New Actions and Draft Laws Signal New Era for China’s Internet Giants

A series of enforcement measures and proposed laws have drawn heightened attention to Beijing’s plans to rein in and remake the environment for big tech in China. Taken together, they reveal an unprecedented willingness by the Chinese government to take on tech giants that have previously gone largely unchecked, forcing them to toe the Party line and also to protect consumer interests and privacy to a degree previously unseen.

Since the summer, regulators have signaled growing concern about monopolistic practices in China’s technology sector. In November, the announcement by China’s market regulator of new measures to curb tech monopolies brought its priorities fully into view. This week it took action, fining three companies for improper reporting of acquisitions for regulatory approval. SupChina’s Lucas Niewenhuis summarized the regulator’s findings and explained their significance:

Now three companies have been fined: , China Literature (a business spun off from ), and Hive Box, an ecommerce company owned by SF Express. SAMR released a short statement (in Chinese) announcing the fines, and a long Q&A (in Chinese) explaining its broader scrutiny of internet businesses.

The companies were cited for “not reporting past deals properly for anti-trust reviews,” including two Alibaba investments in 2014 and 2017, China Literature’s 2018 acquisition of New Classics Media, and Hive Box’s recent purchase of China Post Smart Logistics, per Reuters.

All three penalties were for the small amount of 500,000 yuan ($76,500), which is the maximum under China’s 2008 Anti-Monopoly Law.

But the fines “mark the first time Chinese internet companies have been penalized” under that law, Caixin points out. Markets got the message, Reuters reports, as “Hong Kong-listed shares of Alibaba and Tencent fell after the news, with Alibaba closing down 2.6% and Tencent’s shares ending 2.9% lower in their worst day since Nov. 30.” [Source]

The new rules also signal the closure of a key loophole that big tech companies in China have previously exploited to circumvent regulatory oversight. As Financial Times’ Yuan Yang reported, the fines suggest companies using the “variable interest entity” (VIE) legal structure, which is often used by tech companies to circumvent limits on foreign capital, are no longer exempt from regulatory oversight:

The VIE structure has commonly been used by tech groups such as Tencent and Alibaba to get round restrictions on raising foreign capital, and thus list on foreign stock exchanges. It has also been used by foreign companies to enter the Chinese market.

“The regulators have never pursued a failure-to-notify case against a VIE before. This is saying: ‘You can’t do whatever you want now, and you can’t hide behind the VIE structure,’” said a Beijing-based lawyer who wished to remain anonymous.

The State Administration for Market Regulation said on Monday that although the fines of Rmb500,000 ($76,000) per company were “relatively low”, it hoped the penalties would act as a “deterrence” and “send a signal to society of strengthening internet law, to dispel the attitudes that some companies have — that they can wait and see and enjoy flukes of luck”. [Source]

More enforcement actions from the State Administration of Market Regulation (SAMR) can be expected. On Tuesday, Reuters reported that SAMR was planning to “make an example” of Tencent with a close review of its acquisition of search engine Sougou. Tencent intends on taking the company private:

For the Sogou-Tencent tie-up, the State Administration of Market Regulation (SAMR) is planning a thorough review that could mean the deal may miss a July 2021 completion deadline, two of the sources said.

“The deal now faces big uncertainty and there’s a big chance that it may not close as planned,” one of them added.

Internet search is a sensitive issue in China and the SAMR will take into account the fact that Tencent already has a leading position in several sectors, the person said.

[…] Sogou said in a filing this month that it had submitted the deal for antitrust review, a rare move in China’s tech sector where companies until recently had not proactively sought permission from authorities. [Source]

The clampdown on internet giants’ behavior extends beyond scrutiny of their acquisition records and alleged anticompetitive behavior. In a push to curtail some of the most flagrant and intrusive data collection, efforts are also being made to define how data is collected and used by internet giants. In a deep dive for Asian Nikkei Review, Nikki Sun wrote about proposed restrictions under the draft personal information protection law that would, for the first time, define acceptable data collection practices for different kinds of apps:

“Traditionally, the Chinese app development space has approached user-data collection from the perspective [of]: I’m going to get everything I might need later,” said Kendra Schaefer, head of tech advisory practice at Beijing-based consultancy Trivium. This contrasts with Western countries, where regulators require companies to collect only the data necessary for their operations, she said. But data collection in China has not been properly regulated because there is no regulation to follow, and the lack of rules has led to an anarchic internet sector rife with abuses.

China’s Ministry of Industry and Information Technology has, since last year, reported dozens of mobile applications for their practices including illegally collecting and using user information, sharing personal data with third parties without permission, and seeking excessive access authorization to private information. Tencent, Sina, Baidu, Huawei Technologies and Xiaomi were among the developers behind the problematic apps.

A Nanjing-based software engineer who developed more than 20 mobile apps told Nikkei Asia that many applications were designed to grab as much personal data as possible from one’s smartphone without properly informing the user.

In some cases, programs will order apps to secretly turn on the microphone of the user and record daily conversations. The system will then use AI tools to analyze chat contents, often by capturing keywords, and make the app push relevant products or contents for the user, the 30-year-old engineer said, who only gave his last name as Wang. Some apps would also collect user’s real-time location information when users are not using the app, he added. [Source]

The collection of user data in ways that ultimately come to harm consumers’ interests has attracted growing attention and public outrage in recent years.  For Sixth Tone last month, Shen Weiwei wrote about a practice known as “big data backstabbing” that regulators have taken aim at with new draft laws governing monopolistic behavior:

“Big data backstabbing” — dashuju shashu — refers to the increasingly common practice of using big data to compile user profiles, then leveraging that information to market the same product at various prices to different users, usually in the form of charging higher prices to older users. This behavior is hardly new or unique to China: As early as 2000, Amazon was offering DVDs at a lower price to new users more than older ones; in 2012, office supply store Staples came under fire for offering consumers different prices based on their unique IP addresses.

But as big data technology has matured, China’s internet platforms have become increasingly cutthroat, trying to maximize their profit on every transaction. Unsurprisingly, consumers tend to be particularly sensitive to these practices. In March 2019, a survey published by the Beijing Consumer Association found that 88% of respondents thought big data backstabbing was widespread or common, while 57% said they had personally been “backstabbed.” Online, netizens joke that, “Old users are treated worse than dogs” and, “It’s the people who know you best who hurt you the most.” [Source]

In what may come as a surprise given its pervasiveness as part of the Beijing’s vast surveillance network, the use of facial recognition is another area that the government plans to regulate under the draft personal information protection law. For Vice News, Shen Lu wrote about growing pushback against the use of facial recognition in public spaces, including the first ever lawsuit in China to challenge the use of facial recognition:

But rampant abuse and frequent leaks of data have undermined people’s confidence in the technology. A 2019 survey of 6,154 people suggested that more than 70% of the respondents were worried about personal data leaks due to the use of facial recognition technology in public spaces.

This rising skepticism has prompted the Chinese authorities to regulate surveillance technologies.

[…] As part of these efforts, China is drafting a Personal Information Protection Law and a Data Security Law, limiting facial recognition cameras to be used only for public security purposes.

[…] But the emerging laws are unlikely to protect Chinese citizens from the most watchful of all entities in China – the Chinese government, Yale’s Daum said, as the ruling Communist Party sees mass surveillance as critical to maintaining stability. [Source]

Taken together, the enforcement actions and proposed privacy and data protection laws suggest that big tech in China may be transitioning into a new era, where laissez-faire monitoring is replaced with greater oversight of monopolistic and anti-consumer behavior and heightened concern about privacy rights—at least on paper. The shift in China is not happening in isolation: in Europe and the U.S., lawmakers and regulators are initiating unprecedented efforts to rein in or even breakup their domestic tech giants.

But while Western governments can expect an expensive and prolonged battle with their internet conglomerates, in China it appears that tech executives are not waiting to fall into line. Following in the footsteps of Alibaba’s chairman, who expressed “gratitude towards regulatory governance” last month, Bloomberg reported that on Tuesday, the chairman of Ant Group—whose planned November IPO dramatically fell through at the eleventh hour—appeared apologetic and contrite, pledging a “self review” of the fintech giant:

The company is “looking into the mirror, finding out our shortcomings, and conducting a body check-up,” Jing said in a speech at the 4th China Internet Finance Forum on Tuesday. Ant is striving to “properly manage” issues related to the suspension of the IPO, he said.

[…] “We are listening carefully to public opinion, including those with suggestions and expectations for Ant, as well as various kinds of criticisms,” Jing said. “These are all beneficial to Ant, and we have accordingly been conducting a comprehensive self-review.” [Source]

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