorities insert themselves directly into search results and discussion forums.

Tech firms spend money on these efforts because they have to."To maintain control, the government knows it has to keep tech companies well interwoven with their operations," Mr Natkin said. 

China has already made clear its ambitions extend well beyond the internet. It aims to build world-class competitors in semiconductors and electric cars, and lead the world in artificial intelligence by 2030.

American tech companies like Facebook clearly aspire to break into China. Mark Zuckerberg has even jogged the smoggy streets of Beijing and shown off his Mandarin skills. Still, many see China moving in the opposite direction.

"China has done fabulously well for itself not having an open market," Mr Natkin said. "I don't know why anyone still holds onto the notion the authorities will wake up one day and suddenly open access."

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