In 2021, Chinese regulators had a range of concerns to address, from specific targets like minors’ gaming habits and online insurance sales to broader issues like clamping down on anti-competitive behavior and the disorderly expansion of capital.

For Chinese tech giants, 2021 will be remembered as a harrowing year of regulation, where government penalties and a litany of tough rules hampered the sector’s performance and resulted in some big losses of market value.

Regulators had a range of concerns, from specific targets like minors’ gaming habits and online insurance sales to broader issues like clamping down on anti-competitive behavior and the disorderly expansion of capital, which is in line with the country’s strategic goal of achieving “common prosperity” — a phrase that has been frequently mentioned by the top leadership since last year.

On their end, Chinese tech firms have been trying to comply with stricter rules and stay profitable despite all the penalties. These firms would also have a clearer picture of how to maneuver the regulatory landscape in 2022 since there are signs that authorities are winding down.

Battling monopolies

Regulators started the year by stepping up efforts to rein in unfair market competition. In February, the State Council’s anti-monopoly committee issued formal guidelines that aimed at reining in monopolistic behavior by platform operators. These platforms thrived on business models that create value by facilitating exchanges between interdependent groups and taking a cut of any transactions between the parties.

The series of actions against monopolistic practices can be traced back to November 2020, during the halting of what was expected to be the blockbuster IPO of Alibaba Group Holding Ltd.-backed Ant Group Co. Ltd.

In April 2021, the Hangzhou-based e-commerce behemoth was targeted again with a record fine of 18.2 billion yuan ($2.8 billion), a penalty three times as high as China’s previous record antitrust fine on Qualcomm Inc., which was ordered to pay over 6 billion yuan in 2015. Also in April this year, China’s market regulator and cyberspace and tax agencies summoned 34 of the biggest internet platform operators to a meeting and told them to stop abusing their market dominance and cease all illegal activity within one month.

 

In October, take-out giant Meituan was also fined $533 million for anti-competitive practices that accounted for an estimated 3% of its domestic sales for 2020.

Other internet giants, including Tencent Holdings Ltd., ByteDance Ltd., Baidu Inc., and Didi Global Inc., were also fined for antitrust violations that happened years ago. As of the end of November, the State Administration for Market Regulation (SAMR) had listed a total of 87 such cases since December 2020, each resulting in a penalty of 500,000 yuan. The SAMR found that these deals broke Article 21 of China’s Anti-Monopoly Law, which urges companies to notify the regulators if they reach a concentration in the market.

In September, the government moved to remove tech firms’ “walled gardens,” a common practice in which they block rivals’ external links to protect their own digital ecosystem. Regulators consider this an anti-competitive tactic.

Beyond the domestic market, SAMR issued guidance in November for Chinese companies to step up awareness of overseas anti-monopoly compliance and guard against legal risks abroad. The document clarified that the anti-competitive behavior is not limited to written agreements, but also includes oral agreements and coordinated actions. Penalties range up to $100 million for corporate offenders and up to $1 million for individuals with a maximum prison term of 10 years.

Overseas listings and data security

Ride-hailing titan Didi’s U.S. listing in June spurred a new round of regulatory practices with a focus on data security. Shortly after Didi’s debut on the New York Stock Exchange, the Cyberspace Administration of China (CAC) announced it would investigate the company and ordered its apps removed from domestic app stores. It also accused Didi of violating laws and regulations to collect and use private information.

The CAC subsequently expanded the investigation to include two other Chinese tech companies that went public in the U.S. in June. Within just one week, the watchdog pledged to strengthen oversight of overseas-listed companies and issued draft rules that stipulate that any Chinese internet company with data from more than 1 million users will need to undergo a cybersecurity review if they seek to raise money abroad.

Those rules were tightened yet again in October when the regulator issued draft regulations that would require a national security review of data transfers outside the country involving the personal information of 100,000 or more individuals. A month later, the watchdog released another draft of rules that would require scrutiny of Chinese mainland firms seeking to list in Hong Kong to see if they were exporting data that could affect national security.

Market observers were, thus, worried when Didi announced it would move its listing from New York to Hong Kong in December, about five months after its $4.4 billion IPO. There were concerns that the ride-hailing giant may be faced with strict cybersecurity reviews from the authorities and required to fix issues like the use of unlicensed vehicles and drivers.

Authorities also focused their attention on labor rights of gig workers. In mid-August, the Ministry of Transport called on ride-hailing firms to implement measures including setting reasonable rates for driver pay, using algorithms to manage driver fatigue, and limiting working hours. Four months after that, the regulator issued the guidelines, and gave provincial and local governments until the end of the year to develop clear systems for resolving labor disputes related to the ride-hailing sector.

Approaching the year-end, some media outlets reported that China’s watchdog had planned to ban companies from going public on overseas stock markets through variable interest entities (VIEs), a common way to raise capital abroad that has been used by Alibaba, Tencent, and JD.com Inc. The securities regulator denied the rumor.

On Friday, the regulator published a set of draft rules, saying domestic companies can still use the VIE structure to list abroad as long as they comply with the related requirements. The draft rules are open for public comment until Jan. 23.

Online content and personal information

Both the CAC and the Ministry of Industry and Information Technology (IIT) have carried out campaigns against content deemed unsavory.

The CAC campaign, called “qinglang,” started in May. In late July, Kuaishou Technology, Tencent’s QQ, Alibaba’s Taobao, Weibo Corp., and Little Red Book were ordered to remove offending accounts with sexually suggestive content involving minors and pay unspecified fines by the internet regulator.

Separately, Baidu-owned video streaming platform iQiyi Inc. announced it would cancel idol talent shows and stop featuring any form of online voting in August, shortly after CAC revealed plans to strengthen regulation over the country’s “chaotic” celebrity fan culture. Other video streaming giants like Alibaba-owned Youku Tudou Inc. and Tencent Video followed suit amid an official ban by China’s broadcasting regulator a month later.

The MIIT, on the other hand, launched a six-month campaign in July against apps that spied on users and stole personal information. It ordered more than 100 apps to be pulled from app stores between January and March. This campaign also expanded to new issues like “harassing” pop-up windows and blocking external links. In addition, the MIIT ordered 25 technology companies, including Alibaba, Tencent, Meituan, Xiaomi Corp., and ByteDance, to carry out internal reviews and fix issues ranging from data security to consumer rights protections.

Because of repeated violations of personal information protection, Tencent was suspended from releasing new mobile applications and updating existing ones — including WeChat, which hosts 1.2 billion users worldwide — in late November.

So far, two of three major pieces of Chinese legislation to address data security issues have been either enacted or passed this year — the Data Security Law that was passed in June and took effect in September and the Personal Information Protection Law that was passed in August. The remaining one is the Cybersecurity Law in 2017.

Senior executives step down

One last thing of note this year has been the stepping-down of China tech’s high-profile executives, amid the ongoing regulatory storm.

ByteDance’s co-founder Zhang Yiming, who is the country’s richest internet tycoon according to a Forbes ranking, stepped down as CEO in late May, saying that he will focus more on “longer-term initiatives,” instead of day-to-day responsibilities. The 38-year-old entrepreneur was replaced by Liang Rubo, the firm’s head of human resources.

In mid-March, Ant Group CEO Simon Hu also resigned from his role and said he would remain at the company to focus on the group’s philanthropic work. He was replaced by Ant Chairman Eric Jing.

A week after that, Colin Huang Zheng, the billionaire founder and chairman of Nasdaq-listed e-commerce giant Pinduoduo Inc., resigned from the 5-year-old company’s board eight months after relinquishing the role of CEO.

The founder of e-commerce giant JD.com, Richard Liu also announced he would step back from day-to-day operations in September. Xu Lei, a company veteran and CEO of JD.com’s retail arm, was elevated to the new position of president to take over.

By Manyun Zou (manyunzou@caixin.com) and editor Bertrand Teo (bertrandteo@caixin.com)

Source:  Caixin Global