China’s market regulator has announced new rules to identify and stop monopolistic practices in the internet industry, in the latest move by Chinese officials to rein in the country’s burgeoning tech sector. In a follow up move to the shock suspension of Ant Group’s IPO last week, the State Administration for Market Regulation outlined for the first time on Tuesday what constitutes anti-competitive behavior in the tech sector. The Financial Times’ Ryan McMorrow, Nian Liu, and Mercedes Ruehl reported on the significance of these new regulations, given Beijing’s historically laissez-faire approach to regulating tech companies, even as anti-competitive behavior has grown in recent years:

Until now, Chinese regulators have taken a relatively hands-off approach to antitrust, even as authorities in the US and Europe launched inquiries and investigations into Amazon, Facebook, Google and others.

This is in spite of the fact that Chinese tech companies have been building increasingly captive ecosystems, with users being prevented from using WeChat Pay to purchase products in Alibaba’s Taobao online store, for instance, or easily sharing links to Taobao goods within WeChat.

The new guidelines mark the first time the State Administration for Market Regulation has directly tackled anti-competitive behaviour in the internet sector. [Source]

CDT previously covered Beijing’s reluctance to regulate its tech champions with antitrust regulation, and how its regulator’s position has shifted over the course of this year.

China’s vast online retail behemoths have reportedly been employing increasingly aggressive sales tactics to squash their competition. Earlier this year, The Financial Times reported on one tactic known as erxuanyi (“two choose one”), where online retailers force vendors to sell exclusively with one retailer or the other:

Mark Hu sells thousands of household appliances every month from his computer in a two-story factory complex in south China, using online shops run by Alibaba and Pinduoduo.

But in June the 28-year-old said he was forced to pick between them, after Alibaba allegedly told him that unless he shut his Pinduoduo site, online shoppers would no longer be directed to his products on its Tmall platform.

He said he was given two days to make his choice. “Pinduoduo was around one-third of our sales, while Tmall was two-thirds,” he said. “We are a factory; if we had shut down Pinduoduo immediately, we would have had problems,” he added. [Source]

The timing of the draft antitrust rules’ release on Tuesday is significant, coming a day before November 11th’s Singles Day, an unofficial holiday when online retailers drop prices and use various tactics to lure Chinese consumers into a vast spending spree. Aggressive tactics are known to become more rampant during the fierce competition for sales during the extended Singles Day shopping period. For Techcrunch, Rita Liao reported on some of the questionable tactics that are set to be outlawed under the draft antitrust legislation:

Over the years, e-commerce leaders Alibaba, JD.com and Pinduoduo, food delivery platform Meituan, social giant Tencent and other major industry players have been accused of unfair competition to various extent [sic]. Behavior targeted by Beijing’s new proposal includes price discrimination among consumers, preferential treatment for merchants who sign exclusive agreements with platforms and compulsory collection of user data. [Source]

For Bloomberg, Zheping Huang and Coco Liu reported on the expanded range of penalties that regulators would be empowered to impose. Regulators also left the door open to releasing more rules governing internet transactions at a later stage:

The new rules were proposed in accordance with and build on China’s Anti-Monopoly Law, which in January included broad language governing internet companies for the first time. They restrict targeting specific customers through their online behavior, a common practice adopted by players both at home and abroad. Under the regulations unveiled by the State Administration of Market Regulation, violators may be forced to divest assets, intellectual property or technologies, open up their infrastructure and adjust their algorithms. The watchdog will seek public feedback on the regulations till Nov. 30.

Representatives from Alibaba, Tencent, TikTok-owner ByteDance Ltd. and 24 other tech giants attended a meeting with regulators from the antitrust and cyberspace authorities earlier this month to discuss issues ranging from unfair competition to counterfeiting. “Internet platforms are not outside the reach of antitrust laws, nor are they the breeding ground for unfair competition,” the regulators said in a subsequent statement.

Further measures to tighten oversight of the tech companies may be in the offing. Regulators plan to release new rules governing internet transactions by June 2021, according to a State Council statement released Tuesday. [Source]

Stocks of major Chinese online retailers such as Alibaba and Tencent Holdings were sent tumbling after the regulations were released on Tuesday. For Jack Ma, founder of Alibaba, the selloff marked a second major blow to his financial holdings after Ant Financial, the fintech firm spun off from Alibaba, had its blockbuster IPO abruptly called off last week.

CDT covered the initial reactions to the IPO postponement. Since then, analysts have offered a range of takes on Beijing’s decision to call off the IPO. While some have put the blame on Jack Ma’s boisterous speech the week prior for inciting regulators’ anger, others have viewed the postponement as an opportunity for Ant to get its house in order before it goes public, after new regulations for fintech firms were released in early November. An editorial by the South China Morning Post, which is owned by Alibaba, said the delay “may even benefit investors,” citing how higher capital requirements for fintech firms might later depress the company’s valuation.

Under new regulations for micro-lending businesses, fintech firms are required to fund no less than 30% of the loans they issue. CNBC reported that more than 98% of credit issued by Ant’s lending platforms was from partner financial institutions or securitized. The new rules could significantly change Ant’s profitability and later valuation.

Beijing’s concerted effort to rein in internet companies comes at a time when their foreign competitors are also facing regulators’ scrutiny. In the U.S. and in Europe, regulators are investigating whether big tech firms have been engaging in monopolistic practices.

China is grappling with the same problems as every other country these days. Big Tech has brought vast efficiencies, but has also unleashed forces toward a greater concentration of economic power. (2/3)

— Simon Rabinovitch (@S_Rabinovitch) November 10, 2020

And in China, platform fights can be more vicious: blocking links, blocking bankers who work with rivals, etc. Now that regulators are wading in, will they be heavy handed? An important test of both how to regulate Big Tech and how business regulation functions under Xi. (3/3)

— Simon Rabinovitch (@S_Rabinovitch) November 10, 2020

Regulators in the West and in China may benefit from the pressure on big tech in each others’ countries. In the U.S., internet giants, most notably Facebook, have argued against greater regulation by citing the need to compete with Chinese apps, complaining that the Chinese government’s support for domestic tech companies gives them a leg up over American ones. Similarly, Beijing has had to juggle the competing priorities of building up domestic internet giants to be competitive abroad, and wanting to combat monopolistic behavior at home. As Western governments expand oversight over its internet champions, it may be easier for Beijing to justify regulating its own.