Is the Chinese Government Breaking Up with Tech Companies?
The year 2021 has not been easy for the Chinese high-tech sector. The ‘Holding Foreign Companies Accountable Act,’ adopted by the US Securities and Exchange Commission (SEC) resurfaced investors’ reservations as some Chinese firms could be de-listed from US stock exchanges. The new law states that businesses must comply with American auditing standards and must prove that “they are not owned nor controlled by a government entity in a foreign jurisdiction”. Although the Act applies to any foreign company, it is indirectly targeting Chinese companies such as Alibaba.
At home, Beijing has sharpened its claws as it signalled tougher guidelines. Consequently, this sparked fear among investors, pushing stock prices down. The sector has come under increasing pressure from regulators since last year, when China’s State Administration for Market Regulations (SAMR) began investigating into Alibaba, among other companies, amid rising reports of anti-competitive behaviour and ‘er xuan yi’ practices. Literally translated to ‘choose one out of two’ in English, it refers to e-commerce platforms obliging merchants “to have exclusive partnerships or distribution channels with them”, which limits competition and gives great advantage to the company. Through these agreements, internet platforms can restrict competition by fixing prices.
Several merchants have complained about market concentration and discriminating practices from technology giants, which have excluded and restricted newcomers from competing in the market. So far, the SAMR reported and fined several companies including Tencent, Baidy, Didi Chuxing, and ByteDance for violating anti-monopoly rules.
The new anti-monopoly regulations are aimed at containing ‘disorderly’ expansion of the economy by preventing monopolistic behaviour among internet companies, promote fair competition in the market and safeguard consumers’ interests. The SAMR is in charge of overseeing and disciplining businesses that engage in unfair competitive practices, including “manipulating data, algorithms and imposing differentiated prices and conditions to different customers which restrict competition in the digital market”.
After a thorough investigation that began last year, Alibaba Group Holding, the world’s largest e-commerce company, was fined a record of US$2.8 billion, equal to 4 per cent of its 2019 domestic revenue. Beijing’s decision to sanction Jack Ma’s e-commerce giant was not random, but a warning to all tech platforms abusing their market position and engaging in monopolistic practices. Since October 2020, Alibaba came under scrutiny from regulators after Ma criticised China’s regulatory approach to the finance technology industry. This was followed by the halt of the sister company, Ant Group’s share market launch by Chinese regulators from the People’s Bank of China, who argued that Ant took advantage of its market size, defied regulatory demands and had poor corporate governance.
Official regulators hope this penalty to Alibaba serves as a wake-up call and reminder of the state’s visible hand in the economy. During the administrative guidance meeting for Internet platform enterprises, the SAMR stated that Chinese tech companies are expected to “conduct a comprehensive self-inspection within one month,” rectify unfair competitive practices and improve corporate governance. Shortly after, almost three dozen Chinese firms have come forward to publicly apologise for engaging in anticompetitive behaviour and pledged to comply with the government’s rules, according to the Wall Street Journal. Stocks rose again.
So, what do these regulations mean for the future of the sector? Although it may appear to be a drastic and damaging move by the state, the fact is that the government is heavily reliant on the stability and prosperity of the technology sector and has always shown favouritism towards these organisations. In exchange for this preferential treatment, internet corporations have had to comply with the authorities and obey new regulations.
The government has been an active player and enabler in the advancement of the industry in the country. Since China’s economic opening and implementation of free-market reforms, the state has recognised the importance of digitalising traditional industries, as a new engine for growth and transformation. With Alibaba, Tencent and Baidu as the frontrunners in the digital economy, a myriad of tech firms have emerged and driven the sector to become stronger and more competitive, at home and abroad. According to Michael Keane, a professor of Chinese Digital Media and Culture at the Queensland university of Technology, China’s giants owe a big part of their achievements to the government as the latter “allowed them to benefit from policies designed to keep foreign competitors at bay and attract human capital back to China”. It is to no surprise then that internet companies have invested in recognition technologies to facilitate the communist nation's digital surveillance system.
Besides, this stringent regulatory approach is not something new. It can be recalled that in 2017, outward direct investment transaction volumes experienced a sharp decline as Beijing announced new guidelines to guard against excessive borrowing and risk. In previous years, the authorities liberalized regulation of ODI transactions as an attempt to lift overseas investment levels. The rapid growth however, exposed the dangers of funding large investment projects as small, medium and large enterprises were incentivised to make risky bets on overseas assets, assuming the state would bail them out. The guidelines aimed at obstructing and penalising irrational and reckless investments, deemed threatening to national interests, security and economic stability. Similarly, to the case of Alibaba, the insurer Anbang was investigated and the arrest of its former head, Wu Xiaohui was made an example to other companies involved in corruption and fraud. Notwithstanding, the authorities made clear their support and guidance for rational and careful ODI that boost sustainable economic growth, including infrastructure promoting the Belt and Road Initiative.
The Chinese authorities stepping in again to regulate ‘irrational and dangerous’ behaviour, could be a sign that the industry is maturing. Since the 2000s, tech firms have operated in an environment with little regulation, to stimulate development and innovation. However, Beijing is willing to become a technological superpower. Therefore, regulating its giants is necessary for establishing its standard-setting position globally. While fears that rules will slow down the sector and the growth of the economy overall cannot be ignored, China is known for its long-term strategic vision, and so, today’s costs will be irrelevant once it achieves its ambitious goal.
Written by Sophie Hassam
Sophie Hassam is a columnist at DecipherGrey.