China Moves To Rein in Internet Giants

Alibaba, Tencent plunged this week after the government proposed regulations to improve competition under the country’s Anti-Monopoly Law.
Mark MelnicoeNov 14,2020,15:31

China’s best-known tech companies have grown into juggernauts in recent years, with stock prices to match. Firms such as Alibaba (NYSE: BABA) and Tencent (HK: 0700) are market leaders that have amassed huge valuations and made fortunes for their founders.

They also have gained remarkable power, not unlike American online platforms. And now, just as companies such as Amazon (Nasdaq: AMZN) and Alphabet’s Google (Nasdaq: GOOG) are coming under antitrust scrutiny in the West, China proposed new regulations this week that should rein in some of that power.

For the country’s top entrepreneurs, it represented a rude and sudden awakening. In a nutshell, the rules target anti-competitive practices such as forcing merchants to choose between platforms and selling below cost to thwart competition, as well as behaviors around the use of data and algorithms. As in the West, some of these firms are getting so big and powerful that they can combine data with artificial intelligence to get a huge leg up to fend off competitors.

The State Administration for Market Regulation, which issued the regulations on Tuesday, the Central Internet Information Office and the State Administration of Taxation also held a meeting the previous week, where officials summoned 27 of China’s biggest platform operators, the Caixin news portal reported.

The government reportedly dressed the company executives down, warning them about such things as shouldering responsibilities, strengthening “self-discipline and management” and not abusing their market positions to harm competition.

Then, the day before China’s biggest shopping day – the Nov. 11 “Singles Day” extravaganza - out came the rules, which fall under the nation’s Anti-Monopoly Law and represent the first major revision to that law since 2008. The draft regulations are open for public comment through November but for the most part they will stick.

The suggested rules also carry something unusual for China – financial penalties that actually are strong enough to compel compliance. Violators could be forced to divest assets or intellectual property, for example, and fines could rise as high as 10 percent of sales.

All of this clearly is bad news for China’s internet giants, and share prices plunged in response. Alibaba fell about 5 percent Tuesday, then another 7 percent on Wednesday – to its lowest level since August. Tencent, China’s leader in online gaming and the operator of the ubiquitous WeChat super app, fell more than 10 percent over Tuesday and Wednesday. Meituan (HK: 3690), a food-delivery company that has moved into selling movie tickets and hotel reservations, plunged 10.5 percent Tuesday and another 6 percent Wednesday.

For billionaire Alibaba founder Jack Ma, the week culminated a double whammy, as his Ant Group’s $35 billion IPO, which would have been the biggest In history, was canceled the week before after new regulations were suddenly announced on microlending.

In all, the sudden flurry of regulations slapped down the country’s high-flying internet stars at a time when their share prices had been rising sharply. Alibaba, Tencent and Ant by themselves represented a combined market capitalization of nearly $2 trillion before this week, much more than state-owned giant such as Bank of China. Even after this week’s fall, Meituan shares have catapulted 200 percent in the past year, while Tencent’s price has almost doubled and Alibaba’ is up 47 percent.

China wants its companies to succeed and become global titans, but it also wants to protect its consumers from unfair competition. “The platform economy does not exist outside antitrust laws, nor should it be a breeding ground for unfair competition,” the country’s internet regulator said in a statement.

Xi Jinping’s government has simultaneously been tightening its grip on the world’s No. 2 economy while slowly opening it up to needed reforms. If that seems contradictory, it’s because the moves often come with little warning, as happened over the past week and a half.

Authorities are concerned that the big online companies have become too powerful, and it’s true that they control vast swaths of the economy and occupy big chunks of consumers’ time. The government also takes notice when private firms corral too much data – something the Communist Party prizes and uses to help control the population.

“The Party is faced with the conflicting desires to empower domestic tech companies to be internationally competitive, while keeping their market activities firmly under control at home,” Kendra Schaefer, head of digital research at the Trivium China consultancy in Beijing, told Bloomberg News. “The horizontal spread of Chinese big tech makes anti-monopoly regulation that much more urgent for Chinese regulators.”

Topics:Alibaba, Tencent, Meituan, Anti-Monopoly Law, antitrust