
In recent months, there’s been a lot of noise made about China’s pivot away from “soft tech” (the internet) to “hard tech” (e.g., semiconductors). It’s an intuitive distinction, because unlike in English, where we use the word “tech” as a catchall, the Chinese language separates “internet” companies from “science & technology” driven ones. Even I was taken in by this easy narrative initially, not least because it would sometimes show up in joking banter with Chinese tech entrepreneurs and employees. But humor is not always reflective of reality, especially when reality has been evident in the form of a steady stream of clarifying government documents and actions related to the tech sector in the last year.
In fact, at this point, I’d argue that anyone who insists that China is uniformly suppressing soft tech in favor of hard tech is simply being anti-factual. There is a division, yes, but it is not between the internet and semiconductors. It is between the real and financial economies. To the Chinese government, any technology that helps the real economy, the part focused on the production of services, rather than financial services, is encouraged. The rest? Not so much.
That’s because China loves the real economy. That love differentiates it from the U.S. and many other countries. China wants manufacturing to maintain its current share of GDP, which is at 26% as of 2020 and significantly higher than the U.S.’s 11%. That strategy would mean it is much closer to following the German path, which similarly prizes high manufacturing output, than the American one, where manufacturing share has declined precipitously and there is relatively more emphasis on the financial economy. China believes focusing on the real economy is the best and perhaps only way to ensure a resilient and stable economy. Disruptions such as the pandemic and the trade war, have only reinforced this belief.
Everything, therefore, is judged by its contribution to the real economy. For example, you’ve probably heard about the massive antitrust fine levied against e-commerce giant Alibaba last year. If you think that was a not-so-subtle indicator that e-commerce is being discouraged and the government would rather resources be spent on semiconductors, you’d be wrong. China is in fact actively expanding special economic zones for cross-border e-commerce because it helps with exporting the many goods the country manufactures. It is also hugely supportive of rural e-commerce, with even President Xi Jinping himself joining in briefly on a livestream selling village delicacies. Its commitment extends to advocating for further investment in rural logistics, the backbone to ecommerce success. In fact, even though China is already one of the markets with the highest percentage of retail sold online in the world, and bigger than the next nine markets put together, the dollar value of e-commerce in physical goods still grew another 12% in 2021 — buoyed by the pandemic, for sure, but also as a beneficiary of supportive government policy.
But enough about e-commerce. One of the largest and fastest growing destinations for venture capital in China today is also definitively not hard tech. It is enterprise services and software, which has consistently been in the top 3 categories of investment in the last 5 years and accounted for 12% of early stage investment in 2021. In fact, this is a category that overlaps somewhat with “Internet+,” or the industrial internet, meaning software and IoT solutions that help Chinese businesses, and their supply chains in particular, achieve greater efficiencies. As vice chair of the Financial and Economic Affairs Committee Huang Qifan noted, even a 5% efficiency gain for Chinese businesses will lead to a $2 trillion increase in output and is very much what the government is interested in pursuing. These are not major advancements in materials science or manufacturing processes, but simple digitization. Such a massive opportunity hasn’t been overlooked by China’s internet giants — back in 2018, Tencent had already performed a major re-organization with the industrial internet at its core.
To the Chinese government, any technology that helps the real economy, the part focused on the production of services, rather than financial services, is encouraged. The rest? Not so much.
If these points don’t convince you, consider that last month the National Development and Reform Commission (NDRC), China’s central economic planning commission, issued a complete and coherent document outlining guidelines for digital platforms. It reiterated, as many government edicts have in the past year, China’s wish to become a more digitized, networked country and praised the great contributions internet platforms have made towards that goal. In addition to rural and cross-border e-commerce and Internet+, it also urged the consumer internet platforms to expand their digital offerings to better serve underserved communities such as seniors and disabled individuals, as well as to work with small businesses and encourage new consumption channels and formats.
That message was repeated in a work meeting with the companies in January. This meeting finally seemed to have calmed the nerves of some anxious investors, although it really didn’t need to come to this — Xi Jinping has always placed the internet and building China into a “strong network country” as one of the top priorities of his administration, ever since he came into power in 2014. That was codified into the 13th Five-Year plan in 2015 and remains a clear mantra for the 14th Five-Year plan. I cannot emphasize this enough — the digital economy is not at all at odds with China’s goals for economic growth; it is in fact a critical underpinning. The plan has always been to improve, guide, or in the government’s eyes, strengthen the digital economy because it “is insufficiently deeply merged with the real economy,” as the 14th Five-Year plan for informatization boldly states. It has never been to decimate, weaken, or otherwise interrupt its development in any way.
So if China is not trying to suppress “soft” tech, but to guide it in service of the real economy, then why is it so focused on hard tech? Well, there is nothing mutually exclusive about this. Xi Jinping has also stressed that science and technology are important to China’s national strategy. China has never stopped trying to become self-sufficient technologically, and it is hardly a recent endeavor. China set up its first major semiconductor manufacturing company, SMIC, back in 2000. The first national semiconductor fund was established in 2014, very early in Xi’s administration, with $24 billion. It is merely that in the last few years, efforts were stepped up to resolve some of the most acute problems created by the U.S.’s increasing restrictions on technology exports. Those restrictions have had disastrous consequences for Huawei, in particular, given its reliance on overseas IP for the manufacturing of its semiconductors. These so-called “chokepoint” technologies — many in the areas of manufacturing and aerospace — have the potential to create massive disruptions to the Chinese economy, which is why they are being treated with the utmost urgency. However, they do not displace the need for the internet and related network technologies, which are just as necessary.
While it’s tempting to simplify and reduce the Chinese tech sector to soft versus hard tech, this is simply not the reality. Chinese semiconductors, for example, may be surging in investment and entrepreneurial activity due to the opening of unprecedented business opportunities, but that doesn’t negate the continued growth of other tech sectors which are decidedly less hardcore. No, the much more apt division that is used by the government and also more reflective of reality is that of the real versus financial economy. Where there is speculation and gains via financial means with no connection to the real economy, such as in cryptocurrencies, the Chinese government restricts or prohibits. Where technology can enhance the real economy, the government supports and elevates. With this distinction in mind, I guarantee that you’ll find the policies much more coherent and the market realities quite rational.

Rui Ma has fifteen years of experience in technology and finance, spanning seed stage to pre-IPO investing spread evenly between the U.S. and China. She co-hosts the podcast Tech Buzz China. @ruima