China Ramps up Scrutiny of Giant Tech Companies

By Mariliana Fotopoulou Thursday, December 31, 2020

Beijing’s government seems unformattable with a mouth-watering rise in the value and power of the nation's biggest tech companies. The state authorities made serious efforts to fight monopolistic practices of tech companies and limit their powers.

Large Internet Players Targeted

On December 14, Chinese regulators announced penalties for Alibaba Group and Tencent Holdings, two of the largest companies in China and the world. Overall, the country has stepped up scrutiny for tech giants as a part of the government’s battle against monopolistic practices.

The State Administration of Market Regulation (SAMR) will fine Chinese internet behemoths — including Alibaba, China Literature, and Shenzhen Hive Box — ¥500,000 ($76,464) each for failing to report previous deals for anti-trust reviews. While the fines are extremely low for companies that have market cap measured in hundreds of billions of dollars, Beijing government officials’ intent is more than evident.

As expected, Shares of Alibaba and Tencent dropped on the news, both closing the session down 2.6% and 2.9%, respectively.

The regulators added they plan to investigate the merger between game live streaming companies Huya Inc. and DouYu International. Tencent Holdings holds major stakes in both of these firms and was one of those companies that pushed the deal.

Furthermore, the regulators said they obtained information that certain companies had cornered substantial operating power in some sectors. These companies will be scrutinized by the SAMR as well; hence, investors are now prepared to expect further moves in 2021.

“The fines of the three cases are a signal to society that anti-monopoly supervision in the Internet field will be strengthened,” the regulator said, admitting that the penalties were small.

“The Internet industry is not outside the oversight of anti-monopoly law.”

This represents the first time the SAMR has penalized a company for breaking the anti-monopoly law passed in 2008 for not submitting deals for antitrust review.

“The internet sector was left out of anti-trust reviews in the past 12 years, leading to prosperity ... as well as chaos due to unregulated mergers and expansions,” said Liu Xu, a researcher at the National Strategy Institute of Tsinghua University.

Limiting the Power of Tech Giants

In November, the Chinese government published draft rules in an effort to fight monopolistic practices by tech companies. This was the first time China had imposed significant regulations on the internet sector. The move raised concerns among investors and wiped $250 billion off tech stocks in China instantly.

China’s President Xi Jinping hosted a politburo meeting in early December where he said the government would increase its antitrust scrutiny.

Ant Group, Alibaba’s fintech affiliate company, has also been on the radar of Chinese regulators. Ant Group was supposed to launch the largest-ever initial public offering (IPO) in November, which was stopped by regulators as Ant’s online lending operations faced stricter antitrust reviews.

Before putting Ant's IPO to a halt, Beijing has issued a draft of regulations for online consumer lending providers like Ant. In the draft, the government proposed capping loans to individuals at ¥300,000 ($45,700) and instructing Ant to pay for 30% of any loans it sources together with banks, compared to the 2% the company pays at the moment.

Daniel Zhang, the chief executive of Alibaba, characterized Beijing's plans to step up scrutiny for the internet sector as "timely and necessary."

He added that the country’s digital economy has been able to advance at such a rapid pace so far thanks to government policies.

Zhang said he’s welcoming Beijing's move to step up scrutiny as the country’s officials are working on strategies and new regulations to make sure Chinese internet platforms grow in a healthy manner.

He added that a number of new problems will certainly come to the surface as the country’s internet sector continues to grow and that the government should face them "with policies and regulations that keep pace with the times."

A month before Zhang made his remarks, founder and former CEO of Alibaba, Jack Ma, publicly criticized the country’s regulators for disrupting the path to innovation and said the banks in China have a "pawn shop" mentality.

Not long after Ma’s comments, Beijing halted Ant Group’s massive IPO.

Summary

Chinese market regulator fined tech leaders Alibaba and Tencent as it intensifies the scrutiny of internet companies in the country. However, analysts believe that the real intent behind these moves is to limit the power of the biggest tech players.

About the Author


Headshot for author Mariliana Fotopoulou

Mariliana has an MSC in consumer analytics and business strategy. She has a special interest in fast-moving industries and big data.

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