Wow. China's full-court press on Big Tech continues with the passage of a new data privacy law that's one of the strictest in the world.
The new Personal Information Protection Law will take effect on Nov. 1 after the Standing Committee of China's legislature, the National People's Congress, passed it on Friday.
The passage sent Chinese stocks sharply lower throughout the morning. After a mild afternoon recovery, the CSI 300 index of the largest Shanghai and Shenzhen stocks ended down 1.9% on Friday.
E-commerce company stocks took a particular beating. The Nasdaq-like ChiNext index dropped 2.6%. In Hong Kong, home to many of the most-promising and outward-looking Chinese companies, while the broad Hang Seng Composite Index finished down 2.1% for the day. Those were some of the worst performances on a day of decline in East Asia.
International investors can track the fate of the Hang Seng Tech Index, which incorporates 30 China-focused tech names listed in Hong Kong, pretty much the universe of most interest to overseas investors.
The Hang Seng Tech Index constituents include Alibaba Group Holding (BABA) and HK:9988, Tencent Holdings TCEHY and HK:0700, Xiaomi XIACY HK:1810, Lenovo LNVGY and HK:0992, JD.com (JD) and HK:9618, and NetEase (NTES) and HK:9999. Many of the companies have recently floated shares in Hong Kong to hedge against political pressure on their U.S. listings.
That index finished 2.5% lower on Friday. Thanks to a constant stream of regulatory strictures out of Beijing, it has dropped almost by half since cresting to a Feb. 17 high. In the six months since, it has plunged 46%.
While the new Personal Information Protection Law will protect how companies collect and handle customer data, there's little in the law concerning the government's access to citizen data. Citizen surveillance is therefore sure to remain as intrusive as the Chinese Communist Party deems necessary.
We haven't yet seen the full text of the new law's final version, although official news service Xinhua confirmed its passage. A draft released in April indicates it is similar to the European rules on digital consumer data, the General Data Protection Regulation, which went into effect in 2018.
The Chinese law will require companies to receive consent from consumers to gather sensitive information, particularly health, financial and location data, and tell companies to restrict what information they reap. There are also stipulations on how companies share, trade and transmit data.
The Chinese law also addresses the collection and storage of facial recognition data and biometrics. Chinese companies are some of the leaders in the field. Personal identification equipment in public places must be clearly marked and only used "for the purpose of maintaining public safety," Xinhua states.
The new regulations are sure to ramp up the compliance cost of China's e-commerce companies and app providers. The law instructs companies to collect only whatever data is necessary to process transactions and use the least-intrusive method. Companies must publish regular updates on "social responsibility" and personal information protection and submit to "social supervision" by the government or third-party assessors it appoints.
If the government department supervising personal information protection feels there is an increased risk to processing activities at a company, or even worse a personal information "security incident," the department can conduct an interview with the legal representative of the company processing the data or the "main person in charge."
The government can appoint professional bodies to conduct compliance audits of how companies process data. Violations carry a variety of penalties. They include business suspension or termination for illegal data processing; a fine of up to C¥1 million (US$154,000) for a failure to make corrections; and a personal fine of between C¥10,000 and C¥100,000 (US$1,500 to US$15,000) for the person in charge as well as other personnel directly responsible for the data use.
The new Personal Information Protection Law puts a "lock" on customer data, the state-run mouthpiece Global Times states. It is part of a triumvirate of laws governing digital China, with the Data Security Law due to go into effect in September and the Cyber Security Law being in effect since June 1, 2017. The Data Security Law looks at macro-level data, its economic value and national security importance, while the Personal Information Protection Law looks at micro-level information on customers.
The restriction rollout may seem a bit of a blur. Chinese tech stocks also dropped on Tuesday when China's market regulator, the State Administration for Market Regulation, put forward for public comment a long list of new rules. Those are aimed at stamping out monopolistic and anticompetitive behavior by Internet "platform" businesses, as I explained at the time. They also state that tech companies should not use algorithms to influence customer behavior.
The Commerce Department chimed in on Wednesday with outlines for an "industry standard" on livestreaming and influencers. This would require influencers to declare when they've been paid to profile or market a product or service. But there is also a moralistic bent, with the Commerce Department insisting that hosts must wear clothing and depict an image promoting "good morals."
Income redistribution to come?
The Chinese government since opening the country's economy in the late 1970s has been keen to encourage growth and profitability in the private sector. The Internet economy had largely expanded unfettered and without international competition, with most foreign sites banned.
That attitude has changed in short order. Some of the pressure on Big Tech is similar to the measures taken or considered in the West. But many of the latest pronouncements by Chinese President Xi Jinping indicate a Maoist streak keen to rein in the bourgeois businesspeople making money off the Chinese public.It's not quite a Cultural Revolution, but there are some overtones that sound familiar. Academics have been purged for "unpatriotic" teaching, fingered by student spies reporting to local party cells.
This week, Xi has pledged to "adjust excessive incomes" and redistribute wealth away from the super-rich in a bid to achieve "common prosperity." Xi told the party's Central Committee for Financial and Economic Affairs, which he heads, that the government must "regulate excessively high incomes and encourage high-income groups and enterprises to return more to society."
The meeting did not specify what constitutes an "excessively high" income, but said there's the need to "rectify the order of income distribution." China has long debated a property tax, which likely moves a step closer after this meeting. An inheritance tax is another potential introduction. Individuals and companies will be under implicit pressure to demonstrate largesse.
There also has been piecemeal but significant regulation of specific industries. Changes to the after-class tutoring industry effectively have outlawed for-profit classes. Mainland press reports also suggest that online health clinics may need greater regulation in the way they dispense prescriptions, their major source of profit. Even liquor stocks have sold off on local media reports that large maotai and spirits producers have been called for a regulatory "symposium" to discuss excessive pricing.
The move overshadowed a strong mainland listing debut for China Telecom, one of China's Big Three mobile phone providers. Its shares opened on a modest gain over their C¥4.53 list price, but leapt 19% shortly before midday, triggering a circuit-breaker trading halt. After they resumed trading, they added to the advance, closing up nearly 35%.
Raising US$7.3 billion, China Telecom's Shanghai initial public offering (under the ticker SH:601728) is the largest in the world so far this year. It is also the largest mainland listing since PetroChina SH:601857 raised US$8.9 billion in 2007, according to figures from Refinitiv.
The Shanghai listing of "A shares" comes after the New York Stock Exchange delisted China Telecom and rivals China Mobile and China Unicom, following through on a Trump-era directive against companies determined to be owned or controlled by the Chinese military. President Joe Biden has elected not to undo the move.
While it has targeted tech and specific industries, the central government in Beijing has resisted calls to support the economy through policy easing. Although the Chinese economy faces strong headwinds, the central bank left the one-year loan prime rate unchanged on Friday, at 3.85%. The five-year rate stayed at 4.65%.
"Beijing appears to take a firm stance against aggressive policy easing due to debt and property bubble concerns," the Commerzbank economics team notes.