Chinese social media app RedNote is full of cute and emotional moments after nearly 500,000 American users flocked to it 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 pictures and videos of cats. They answered so many questions from their new Chinese friends: Is it true that in rural America every family has a big farm, a big house, at least three children and several big dogs? That Americans have to work two jobs to support themselves? That Americans are terrible at geography and many believe Africa is a country? That most Americans have two days off each week?
The Americans also asked questions of their new friends. “I heard every Chinese has a giant panda,” wrote one American RedNote user. “Can you tell me how I can get it?” One response came from someone in the eastern province of Jiangsu: “Trust me, it’s true,” the person was left dead, posting a photo of a panda doing laundry.
I spent hours scrolling through those so-called cat tax pictures and laughing at the cute and honest answers. That’s what the internet is supposed to do: connect people. More importantly, RedNote showed how competitive a casual Chinese social media app can be from a product standpoint.
With access to an online population of one billion and an army of diligent and resourceful engineers, China’s internet platforms are world-class in their design, functionality and user experience – as demonstrated by TikTok and now by RedNote, or Xiaohongshu in Chinese.
But why aren’t more people outside of China using Chinese apps?
For a while, the Chinese 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 from Uber in China in 2016, when Facebook was imitating 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 by market capitalization were Chinese. Now Tencent, the creator and company of WeChat games, is the only one left in those ranks.
The biggest Chinese internet companies still produce products that can compete with anyone in the world. Their employees work harder than their counterparts in Silicon Valley. (Many of them work “996” hours – 9am to 9pm six days a week.) In the face of US semiconductor bans, they have managed to make impressive developments 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 industry did not live up to its promises. Why? What happened?
In 2017, I wrote a column in another publication titled, “Behind the Great Firewall, China’s Internet is Booming.” I told English-speaking readers to think beyond China’s desire to censor and copy Western businesses, because China was digitizing at a rate and speed that was astounding.
That year, Tencent’s revenue rose 56 percent, while revenue 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 is much more difficult for Chinese Internet companies to thrive now.
The country is mired in the worst economic downturn since the Mao era. Few people believe the 5 percent growth rate the government announced for 2024. Consumer confidence is low — both Uniqlo and Starbucks, two consumer brands that had thrived in China for years, are losing customers to brands cheap.
When a country’s economy suffers, it’s hard for one of its pillar industries to do well. Tech company earnings have reflected this.
As China’s population continues its steady decline — it fell for the third year in a row — big tech platforms are running out of new users. WeChat has about 1.4 billion accounts, larger than the population of China. Even a second-tier social media app like RedNote, which is popular among young, urban and affluent female users, amassed more than 300 million users. For such companies, international expansion is the natural next step.
ByteDance, the parent company of TikTok, is the envy of the industry because of the success of its overseas businesses, which have grown at a much faster rate than its domestic operations.
But the US effort 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 trust its citizens’ personal data to Chinese companies, which ultimately answer to Beijing.
There are good reasons why the outside world, including the US government, does not trust these companies. In a country where the government owns much of everything and wields power casually and often ruthlessly, the private sector has been at its feet. Internet companies are heavily censored and must self-censor to survive. All the big ones, without exception, have had their apps pulled from app stores or been fined or disciplined by regulators in recent years.
It is well known that China’s leader, Xi Jinping, is not a fan of the digital sector, unless it is used 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 should never deviate from the real economy to over-reliance on the virtual economy.”
In that speech and on other occasions, Mr. Xi made it clear that he prioritized advanced manufacturing over the Internet and favored state-owned enterprises over the private sector.
This set the tone for Alibaba, Ant Group, Didi and Tencent’s video game business to hit in 2020 and 2021. The harsh “zero Covid” restrictions in 2022 that crippled the country’s economy plunged some of the biggest Internet companies into financial losses for the first time in years.
Also around this time, the Chinese government’s belligerent diplomacy and its alliance with Russia forced many countries to rethink 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. Perceptions of China worsened 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 think that China’s technology industry is not worth investing in because of the country’s geopolitical tension and unpredictable policies.
US university endowments and pension funds did not lend money to venture capital firms to invest in Chinese start-ups. A generation of Chinese investors who helped create some of the most successful tech companies have taken up golf, marathons and hiking.
Investors in global stock markets are equally uninterested in Chinese Internet firms.
An investor who was 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 percent of the fund’s emerging market holdings were stocks. of Chinese technology. Now they are less than 3 percent.
The ecosystem that cultivated a vibrant tech sector is broken. Less investment means fewer start-ups, far fewer overseas initial public offerings and much lower stock valuations than their American counterparts. RedNote, the social media app that American TikTok users have been using, 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 important.
