What’s Behind China’s Crackdown on Its Tech Giants

It started with Ant, the fintech giant whose business expanded into payments, banking, wealth management and insurance during years of loose regulatory oversight. Just ahead of what was to be a $35 billion mega-listing in Shanghai and Hong Kong, Chinese authorities slapped new rules on the online consumer-lending industry, in which Ant is the biggest player. That led to an indefinite suspension of Ant’s Nov. 5 initial public offering. The following week, regulators proposed new rules intended to curb monopolistic practices across its entire internet landscape, spooking investors again. The rules were finalized in just three months, underscoring the urgency of the campaign. Tencent may become the next target, with regulators said to be considering requiring the social media giant to establish a financial holding company to contain its banking, insurance and payments services. Since then, Xi himself has declared he will go after “platform” companies that amass data and market power — a sweeping definition that includes just about all of China’s largest firms. His government is now said to be considering creating an officially directed entity to oversee internet data, the source of much of the industry’s influence. Alibaba has said little about the investigation it faces while Tencent has tried to play down the potential fallout.

We don’t know exactly. As is almost always the case, the country’s leaders have said little about their intentions, apart from protecting consumers and maintaining financial stability by mitigating risks. Some analysts and investors say they think regulators are merely re-asserting their oversight power, not looking for drastic changes. Others think they may have grown frustrated with the swagger of tech billionaires and want to teach them a lesson by breaking up their companies — even if it means short-term pain for the economy and markets. What’s known is that the Communist Party has grown increasingly concerned about the growing clout of its internet firms, mostly private entities over which they have little direct control. In 2020, the disappearance of posts from an Alibaba-backed online service, regarding a scandal involving a top company executive, drew attention to the potential for internet giants to influence public forums — outside the Party’s control. Those concerns crystallized after Ma blasted China’s financial system as outdated and complained that regulators were shortsighted during an October conference. He was summoned to Beijing for a rare joint meeting with the country’s top financial officials. The new regulations soon followed.

3. Why was Jack Ma singled out?

The charismatic impresario behind two of the country’s largest corporations, Ant and Alibaba, Ma is arguably the one person most closely identified with the meteoric rise of China’s internet sector. Long a regular on the global conference circuit, the flamboyant billionaire all but vanished from public view after Ant’s IPO got derailed and, according to a person familiar with the matter, was advised by the government to stay in the country. Ma resurfaced in mid-January, propelling Alibaba’s market value $58 billion higher. While his appearance dispelled some of the more dire speculation around the fate of his empire, questions remain over Beijing’s broader campaign to rein in the tech giants. Tencent founder Pony Ma (no relation) — a delegate to the country’s top lawmaking body — has been far less vocal than his globe-trotting compatriot; in March he initiated a voluntary meeting with antitrust officials as part of their regular chats. Tencent, however, can’t escape the spotlight, given it’s the country’s undisputed leader in social media via WeChat, games and music publishing — to name a few sectors.

4. Is this a big change for China?

The government has played an important role in developing the tech sector, aided by a massive consumer market. In manufacturing, it intervened directly many times to reach the point where much of the world’s technology is made in China, even if it’s not always by Chinese companies. The central metropolis Zhengzhou, dubbed by locals as iPhone City, wouldn’t have become Apple Inc.’s biggest production base without government incentives. While less active in software and services, China facilitated their development by effectively creating its own version of the internet that’s blocked off from the rest of the world by what’s known as the Great Firewall. In the absence of Facebook Inc. or Twitter Inc., Tencent’s WeChat and Sina Corp.’s Weibo have flourished as social networks. Once Alphabet Inc.’s Google pulled out, Baidu Inc. extended its dominance of desktop search.

Early movers Alibaba and Tencent grew massively and came to dominate the entire ecosystem. Together with Ant they had a combined market capitalization of nearly $2 trillion in early November — easily surpassing state-owned behemoths like Bank of China Ltd. as the country’s most valuable companies. Their networks of investments encompass the vast majority of Chinese startups in arenas from artificial intelligence (SenseTime, Megvii) to fresh veggies (Meicai) and digital finance (Ant Group). Their patronage helped groom a new generation including food and travel giant Meituan and Didi Chuxing — China’s Uber. Rare are those that prosper outside their aura, the largest being TikTok-owner ByteDance Ltd.

6. Will Ant – or anyone else – get broken up?

Likely not Ant, it seems. Ant and Chinese regulators have agreed on a restructuring plan that will turn it into a financial holding company, making it subject to capital requirements similar to those for banks, Bloomberg reported Feb. 4. The plan calls for putting all of Ant’s financial businesses into the holding company. The central bank had earlier stressed it was important Ant “understands the necessity of overhauling its business.” Authorities also had berated Ant for what they said was sub-par corporate governance and disdain toward regulatory requirements. It’s unclear how the antitrust investigation of Alibaba will unfold, but the Chinese government was said in March to want it to sell some of its media assets, including the South China Morning Post, because of concerns about the company’s influence over public opinion. Regulators are still in the early stages of examining Tencent and others. Overall, authorities in Beijing are expected to tread cautiously, looking to rein in the growing clout of the tech giants without undermining some of the country’s biggest corporate success stories.

7. What are the legal issues?

Roughly 20 pages of new, vaguely worded, anti-monopoly edicts finalized in February establish the broad framework for curbing potentially anti-competitive behavior such as forced exclusivity deals, algorithm-based prices favoring new users or below-cost pricing to eliminate competitors. In that sense it echoes concerns raised by regulators worldwide who are investigating whether Facebook, Google and other internet giants are leveraging their dominance to squash competition, or abusing user data. Consumers in China in recent years also have protested against the gradual erosion of their privacy via technology from facial recognition to big data analysis. If the government follows through on creating a single entity to manage — and share — data accumulated by the likes of Alibaba, Ant and Tencent, that could set a global precedent for governments concerned about the enormous leverage that internet giants wield over the economy and public discourse.

8. Has this happened before?

Yes, to an extent. China has a tradition of cracking down in fits and starts, or making examples out of high-profile companies. Tencent, for instance, became a target of a campaign to combat gaming addiction among children in 2018. While its shares took a hit, they eventually recovered to hit new highs. Alibaba has done the same after running afoul of authorities on everything from unfairly squeezing merchants to turning a blind eye to fakes. Since early 2017, Beijing has embarked on a campaign to defuse risks in China’s $53 trillion financial system — including targeting areas of online finance. But the present scrutiny is shaping up to become one of the largest concerted actions against private enterprise in decades. To cite just one example, new measures proposed by China on Jan. 20 to curb market concentration in its online payments market could slash Ant’s valuation by roughly two-thirds to just over $100 billion, according to Bloomberg Intelligence. It could also endanger the growth of Tencent’s estimated $120 billion fintech division.

9. Is the internet being singled out?

China’s private sector has maintained a delicate relationship with the Communist Party for decades, and has only recently been recognized as central to the nation’s future (Jack Ma was confirmed as a Communist Party member in 2018). While Xi’s government has been steadily tightening its grip on the world’s second-largest economy, it had taken a relatively hands-off approach toward the internet, e-commerce and digital-finance spheres. That could be changing as Big Tech amasses ever-more influence and power through the data and loyal patronage of hundreds of millions of consumers.

10. Is there more coming?

Xi’s administration is particularly concerned about eradicating systemic risks — such as unsupervised growth of consumer debt — in part to ensure the Party’s dominion. Expect more regulations on that front. Market observers don’t rule out that Beijing may also seek greater oversight over not just data but also mergers and acquisitions, given China’s internet firms have over the years invested in hundreds of the country’s most influential up-and-comers in a plethora of realms from online health care to artificial intelligence. Regulators have begun issuing token fines for deals closed years ago, spurring fears of a bigger probe into M&A. More broadly, investors are watching to see if regulators will expand their official investigations beyond Ant and Alibaba to include other sector leaders including Tencent.

(Updates with crackdown widening against Tencent, Alibaba in from section 1)

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