Perhaps no company embodies the ups and downs of Chinese big tech better than its biggest tech firm of all—Tencent. Two years ago the online empire seemed unstoppable. More than a billion Chinese were using its ubiquitous services to pay, play and do much else besides. Its video games, such as “League of Legends”, were global hits. Tencent’s market value exceeded $900bn, and the firm was on track to become China’s first trillion-dollar company.

Then the Communist Party said, enough. Xi Jinping, China’s paramount leader, decided that big tech’s side-effects, from distracted teenagers to the diversion of capital from strategically important sectors such as semiconductors, were unacceptable. Tencent was, along with the rest of China’s once-thriving digital industry, caught up in a sweeping 18-month crackdown.

These days things are looking up for China’s internet firms. Shoppers are “revenge spending” their way out of zero-covid gloom. The government’s clampdown on tech seems to have ended: regulators are easing off the companies’ old businesses and giving them more room to toy with possible new ones, from short-video entertainment and cloud computing to artificial-intelligence (ai) chatbots. And Tencent, whose market value has doubled to nearly $500bn in the past three months (see chart), is once again the embodiment of the changing mood. If you want to understand big tech’s new normal, and what it means for the future of China’s digital economy, look to its humbled champion.

Tencent has no equivalent in the West, or anywhere else outside China. It is part Meta, part PayPal, part Epic Games (in which, as it happens, Tencent owns a big stake), with a bit of Amazon and SoftBank thrown in (Tencent offers e-commerce and cloud services, like the American giant, and, like the Japanese one, has made hundreds of tech investments globally). The disappointing third quarter notwithstanding, it is expected in March to report annual sales last year of more than $80bn. Roughly a third each comes from gaming, business services (which include payments, e-commerce and cloud computing), and social media and advertising. Its pre-tax profit is expected handily to exceed $30bn. If you exclude banks and energy companies, which had a bumper 2022, only a handful of firms in the world did better.

The linchpin of Tencent’s riches is its WeChat super-app. Companies around the world have for years attempted to ape its astute marriage of pay (the transaction economy) and play (the attention economy). Few have succeeded in doing so as seamlessly as Tencent—and none on anything like the same scale. Last month’s lunar-new-year celebrations are a case in point. During the weeklong festivities WeChat users sent loved ones 4bn digital hongbao (red envelopes that in the real world come stuffed with cash), and more people tuned in to the annual new-year gala on WeChat’s newish Channels video platform (190m) than on Douyin, TikTok’s popular Chinese sister video app (130m).

The new-year blowout hints at where the company is headed. The rapid rise of Douyin has, like that of TikTok in the West, pushed digital life towards short-video sharing. In the past year the average Chinese spent more hours on such platforms than anywhere else online. Those platforms overtook instant messaging in 2020. Short-video apps are becoming the centre of China’s attention economy—and of its digital-ads business, which generated $35bn in sales in the third quarter of 2022, according to Bernstein, a broker. Between July and September short-video platforms claimed about a quarter of those ad dollars; their ad sales grew by a brisk 34%, compared with a year earlier.

Tencent has a shot at capturing a slug of that growth. The ranks of Channels users trebled last year, the company says. Although it declines to give a total figure, its new-year-gala streaming tally suggests they now number in the hundreds of millions. The company could bring in another 30bn yuan ($4.4bn) in ad revenues within a few years, reckons Robin Zhu of Bernstein, mainly at the expense of Kuaishou (which Tencent part-owns but may consider offloading) and Bilibili, another similar service.

Although like Douyin it occasionally hires big names to draw in new viewers—for example the Backstreet Boys, an American pop group who entertained 44m fans at a Channels concert last June—Tencent has adopted a more ecumenical approach to talent. Content creators with as few as ten followers can get a slice of the platform’s ad revenues. On Douyin, they need 10,000 fans to start earning money this way. Tencent hopes that its strategy will attract more up-and-coming creators, more viewers—and more advertisers.

[huge_it_slider id=”15″]The company is reorienting other parts of the WeChat economy around Channels, too. Most notably, it is equipping the platform to enable “social commerce”. This peculiarly Chinese form of consumerism, which combines live-streamed entertainment with shopping, is expected to generate some $720bn-worth of transactions this year. Here, too, short-video apps are taking market share from incumbents, such as jd.com and China’s biggest e-emporium, Alibaba.

Tencent used to steer clear of this business, perhaps worried that its entry would destroy the value of its lucrative stake in jd.com. With that stake no longer on its balance-sheet, Tencent has appeared much more willing to try its luck in e-commerce. It will not disclose how much money changes hands on its e-commerce platform. But, it says, the figure ballooned nine-fold, year on year, in 2022. WeChat Pay takes its usual 0.6% cut from each transaction. And despite the government’s edict on letting in rival payments systems, most transactions on WeChat involve WeChat Pay: both Tencent and Alibaba, which operates the other popular service, have made cross-platform payments possible but cumbersome.

The shift to Channels is especially crucial for Tencent. The government’s anti-gaming stance has made it urgent to look elsewhere for growth. Pony Ma, Tencent’s founder, recently described Channels as “the hope of the company”. Its recent success suggests that this hope might not be forlorn, and Tencent’s share of revenues from its non-gaming businesses has been edging up. But to thrive in the new normal, where the government has put limits on some digital activities, and stands all too ready to regulate further, Tencent will have to deal with three challenges—as indeed will China’s other digital giants.

The first of these has to do with ensuring a company culture that is nimble enough to adjust to the new reality. As tech founders go, Mr Ma is low-key and laid-back. This has empowered subordinates, such as WeChat’s creator, Allen Zhang, and led directly to many of Tencent’s successful businesses. But it also introduces friction when those subordinates have different ideas. Mr Zhang, for instance, has long resisted the app’s encroaching commercialisation, fearing that it will spoil the user experience. As a result, WeChat’s home screen has remained unchanged for a decade and accessing videos on Channels requires two taps—not a chore, exactly, but a drag compared with Douyin, which starts streaming clips as soon as a user opens the app. The same resistance to change explains why the e-commerce operations, too, will be rolled out only gradually, notes Clifford Kurz of s&p Global, a research firm.

The last thing that could trip up Tencent, or its rivals, is politics. Although regulators have declared the tech crackdown over, the party remains a spectral presence. The state is taking small stakes in subsidiaries of the biggest tech titans, including Alibaba and, reportedly, Tencent. As Sino-Western tensions mount, closeness with the state could jeopardise foreign earnings, such as Tencent’s profitable international gaming business.

At home, meanwhile, cyberspace, media and antitrust agencies have gained new powers—and, notes Angela Zhang of University of Hong Kong, are willing to wield them. Censorship, always part of the Chinese online experience, is intensifying as Mr Xi’s strongman rule becomes entrenched, which could mean more delays to Tencent’s games launches. And the danger of the party paralysing a company’s growth is ever present. On February 9th share prices of Chinese ai firms fell after state media warned that “some new concepts” (like chatbots) were getting too much attention.

Short videos have so far been spared the party’s rod. Critically for Tencent, they face fewer restrictions than games. But this could change if Mr Xi concludes that being glued to Douyin or Channels instead, which is how young erstwhile gamers spend two-thirds of their time, is not conducive to moulding good communists.

In his public statements Mr Ma has repeatedly stressed how Tencent’s universe of apps “served society” and “assisted the real economy”. Such words should be catnip to Mr Xi and his cadres. Investors, too, are once again purring. But greater competition and fickle government is likely to constrain Tencent’s prospects for years to come. In today’s China there is no room for consumer-tech winners—only survivors.