Li Yuan

China’s technology boom, it turns out, has been largely built on top of Western technology. The ZTE incident, as it is called in China, may be the country’s Sputnik moment. Like the United States in 1957, watching helplessly as the Soviet Union launched the first human-made satellite, many people in China now see how far the country still has to go.

The Chinese internet’s race to go low: lower income, lower-tier cities and lower internet-service penetration. China’s relatively young internet industry is facing a mature-market problem: User growth for popular online services such as instant messaging, search, online news and video has fallen to single digits. Online population growth has hovered around 5% to 6% annually since 2014, which is only slightly higher than in mature economies. Unlike in many developed markets, a vast number of Chinese are unconnected.

American tech giants need to rethink their relationship with China. Now. The need to do so was evident on Oct 30 when Facebook's Mark Zuckerberg, Apple’s Tim Cook, and a bevy of other leaders in the worlds of technology, finance and industry were whisked to the Great Hall of the People to meet Chinese President Xi Jinping. President Xi was fresh off a Communist Party congress that anointed him as China’s paramount leader.

China’s internet industry is dominated by a trio of giants, and one of the biggest weapons they use to maintain their dominance is their checkbook.

Search engine Baidu, e-commerce company Alibaba and game-and-social-media company Tencent — known collectively as BAT— all have used a combination of minority-stake investments in startups and acquisitions to ensure they don’t miss out on big trends and can build wide-reaching ecosystems that reinforce their core businesses. US internet companies like Facebook Inc. and Google parent Alphabet Inc. also invest in and acquire startups as part of their strategies. But as much as those companies are dominant within specific slices of the internet business—search, social—the collective clout of China’s big three is hard to compare.

China has proposed strengthening its policies on internet safety for children, which could force technology companies to make substantial operational changes to meet the new requirements.

The draft rules would require online-game operators to lock out anyone under the age of 18 between midnight and 8 a.m. They would also call for an increased number of websites to post warnings about content deemed unsuitable for minors. Few companies will criticize Chinese policies openly. However, industry experts said that a strict implementation of the proposed rules could also force foreign companies to use Chinese censorship software that they can’t control and that could potentially serve as backdoors for Chinese surveillance. The proposed regulations posted online Sept. 30 are vague as to whether companies’ existing parental control systems would suffice or if they would have to use Beijing-approved software.

The Cyberspace Administration of China, the country’s internet regulator, said that it would support the development of web-filtering software to keep children safe online and would determine which products comply with its requirements.