Chinese social media app RedNote is full of cute, heartwarming moments after some 500,000 American users took 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 huge house, at least three children and many 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 an 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 killed, posting a photo of a panda doing laundry.
I spent hours scrolling through these so called cat tax photos and laughed at the cute and honest responses. That’s what the internet is supposed to do: connect people. More importantly, RedNote showed how competitive a random Chinese social media app can be from a purely product perspective.
With access to an online population of one billion and an army of hard-working, resourceful engineers, China’s internet platforms are world-class in design, functionality and user experience — as evidenced by TikTok and now RedNote or Xiaohongshu in Chinese.
But why don’t more people outside of China use Chinese apps?
For a while, the Chinese Internet giants looked poised to take over the world. You remember the excitement when Alibaba launched its initial public offering in New York in 2014, when Didi took on Uber in China in 2016, when Facebook imitated WeChat, and when a partner from Silicon Valley firm Andreessen Horowitz touted 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 WeChat creator and game company, is the only one left in those ranks.
The biggest Chinese internet companies still make products that can compete with any in the world. Their employees work harder than their counterparts in Silicon Valley. (Many work a “996” schedule — 9 a.m. to 9 p.m. six days a week.) In the face of U.S. semiconductor bans, they’ve managed to make impressive advances in artificial intelligence. But the world seems to have forgotten about China’s internet leaders, except to see them as part of a technological and geopolitical threat.
The industry has not kept its promises. Why? What happened?
In 2017, I wrote a column in another publication titled, “Behind the Great Firewall, China’s Internet Booms.” I told English-speaking readers to think beyond China’s impulse to censor and copy Western business because China was digitizing at a scale and speed that was staggering.
That year, Tencent’s revenue rose 56 percent, while e-commerce giant Alibaba’s revenue rose 60 percent. Didi has raised nearly $10 billion in funding, mostly from international investors.
This all feels like a lifetime ago. It is much more difficult for Chinese internet companies to thrive now.
The country is mired in its worst economic recession since the Mao era. Few believe the government’s announced 5% growth rate 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 the pillars of the industry to do well. Tech company earnings reflect this.
As China’s population continues to steadily decline — it fell for the third year in a row — major tech platforms are being drained of new users. WeChat has about 1.4 billion accounts, larger than the Chinese population. Even a second-rate social networking app like RedNote, which is popular among young, urban and affluent women, has 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 business, which is growing 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 that 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 haphazardly and often ruthlessly, the private sector has been at its feet. Internet companies are heavily censored and must censor themselves to survive. All the big ones, without exception, have had their apps removed 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 revitalization 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 that he liked state-owned enterprises more than the private sector.
This set the tone for a crackdown on video game business Alibaba, Ant Group, Didi and Tencent 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 at the 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 world 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 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 tech industry unworthy of investment due to the country’s geopolitical tension and unpredictable policies.
US universities and pension funds stopped giving money to venture capital firms to invest in Chinese startups. A generation of Chinese investors who helped build some of the most successful tech companies have taken up golf, marathons and hiking.
Investors in global stock markets are not equally interested in Chinese Internet companies.
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 Chinese tech stocks. Now it’s less than 3 percent.
The ecosystem that cultivated a vibrant tech sector is broken. Less investment means fewer startups, 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.
Those companies remain competitive, the investor said. But in the eyes of the world, he added, they are no longer relevant.
