Chinese social media app RedNote is full of adorable, heartwarming moments after about 500,000 American users fled to it last week to protest the US government's impending ban on TikTok.
These users called themselves “TikTok refugees” and paid the “cat tax” to join RedNote by posting cat photos and videos. They answered so many questions from their new Chinese friends: Is it true that in rural America every family has a big farm, a huge house, at least three children and several big dogs? That Americans have to work two jobs to make a living? That Americans are bad at geography and many believe Africa is a country? That most Americans have two days off every week?
Americans also asked questions of their new friends. “I heard that every Chinese person has a giant panda,” wrote an American RedNote user. “Can you tell me how to get it?” The answer came from someone in the eastern province of Jiangsu: “Trust me, it's true,” the person deadpanned, posting a photo of a panda doing laundry.
I spent hours scrolling through those so-called cat tax photos and chuckled at the cute and serious responses. This is what the internet is supposed to do: connect people. More importantly, RedNote has shown how competitive any Chinese social media app can be from a purely product perspective.
With access to an online population of a billion people and an army of hard-working, resourceful engineers, China's internet platforms are world-class in design, functionality and user experience – as demonstrated by TikTok and now RedNote, or Xiaohongshu in Chinese. .
But why don't more people outside of China use Chinese apps?
For a while, China's internet giants seemed on the verge of taking over the world. Remember the excitement when Alibaba listed its IPO in New York in 2014, when Didi acquired Uber in China in 2016, when Facebook imitated WeChat, and when a partner from Silicon Valley firm Andreessen Horowitz preached the power of WeChat? At one point, five of the world's ten largest Internet companies by market capitalization were Chinese. Now Tencent, the creator and gaming company of WeChat, is the only one left in those ranks.
The largest Chinese internet companies are still making products that can compete with those of the rest of the world. Their employees work harder than their Silicon Valley counterparts. (Many work the '996' schedule – six days a week from 9am to 9pm.) Despite US semiconductor bans, they have managed to make impressive advances in artificial intelligence. But the world seems to have forgotten China's internet leaders, except to see them as part of a technological and geopolitical threat.
The sector has not delivered on its promises. Why? What happened?
In 2017, I wrote a column for another publication with the headline: “Behind the Great Firewall, the Chinese Internet is Thriving.” I told English-speaking readers to think beyond the Chinese drive to censor and copy Western companies, because China was being digitized on a scale and at a speed that was mind-boggling.
That year, Tencent's sales grew 56 percent, while sales at Alibaba, the e-commerce giant, rose 60 percent. Didi raised nearly $10 billion in funding, mostly from international investors.
All of this feels like a lifetime ago. It's now a lot harder for Chinese internet companies to thrive.
The country is in the worst economic downturn since the Mao era. Few people believe in the 5 percent growth rate that the government has announced for 2024. Consumer confidence is low: both Uniqlo and Starbucks, two consumer brands that thrived in China for years, are losing customers to cheaper brands.
When the country's economy suffers, it is difficult for any of the pillar industries to do well. The tech companies' profits reflect that.
As China's population continues to decline steadily – it has fallen for the third year in a row – the major tech platforms are running out of new users. WeChat has about 1.4 billion accounts, larger than China's population. Even a second-tier social media app like RedNote, which is popular among young, urban and affluent female users, has amassed more than 300 million users. For such companies, international expansion is the logical next step.
ByteDance, TikTok's parent company, is the envy of the industry due to the success of its foreign companies, which have grown much faster than its domestic operations.
But the US attempt to ban TikTok underlines how difficult it is for Chinese internet companies to expand abroad. As the Chinese Communist Party tightens its grip on the country's private sector, it is becoming increasingly difficult for the world to entrust the personal data of its citizens to Chinese companies, which are ultimately Beijing's responsibility.
There are good reasons that the outside world, including the US government, does not trust these companies. In a country where the government owns much of everything and exercises power arbitrarily and often ruthlessly, the private sector has been on alert. The internet companies are heavily censored and have to self-censor to survive. All major companies, without exception, have had their apps removed from app stores or faced fines or disciplinary action by regulators in recent years.
It is well known that Chinese leader Xi Jinping is not a fan of the digital sector unless it is used to further his agenda of national rejuvenation.
“The real economy is the foundation of a country's economy and the source of its prosperity,” he said in 2018. “Economic development should never deviate from the real economy towards an excessive dependence on the virtual economy.”
In that speech and on other occasions, Mr. Xi made clear that he placed a higher priority on advanced manufacturing than the Internet and that he favored state-owned enterprises over the private sector.
That set the tone for the crackdown on the video game businesses of Alibaba, Ant Group, Didi and Tencent in 2020 and 2021. The harsh 'zero Covid' restrictions in 2022 that crippled the country's economy brought in some of the biggest internet companies financial losses for the whole world. for the first time in years.
Also around this time, the Chinese government's wolf warrior diplomacy and its alliance with Russia forced many countries to reconsider their views of China as an important part of the global economy. Some now see it as a threat to democratic systems and world peace. The perception of China has deteriorated in many Western countries and fewer people are interested in visiting China compared to a decade ago.
Chinese internet companies and investors are increasingly caught between their authoritarian government at home and suspicion, even hostility, abroad.
Most Western investors now consider China's technology industry not worth investing in due to the country's geopolitical tensions and unpredictable policies.
American universities and pension funds stopped giving venture capital firms money to invest in Chinese startups. A generation of Chinese investors who helped create some of the most successful technology companies took up golf, marathon running and hiking.
Investors in global stock markets are also not interested in Chinese internet companies.
An investor who was not authorized to speak publicly recently told me that when she joined a hedge fund managing more than $100 billion in 2017, about 40 percent of the fund's emerging market investments were in Chinese technology stocks . Now it is less than 3 percent.
The ecosystem that has cultivated a vibrant technology sector is broken. Less investment means fewer start-ups, far fewer foreign IPOs and much lower stock valuations than their US counterparts. RedNote, the social media app that American TikTok users have taken to, was founded in 2013 and has yet to go public.
These companies remain competitive, the investor said. But in the eyes of the world, she added, they are no longer relevant.
