TikTok, RedNote and the Broken Promise of the Chinese Internet

Chinese social media app RedNote is full of cute and exciting moments after about 500,000 American users flocked to it last week to protest the US government’s ban on TikTok.

Calling themselves “TikTok refugees”, these users paid the “cat tax” to join RedNote by posting cat photos and videos. They answered a lot of 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? Do Americans have to work two jobs to support themselves? Americans are terrible at geography and many believe that Africa is a country? Most Americans have two days off a 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 to get it?” A response from a person in the eastern province of Jiangsu: “Believe me, it’s true,” said the deadpan person, posting a photo of a panda doing laundry.

I’ve spent hours scrolling through these so-called cat tax pictures and laughing at the cute and warm answers. This is what the Internet is supposed to do: connect people. More importantly, RedNote has shown how competitive Chinese social media apps are just from a product perspective.

With access to one billion online residents and an army of hard-working and skilled engineers, China’s Internet platform is world-class in its design, functionality and user experience – according to represented by TikTok and now by RedNote, or Xiaohongshu in Chinese.

Why aren’t more people outside of China using Chinese apps?

For a while, it looked like the Chinese internet giants were poised to take over the world. Remember the excitement when Alibaba listed its initial public offering in New York in 2014, when Didi took on Uber in China in 2016, when Facebook copied WeChat, and when the power of WeChat a colleague from Silicon Valley company Andreessen Horowitz? At one point, five of the world’s 10 largest Internet companies measured by market capitalization were Chinese. Now Tencent, the WeChat developer and game company, is the only one left in those ranks.

The largest Chinese company on the Internet still produces products that can compete with anyone in the world. Their employees work harder than their Silicon Valley counterparts. (Many work a “996” schedule — 9 a.m. to 9 p.m. six days a week.) In the face of the U.S. semiconductor embargo, they’ve 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 industry has failed to deliver on its promises. Why? What happened?

In 2017, I wrote a column for 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 companies because China is being digitized on a scale and at a pace that boggles the mind.

This year, Tencent’s revenue grew 56 percent, while e-commerce giant Alibaba’s revenue rose 60 percent. Didi has raised nearly $10 billion in funding, mostly from international investors.

It’s all like the old life. It is more difficult for Chinese internet companies to thrive today.

The country is in the midst of its worst economic recession since the Mao era. Few people believe the 5 percent growth rate predicted 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 a country’s economy suffers, it is difficult for a pillar industry to be successful. This is reflected in the earnings of technology companies.

As China’s population continues to shrink — its third straight decline — major tech sectors are running out of new hires. WeChat has about 1.4 billion accounts, larger than the population of China. Even second-tier social media apps like RedNote, popular with young, urban and affluent users, have 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 has grown faster than its domestic operations.

But the U.S. effort to ban TikTok underscores 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 becoming increasingly difficult for the world to trust its citizens’ personal information to Chinese companies, which ultimately answer to Beijing. .

There are good reasons why outsiders, including the US government, do not trust these companies. In a country where the government owns most everything and wields power in an arbitrary and often ruthless manner, the private sector is already in control. Internet companies are heavily censored and must censor themselves to survive. All the big ones, without exception, have had their apps removed from their app stores or fined or disciplined by regulators in recent years.

China’s leader, Xi Jinping, is known to be no fan of the digital space unless it is used to advance his country’s reform agenda.

“The real economy is the basis of the country’s economy and the source of its wealth,” he said in 2018. “Economic development should not move away from the real economy towards dependence excess in the virtual economy.”

In that speech and at other times, Mr. Xi made it clear that he placed a higher priority on advanced manufacturing than on the Internet and that he preferred state-owned enterprises to the private sector.

This led to the suppression of the video game companies of Alibaba, Ant Group, Didi and Tencent in 2020 and 2021. The strict “zero Covid” restrictions in 2022 that crippled the country’s economy caused some of the largest Internet companies to be financially bankrupt for the first time in many years.

At the same time, the wolf diplomacy of the Chinese government and its alliance with Russia forced many countries to re-evaluate their view of China as an important part of the global economy. Some consider it a threat to the democratic system and world peace. Perceptions of China have deteriorated in many Western countries, and fewer people are interested in visiting China than a decade ago.

Chinese internet companies and investors are increasingly finding themselves at odds with their authoritarian government at home and suspicion, even hostility, abroad.

Most Western investors now consider China’s technology industry unviable due to the country’s geopolitical tensions and unpredictable policies.

American university endowments and pension funds have stopped giving money to venture capital firms to invest in Chinese companies. A generation of Chinese investors who helped create some of the world’s most successful tech companies are now involved in golf, marathoning and travel.

Global stock market investors are not interested in Chinese Internet companies.

An investor who was not authorized to speak publicly told me recently that in 2017, when he joined a hedge fund that managed more than $100 billion, about 40 percent emerging market stocks are Chinese technology stocks. Now they are less than 3 percent.

The ecosystem that cultivated a vibrant technology sector was destroyed. Fewer investments mean fewer startups, fewer initial public offerings overseas and lower stock valuations than their American counterparts. RedNote, the social media app adopted by American TikTok users, was founded in 2013 and has yet to go public.

Those companies are still competitive, investors say. But in the eyes of the world, he added, it doesn’t matter anymore.