China tech crackdown: in 2021, technology giants came under intense scrutiny after sleeping watchdogs awakened
- Almost overnight, China’s anti-monopoly bureaucrats became a force feared by Big Tech, as they issued hefty fines for deals struck without official approval
- As regulators jostled for control over the tech sector, there were signs of ‘regulatory competition’ and inconsistency, according to industry observers
2021 will go down as a tough year for Chinese technology firms as Beijing moved to exert control over the once-freewheeling sector. In the first of a four-part series, the South China Morning Post looks at how the sudden change in relationship between the government and Big Tech has shaped the companies, their entrepreneurs, and the regulators themselves.
On a chilly day in November, a new black-and-white name board was added to a marbled column at the entrance of the State Administration for Market Regulation (SAMR) building in downtown Beijing.
A short, low-profile ribbon-cutting ceremony was held in front of the drab offices, marking Beijing’s decision to upgrade the political status of what was just one of many internal departments within the SAMR.
That move would have a lasting impact on the country’s business environment, and in particular, China’s Big Tech firms that had been largely immune from antitrust scrutiny until recently.
Until a year ago, the anti-monopoly bureau was largely a toothless watchdog overseeing Big Tech. But on Christmas Eve last year – acting on orders from the country’s top leadership to bring down “monopolies” and curb “irrational expansion of capital” – the department’s bureaucrats raided the campus of e-commerce giant Alibaba Group Holding, owner of the Post.
Almost overnight, the anti-monopoly bureaucrats became a force to be feared – and they had the backing of China’s top leader. In March and again in August, President Xi Jinping ordered the anti-monopoly team to beef up their antitrust activity, Gan Lin, the new head of the bureau, told state media in an interview published Sunday.
With those marching orders, the bureau issued fines for deals struck without official approval, including ones that predated the regulator’s own existence. They summoned executives from Chinese tech giants to lecture them on how to behave, and slapped hefty fines on Alibaba and food delivery platform Meituan for monopolistic behaviour. And to handle all the extra work, the bureau advertised openings for 18 new jobs.
This transformation from a relatively irrelevant watchdog for firms like Alibaba and social media and gaming giant Tencent Holdings, to that of an intrusive, powerful regulator, forms part of the sweeping changes in China’s regulatory system that have clipped the wings of the country’s once high-flying tech champions.
With a clear signal from Beijing to tame Big Tech, the bureaucratic apparatus of multiple ministries – from taxation to labour – has been mobilised to play their part in disciplining the corporate behaviour of tech giants that had been tolerated, if not encouraged, for years.
Winston Ma, adjunct professor at NYU School of Law and author of The Digital War: How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace, said Chinese regulators’ antitrust and regulatory action is unlikely to have reached its “final phase” for the internet industry, even as the year comes to an end.
The cold winds were first felt by the sector in late 2020, when a mega IPO planned by Alibaba fintech affiliate Ant Group was called off at the last minute – just days after founder Jack Ma publicly challenged China’s financial regulators.
Over the next few months, a slew of regulatory actions were unleashed, leaving virtually no major tech firm untouched. Tencent had to roll back some merger deals and exclusive music partnerships, ride-hailing platform operator Didi Chuxing felt the wrath of China’s cyberspace administration for listing in New York against their advice, and TikTok owner ByteDance saw the writing on the wall and put its own IPO on the back burner.
The hardest hit firms were from the online education sector, after a document issued by China’s top leadership, backed by the Ministry of Education, effectively made their business models illegal.
One fundamental change in the rules of the game came when the government made it significantly harder for Big Tech to acquire data under new laws covering data security and personal information protection, undermining the ability of tech firms to grow and make money.
Leading up to the crackdown, Chinese government-related researchers, including former Chongqing mayor Huang Qifan, had been pushing the idea that data should be under control of the state.
As regulators jostled for control over the tech sector, there were signs of “regulatory competition” and inconsistency, according to industry observers.
For example, the Cyberspace Administration of China (CAC), the internet regulator that traditionally was not involved in tech IPOs, emerged as the enforcer of data security reviews for overseas listings.
The CAC’s approach of regulating through punishment caught investors off guard, prompting the Chinese Securities Regulatory Commission, the agency with more experience dealing with investors, to step in to soothe what had become a market panic.
However, when CAC formed a multi-agency team, which included the Ministry of State Security, to investigate New York-listed Didi, the securities watchdog was not invited.
Ling Chen, assistant professor at Johns Hopkins University’s School of Advanced International Studies, told the Post that a bureaucratic power grab was taking place in Beijing among agencies tasked with regulating business.
“Data regulation is quite a new area and an important one,” Chen said. “Each department is actively searching for ways in which they can insert themselves into that, so in the future they do not lose their position as regulators.”
Wei Hongxu, an analyst from Beijing-based think tank Ambound, said the inconsistency among regulators was noticeable.
“It appears that the regulations are not systemic enough. Financial, market, internet and industry regulators haven’t coordinated and communicated effectively,” Wei said. “The rules on the tech and internet sector have just been gradually formed.”
In China’s highly centralised administrative system, turf wars and infighting among different government agencies – just like in any bureaucratic apparatus – are not new. But the opening of China’s tech sector to regulation made it particularly tempting for Chinese officials to jostle for a seat at the table, and prove their party loyalty by enthusiastically responding to edicts from state leaders.
China’s Ministry of Industry and Information Technology (MIIT), which rarely dealt with Chinese app stores, is now acting as the de facto “app police” for China’s 1 billion mobile internet users.
Last month, the MIIT ordered Tencent to suspend the upgrading of its apps and demanded the tech firm submit new ones for approval. Tencent confirmed last Friday that the first batch of nine apps had been reviewed and approved by the regulator.
The rush to regulate China’s Big Tech has led to conflicts among different agencies that have different agendas and priorities, according to Trivium China analyst Tom Nunlist.
For example, the CAC’s agenda is “driven by national security above all else, and this puts them at odds to some degree with the economic and development-focused agencies,” Nunlist said.
“Signs of friction are not very overt, but they are there,” he added.
For Chinese tech firms and investors, the new regulatory landscape may have put an end to the era when the country’s internet platforms were the darlings of both Beijing and Wall Street. A sector that forged so many rags-to-riches stories could lose its glamorous image and be treated by the government as another utility industry.
Beijing’s regulatory crackdowns in 2021 “signal the end of an era, as the earlier ‘barbarous growth’ of internet platforms is gone forever,” NYU’s Ma said.
However, it also raised the question of whether the Chinese government is repeating the pattern from regulation of other industries, by swinging between the two extremes of “loosening to the point of chaos” and “controlling to the point of death”, as the behaviour is described by Chinese market observers.
Beijing must walk a fine line as it cannot afford a weakened technology sector, which has been a key source of economic growth – including jobs for young graduates – in recent years. The country’s tech entrepreneurs also play a key role in maintaining links with international tech firms and capital, both necessary to avoid a tech “decoupling” that would be detrimental to China’s interests.
At the same time, Beijing’s crackdown is not taking place in isolation. The Chinese government has joined what has become a global push for tighter oversight of Big Tech. In the EU, Facebook was slapped with a US$5 billion fine in 2019 for violating consumer privacy rights, and earlier this month, Italy’s antitrust watchdog said it fined Amazon 1.13 billion euros (US$1.28 billion) for alleged abuse of market dominance.
Alphabet’s Google unit was fined more than US$9 billion by the EU for antitrust violations, while three US antitrust lawsuits were brought by the Department of Justice and some state attorneys general against the Silicon Valley-based company in the latter part of 2020.
On November 30, the UK ordered Meta’s Facebook to sell Giphy, the animated file search engine it bought for US$315 million in 2020 – the first time a major global regulator has weighed in against a Silicon Valley giant and ordered it to unwind a deal after completion.
“The world – [including] China, the West and emerging markets – is waking up to the reality that tech businesses also have a dark side,” said Ma. “It is no coincidence that the antitrust crusades in China have accelerated during the pandemic. A locked-down world has come to rely on tech companies more than ever, with many racking up gains at the expense of smaller competitors.”
As for China’s anti-monopoly bureau, it has come a long way since its original mission under the Ministry of Commerce to prevent big foreign acquisitions of domestic competitors. In 2009, it famously vetoed an attempt by The Coca-Cola Co to buy Huiyuan Juice.
The bureau, which merged with SAMR in 2018 as part of a government reshuffle, has also been busy expanding – even before it was upgraded. Since 2018, it has trained more than 1,000 staff, former bureau head and commerce department veteran Wu Zhenguo was quoted as saying by the American Bar Association’s Antitrust Source magazine earlier this year.
With last month’s appointment of SAMR deputy director Gan Lin as anti-monopoly chief, the watchdog now reports directly to the country’s top leadership, giving it the teeth it never had.
Authors: Coco Feng, Xinmei Shen, SCMP