The Beijing government is continuing its summer of regulatory onslaught with new rules for the tech sector, ostensibly to combat anti-competitive behavior. The lengthy list is also designed to stop businesses from using Big Data or algorithms to influence customer choice.
China's top market regulator, the State Administration for Market Regulation (SAMR), issued the draft rules on Tuesday. They are open to public comment through September 15, but are highly likely to go into effect in much their present form.
The move caused China's entire stock market to lurch lower. The broad CSI 300 of the largest stocks in Shanghai and Shenzhen has recovered some lost ground on Wednesday, ending the day up 1.2%. Chinese stocks dipped 2.6% as a whole on Tuesday immediately after the new rules came out.
It has been a torrid summer due to government intervention into an ever-expanding number of industries, with tech at the forefront. The Chinese benchmark has fallen 8.4% since June 1, and leading lights in the digital sector have fared far worse.
Small-city e-commerce site Pinduoduo (PDD) has surrendered 43.0% since the start of June, short-video app Bilibili (BILI) is down 39.1%, videogame maker and WeChat app operator Tencent Holdings (TCTZF) is off 30.6%, leading e-commerce site Alibaba Group Holding (BABA) has given back 21.4%, rival platform JD.com (JD) has lost 14.9%... the big names long favored by foreign investors have all taken a beating of varying degree.
The SAMR says the new rules are designed to protect consumers' interests, and to increase supervision of tech-industry behavior. It is unclear how they will be implemented in practice.
There are specific line items to ban the blocking of competitor information, as well as the diversion of Internet traffic away from rivals. Platform operators will also not be allowed to use Big Data or algorithms to attempt to sway consumer choice. Regulators would also like to stamp out ring-fencing, where apps or e-commerce operators prevent consumers from accessing Internet products and services from competitors.
Internet operators will be banned from using "digital means to unfairly influence consumers' decisions and reduce communication between consumers and other Internet business operators," the official Global Times newspaper explains. They will have to cease publishing fake reviews and offering "red packets" as a cash incentive to write a positive review.
Third-party evaluators may be called in to audit tech-company data. Violations will produce hefty fines. For operators, there's sure to be a heavier compliance burden, not to mention a change in many practices.
The SAMR in April levied a record C¥18.2 billion (US$2.8 billion) fine on Alibaba for monopolistic behavior. That as I explained at the time actually produced a jump higher in the stock because the fine wasn't as bad as it could have been.
Regulators at the end of April summoned representatives from 13 leading online companies, a Who's Who of the Chinese Internet, to warn them to cut out anticompetitive behavior. Web-browser operator Baidu (BIDU) , food-delivery app Meituan (MPNGF) , ride-hailing app Didi Global (DIDI) and TikTok operator ByteDance were all called in, as were the companies mentioned earlier regarding their stock performance.
The other companies rounding out the list of 13 were the finance arm of smartphone maker Xiaomi (XIACF) , the Twitter-equivalent Weibo (WB) and its operator Sina, electronics retailers Suning (SZ:002024) and Gome (GMELF) , online travel agency Ctrip (TCOM) and consumer-finance products provider 360 DigiTech (QFIN) .
There's no doubt that Big Tech companies in China have engaged in practices that are anti-competitive, and harm consumers. The leading e-commerce sites, for instance, forced bigger brands to sign exclusivity deals only to sell through one company's suite of sites. For investors, the business empires overseen by Alibaba and Tencent have also required exclusivity, with investors expected to devote themselves to one group over the other if they are to be offered stakes in the next startup in the stable.
So the regulatory pressure is to some extent no different from the spotlight shone on Big Tech in the United States and Europe. The Chinese government has, however, encouraged monopolistic behavior through licensing, preferring to see some businesses scale up relatively unopposed. When it comes to online content, foreign Web sites and apps are generally banned. The desire for censorship and control has played into the hands of Chinese tech brands.
The Chinese Communist Party has recently cranked up its rhetoric over what it calls "platform" businesses. On one level, it sees platforms as middle-man entities extracting profit at the expense of consumers. They likely have in mind China's traditional base of agriculture and industry, where "real" goods are produced: authentic, old-fashioned work.
Separately, China's Internet regulator, the Cyberspace Administration of China, has teamed with the stock watchdog, the China Securities Regulatory Commission, to launch measures designed to "rectify" the way finance-industry information and comment is shared via online platforms.
The Shanghai bureaus of the two regulators say they have removed more than 17,000 pieces of "harmful" information from major Web sites. The authorities want to stamp out the use of online forums to spread "false or misleading" information, or to manipulate markets.
The content includes audio comment, video posts, illegal social-media accounts and live-broadcast chatrooms. Bilibili is praised for putting verified financial and economic accounts in a distinct unified community, where unlicensed people and institutions cannot post content.
Podcast specialist and audio app Ximalaya is highlighted for expanding its investigatory efforts to trace illegal content, and for improving its efficiency in reporting suspect content. The company is one of several big-name Chinese tech brands that had been preparing a U.S. listing, in its case under the Nasdaq ticker (XIMA).
Any Chinese company intending to conduct an overseas securities listing must now submit to a formal review by the Office of Cybersecurity Review, if it has data on more than one million users. Those new rules were promulgated in July, giving newfound power to the little-known review office, which was only created in May 2020.
