TikTok, RedNote and the crushed promise of the Chinese internet

With access to an online population of 1 billion and an army of hardworking, resourceful engineers, China’s internet platforms are world-class in their design, functionality and user experience. But why aren’t more people outside China using Chinese apps?

The Chinese social media app RedNote is full of cute, heartwarming moments after about 500,000 American users fled to it last week to protest the looming US government ban on TikTok.

Calling themselves “TikTok refugees,” these users 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 large farm, a huge 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 that Africa is a country? That most Americans have two days off every week?

Americans also posed questions to their new friends. “I heard that every Chinese has a giant panda,” an American RedNote user wrote. “Can you tell me how can I get it?” An answer came from someone in the eastern province of Jiangsu: “Believe me, it’s true,” the person deadpanned, posting a photo of a panda doing the laundry.

I spent hours scrolling those so-called cat tax photos and chuckled at the cute and earnest responses. This is what the internet is supposed to do: connect people. More important, RedNote demonstrated how competitive a random Chinese social media app can be from a purely product point of view.

With access to an online population of 1 billion and an army of hardworking, resourceful engineers, China’s internet platforms are world-class in their design, functionality and user experience — as is demonstrated by TikTok and now by RedNote, or Xiaohongshu in Chinese.

But why aren’t more people outside China using Chinese apps?

For a while, the Chinese internet giants seemed to be 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 Uber in China in 2016, when Facebook was imitating WeChat, and when a partner from the Silicon Valley firm Andreessen Horowitz preached 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 Silicon Valley counterparts. (Many work a “996” schedule — 9 am to 9 pm 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 for seeing them as part of a technological and geopolitical threat.

The industry didn’t live up to its promises. Why? What happened?

In 2017, I wrote a column at another publication with the headline, “Behind the Great Firewall, the Chinese internet is booming.” I told readers to think beyond China’s urge to censor and copy Western businesses because China was being digitized on a scale and at a speed that was mind-boggling.

That year, Tencent’s revenue grew 56 per cent, while revenue at Alibaba, the e-commerce giant, surged 60 per cent. Didi raised nearly $10 billion in funding, mostly from international investors.

All of these feel like a lifetime ago. It’s a lot 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 per cent growth rate the government announced for 2024. Consumer confidence is low — both Uniqlo and Starbucks, two brands that had thrived in China for years, are losing customers to cheaper brands.

When the country’s economy suffers, it’s hard for one of its pillar industries to do well. The tech companies’ earnings have reflected that.

As China’s population continues a steady decline — it fell a third consecutive year — the big tech platforms are running out of new users. WeChat has about 1.4 billion accounts, bigger than the Chinese population. 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 been growing at a much faster rate than its domestic operations.

But the US effort to ban TikTok highlights how hard it is for Chinese internet companies to expand overseas. As the Chinese Communist Party tightens its grip on the country’s private sector, it’s increasingly difficult for the world to entrust their citizens’ personal data to Chinese companies, which ultimately answer to Beijing.

There are good reasons that the outside world, including the US government, doesn’t trust these companies. In a country where the government owns much of everything and wields power randomly and often ruthlessly, the private sector has been on its toes. The internet companies are heavily censored and must self censor to survive. All the big ones, with no exception, have had their apps removed from app stores or been fined or disciplined by regulators in recent years.

It’s well known that China’s leader, Xi Jinping, is no fan of the digital sector, unless it is being used to advance his agenda of national rejuvenation.

“The real economy is the foundation of a nation’s economy and the source of its wealth,” he said in 2018. “Economic development must never deviate from the real economy toward excessive reliance on the virtual economy.”

In that speech and on other occasions, Xi made it clear that he put a higher priority on advanced manufacturing than on the internet and liked the state-owned enterprises more than the private sector.

That set the tone for the crackdown of Alibaba, Ant Group, Didi and Tencent’s video game business 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 wolf warrior 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 deteriorated in many Western countries, and fewer people are interested in visiting China compared with 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 deem China’s tech industry not worth investing in because of the geopolitical tension and the country’s unpredictable policies.

US university endowments 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 tech companies have taken up golfing, marathoning and hiking.

Investors in global 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 per cent of the fund’s emerging market holdings were Chinese tech stocks. Now they are less than 3 per cent.

The ecosystem that cultivated a vibrant tech sector is broken. Fewer investments mean 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 taken up, 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’re no longer relevant.