China is cracking down on its big tech monopolies

China is cracking down on its big tech monopolies
Source: Tingshu Wang, Reuters
The recent turn suggests that big tech’s reckoning has extended to China, while heightened scrutiny and criticism of dominant tech corporations remains ongoing in the United States.

Some of China’s biggest tech corporations are facing a new level of government anti-monopolistic scrutiny, in a stark regulatory turn for the world’s second-largest economy.

China’s government has stepped up its regulation of its internet giants, such as Alibaba Group Holding Limited and Tencent Holdings Ltd., which previously benefited from a “hands off” approach, compared to other industries.

New regulations and draft rules signaling tougher regulatory scrutiny has already seen frenzied market activity, as shares in impacted companies have been sold off amid fears that China’s big tech will face punishments due to alleged monopolistic activity.

Some companies have already begun to be hit with fines and other punishments for historic acquisitions and deals that reportedly broke existing antimonopoly laws.

This new regulatory attention to big tech is the latest sign of a tightening regulatory scene in China more broadly. The toppling of financial services company Ant Group’s initial public offering (IPO) in November signaled further regulation of a fintech industry that has traditionally benefited from lax rules.

The recent turn suggests that big tech’s reckoning has extended to China, while heightened scrutiny and criticism of dominant tech corporations remains ongoing in the United States.

Monopoly crackdown

In November, China’s State Administration for Market Regulations unveiled new draft rules to combat monopolistic practices in the first sign that the country’s biggest tech companies would be placed under greater regulatory scrutiny.

The new rules aim to “prevent and stop monopolistic” behavior, while also promoting “the sustainable and healthy development of the online economy.”

The timing of the new rules has likely been accelerated as a result of the success enjoyed by big tech as a result of the pandemic, with e-commerce giants such as Alibaba having been uniquely positioned to benefit from pandemic-era consumer activity.

Nonetheless, the new rules present a marked difference to the traditional regulatory approach to China’s big tech companies. Firms such as Alibaba, Tencent and others have benefited in the past from a lax regulatory environment that has allowed them to become some of China’s largest tech companies.

Hoi Tak Leung, a Hong Kong-based lawyer specializing in Chinese internet companies for Ashurst LLP, told Bloomberg that the new regulations suggest a “broader China government sentiment that internet platforms are becoming too powerful” which “would be consistent with worldwide developments as well.”

Indeed, some of the biggest names in the technology and internet industries in the US have also been under fire for monopolistic activity as of late.

In October, Alphabet Inc’s Google LLC faced a landmark antitrust lawsuit from the US Department of Justice for alleged monopolistic activity, as did social-media giant Facebook Inc. in December.

The latest regulatory moves against China’s big tech companies parallel greater regulatory scrutiny of China’s economy more broadly. In November, Ant Group, the operator of popular digital payments app Alipay, saw its potential US$35 billion IPO topple after officials informed the company that it no longer met the regulatory requirements for its listing.

The toppling of Ant’s potentially record-breaking IPO was also widely seen as a warning shot against China’s richest, with Ant Group founder Jack Ma having previously aired public criticism of China’s state regulators.

Ant Group chairman Eric Jing has also apologized for the collapse of the IPO and has said the company is “looking into the mirror, finding out our shortcomings, and conducting a body check-up.”

Fines show increased scrutiny

The release of new draft regulations targeting China’s internet companies has caused a mass sell-off in shares of the impacted companies, as well as technology stocks and bonds more generally.

Shares in Alibaba dropped by nearly 10% in a single day, whilst Tencent fell by 7.4% and e-commerce company, Inc. fell by 9.2%.

In a recent follow up, China’s State Administration for Market Regulations has also fined Alibaba and Tencent-backed companies for failing to report past deals and acquisitions for antitrust review.

Regulators fined Alibaba for a US$692 million investment in Intime and its 2017 bid to privatize the company, whereas Tencent-backed China Literature was fined for failing to report its acquisition of New Classics Media in 2018.

The companies were fined some 500,000 yuan (US$76,464), the max allowed under China’s 2008 antimonopoly law.

Though their size is negligible, the signals sent by the fines cannot be ignored. This is the first time that Chinese regulators have fined any internet company for violating the 2008 law.

According to Scott Yu, an antitrust lawyer with the Beijing-based Zhong Lun Law Firm, “despite its relative modest amount,” the fines, “together with the draft antitrust guidance unveiled in November, signals that Beijing will pay close attention to the monopolistic status of Chinese internet companies.”

Though the unveiling of new draft laws and recently issued fines constitute relatively small steps taken by China’s top regulator, they are nonetheless steps in the direction toward stricter regulation of big tech in the company.

The move parallels developments seen worldwide, as governments are paying greater attention and scrutiny to big tech and the allegedly “monopolistic” practices that they have been engaged in for years.

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