For Control & Global Competitiveness-China Pushes Back on its Sprawling Tech Giants

NIKKEI Asia December 16, 2020 06:09 JST |THE BIG STORY| “China rethinks the Jack Ma Model” “Alibaba, Tencent and a host of internet giants face new scrutiny from the Party”. “For years, Beijing encourage runaway growth of the country’s internet giants as a symbol of Chinese tech prowess. Now, though, they appear too sprawling and influential for comfort.”



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Summary

Alibaba Group Holding (AGH) ushered in the “arrival of China’s Big Tech era” with its 2014 IPO on the NYSE and “Beijing balked at standing in the way…”. Now “the political winds have shifted” as such companies are part of “most sectors of the economy” and “the state is asserting its dominance.” Previously tolerated push back from AGH’s founder Jack Ma recently compared Chinese banks to pawnshops that are regulated by an “old people’s club.” Regulators reportedly working on orders from Xi Jinping subsequently stopped Ma’s $34B IPO of Ant Group (Ma is the “controlling shareholder). Following that AGH’s CEO, Daniel Zhang walked the bravado back by pledging “loyalty to” Xi, stressing the importance of the government’s support in the “company’s development” and messaging that new rules for internet companies were “timely and necessary.” It is well known that China meddles with the internet with its “Great Firewall” that blocks many foreign websites but blocking the “Ant IPO signaled…a new era in regulation.”


Draft guidelines issues on November 10 aim to prevent “large internet platforms from blocking competition.” Since that time share prices of Alibaba, Tencent, Meituan and JD.com declined “between 9% and 17%.” Other small actions have come from the SAMR (State Administration for Market Regulation). Competition is believe threatened in part by the dominant market share of the five top firms with AGH at 50.1%, JD.com at 26.5%, Pinduoduo at 12.8%, Sunning.com at 3% and Vipshop Holdings at 1.9% leaving 5.7% for all others. SAMR is now enforcing reports of all proposed mergers. According to Victor Shih (UCSD) …”[The] Chinese government can…stop [firms] if it perceives that private entrepreneurs are not toeing the line of the party.” More rules are being rolled out from “a number of different bodies” focused on “anti-competitive practices, overmarketing on live streaming platforms and illegal personal data collection of mobile apps…” Such actions were previously tolerated in other industries but “the vertiginous rise of China’s Big Tech…has clearly spooked the government” into reversing course. Zhu Ning (Shanghai Advance Institute of Finance) notes that “many internet companies…influence has grown to an extent that they can sway government policy. ‘This concerns policymakers very much.’”


BAT (Biidu, Alibaba, Tencent) have built up “over one billion users each” and expanded into new business partly by M&A of startups. Others like “Pinduoduo (e-commerce), Meituan (food delivery), JD.com (e-commerce), Did Chuxing (ride-hailing) and Bytedance (short videos) are following the same method. In common they all “expand their reach into other areas and dominate more industries by leveraging consumer data.” What regulators are asking for is proof that M&A does not hinder “consumer interests.” As an example, “an e-commerce company with a large amount of purchasing data could…manipulate logistics” by sharing data with their preferred partners. The draft guidelines mention violations would include past practices like “selling goods below cost, price discrimination based on customer data analytics, and exclusive sales agreements.” Another government concern, not surprisingly, is that large media entities would be or are “difficult to censor.” Estimated to control more than “half of the time Chinese internet users spent online (an average of 30.8 hours/week)” these companies have oversized potential to influence “social attitudes and media reporting.” Media regulators want those involved “to register real names and company affiliations, to hire more censors, and to livestream more programs that spread ‘positive energy’.”


Financial regulators worry that new services like online loans, seen as profitable and “low handing fruit” are being offered by a wide range of internet firms, are not properly capitalized and given their increasing “reach through the economy” add to “concerns of China’s banking regulator.” Guo Shuqing (China Banking and Insurance Regulatory Commission) is quoted as saying “…timely and targeted measures [are needed] to prevent new systemic risks.” Alipay (payment app of AGH) has more than 700 million monthly active users (MAU) and “Tencent’s WeChat Pay had more that 800 million MAU in 2019.” Tencent says that nearly 80% of “small to mid-merchants in China were using its payment services in 2020.”


Given that China is “where mass surveillance is still a fact of life” it is on the other hand hard to imagine that they are interested in making protecting “personal data” a priority. Regardless, the “Cyberspace Administration” has identified what is allowed as “required personal information” for company operations in response to what has been dubbed the “Wild West” where firms were capturing extensive amounts of data from consumers. “In some cases, programs will order apps to secretly turn on the microphone of the user and record daily conversations.” AI tools are then used by the system to “analyze chat content, often by capturing key words, and makes the app push relevant products or contents for the user.” To a degree “smartphones have been upgrading their operating systems with more personal data protection measures.” Chinese regulators are adding to the mix of checks on apps but Samuel Yang (An Jie) “believes the government will try to strike a balance” between business growth and personal protection.


Chinese tech has created millions of jobs from creators to commercial end-users. Coming with that is a Chinese concern that these apps have “increased the risk of social disturbances…”. Examples, in business, cited are users getting ripped off by companies that fail and then don’t return deposit money, a rent middle-man that does not pay landlords monies received from tenants, or investors that “lost their saving during a collapse of peer-to-peer lending…”. True “top leadership in China [have found]…that internet companies can cause immense trouble, and at a huge scale, if they are not kept in check.” Andy Xie (Independent Economist in Shanghai former head of Morgan Stanley Asia Pacific) claims that “The internet…redistributes…resources and wealth in the real economy. If does not create, It disrupts…this has in reality meant lower revenues and higher unemployment.” With a customer-to-manufacturer model middleman lose out.


Finally, China’s new push for regulation simply recognizes that growth beyond China will require higher standards a “solid foundation of data governance principles.” Interestingly, some of what is happening in China, anti-competitive and misinformation control, mirrors similar controls of Big Tech in Europe and America. In the end “China wants to empower its tech companies…to compete with the likes of Google and Facebook” etc. while also acting on its recurring theme of “stability.”