Updated: Jan 19
“Outdated” was the key word of the evening at a recent financial forum in Shanghai in mid-October. Responding partly to President Xi’s campaign to mitigate risks in the Chinese financial sector, Alibaba founder and business tycoon Jack Ma alluded to China’s allegedly outdated financial regulation, which he thinks stifles innovation and harms economic growth.
Yet, the way China’s regulation of large tech conglomerates has been changing since this ominous event cannot be to the liking of Mr. Ma. Partially as a response to his comments, state authorities, allegedly under direction from President Xi himself, suspended the long-anticipated IPO of Ant Group, whose mobile payment app, Alipay, is used by around 70% of Chinese citizens.
Shortly afterwards, Chinese regulators published new draft antitrust guidelines, which would give authorities more leeway in punishing large tech companies for exploiting their market dominance and acting against the consumer interest. Subsequently, the shares of Alibaba, Tencent and Meituan plummeted sharply, signaling that bigger, long-lasting changes were underway. On December 24th, China’s antitrust watchdog, the State Administration of Market Regulation, even had its own little Christmas present for Jack Ma – the formal launch of an antitrust investigation into Alibaba’s business practices and the announcement of further interrogations with officials from Ant Group.
Meanwhile, Chinese officials and state-controlled media outlets have been emphasizing that these moves ought not to be seen as an outright assault on Alibaba & Co., but rather as a necessary step to boost the overall development of China’s platform economy. After years of tolerating monopoly-like constellations in part not to hinder the growth of successful “national champions”, companies like Alibaba or Tencent have come to dominate their respective markets. In e-commerce, for instance, the former enjoys a share of roughly 50% of the entire sector.
Anti-competitive practices, partially far in excess of the behavior of Google, Facebook or Amazon, have been a key component of this. Particularly controversial is a strategy called “pick one of two”, under which tech platforms force merchants and suppliers to clearly state which side of the battle between the tech giants they are on. Numerous are the reports of businesses whose sales on Tmall or Taobao, Alibaba’s two main e-commerce sites, have plummeted following the launch of their products on rival providers’ websites. As such, Chinese regulators’ intention to rein in this kind of monopolist behavior is clearly justified and in line with similar recent moves by regulators in the EU or the US.
Yet, this interpretation only tells half the story. In fact, there might be an even more important reason for this sudden antitrust campaign: the CCP’s and, more specifically, Xi Jinping’s fear of a too powerful and too big to fail tech sector.
As tech companies have increasingly moved into the weakly regulated area of fintech in recent years, their influence in Chinese society has grown even further. Ant’s two digital-lending platforms, Jiebei and Huabei, have, for instance, extended credit to roughly half a billion of Chinese citizens by matching banks with borrowers while at the same collecting a fee for conducting the transaction. With borrowers allegedly not being subject to appropriate standards concerning credit worthiness and loans being mostly unsecured, Chinese authorities fear for the overall stability of the financial system and the social consequences of its potential breakdown.
An equally important part of this is data collection, which Alibaba and Tencent have brought to perfection. In the area of information on credit worthiness of potential borrowers, for example, Ant is far ahead of traditional lenders, state-owned banks and China’s central bank, whose credit-scoring system lacks many of the facets featured in Ant’s algorithms. The same is true for the data tech companies collect through e-commerce sites or even messaging services. Much to the anger of CCP officials, however, these companies have so far resisted to routinely share their large amount of data with the government. All of this gives them a certain degree of leverage over the latter, which officials have come to despise over the last months.
Triggered by Jack Ma’s highly critical comments in Shanghai last October, it is not surprising that China’s political elite then decided to finally take action. Their overall message seems to be clear: Big Tech is only allowed to operate freely as long as its interests and actions are aligned with the CCP’ political priorities, among which societal stability is the most important one.
Whatever the ultimate rationale behind the CCP’s sudden appreciation of tough competition policy may be, one thing is certain: The regulation of China’s Big Tech companies is undergoing a revolution, and the changes this brings are long-lasting and here to stay.
Alexander Maichel is Editor of APRA's Think Tank Team.