7 min read.
The BAT1 of China is the equivalent of FAANG2 in the United States (US) — what the acronyms really mean is that the technology and internet industries in both countries are dominated by a handful of powerful firms. The American big tech firms have constantly come under fire in their home country, as well as in Europe, for antitrust offences. Meanwhile, Chinese internet giants have had it easy so far, as regulators try to figure out the best practices for a market-driven “platform economy”, the broad umbrella term for the Internet economy, driven by China’s own big tech firms.
Nevertheless, the government is eager to update its laws for the internet era. In the past, China used revenue or market share to determine whether a firm was monopolistic. It has been difficult to apply these precepts to the internet industry where market dominance is not always quantifiable, as the firms sometimes control valuable information that has yet to be monetized. Therefore, despite numerous complaints from the industry and consumers over the years, the authorities have been slow to react with viable solutions.
This is definitely changing. The industry watched with bated breath during the final months of 2020, as the Chinese authorities came down hard on their internet darlings with swift, shocking blows. The cornerstones of China’s internet economy, Alibaba and Tencent, as well as rising stars like ByteDance, Meituan-Dianping, Pinduoduo and JD, were among some 24 tech giants that were summoned by anti-trust watchdogs to discuss issues ranging from unfair competition to counterfeiting, and given anything from a warning to fines and orders to restructure their businesses.
Perhaps the most harshly reprimanded was Alibaba, and its affiliated financial arm, Ant Financial, whose highly anticipated initial public offering (IPO) in November was abruptly halted just a few days before its debut on both the Shanghai STAR Market and Hong Kong Stock Exchange. In the ensuing weeks, plans for a probe into Alibaba’s alleged monopolistic behavior unfolded. The State Administration of Market Regulation (SAMR) investigation officially began on Christmas Eve, sending Alibaba’s stock tumbling 8 percent and 13 percent in Hong Kong (9988) and New York (BABA), respectively — their single-day biggest drop since the stock began trading on both exchanges. On December 27, the regulators ordered Ant Financial to focus on its payments business, threatening to clip the firm’s main wings of growth — the profitable consumer loans and wealth management businesses.
The timing of these sudden antitrust actions is a curious one. The internet giants are growing too fast, so understandably the authorities want to rein them in before they are out of control. More importantly, the COVID-19 outbreak also accelerated the digital transformation of diverse industries, putting more power into the hands of the big tech firms, as they played integral roles in strategic sectors that are economically significant and could impact social order.
“Internet giants have expanded their reach into various sectors like finance and healthcare that are vital to the economy, and that really concerns regulators,” said Shen Meng, director of Beijing-based boutique investment bank Chanson & Co.
The move also comes at a time of intensifying US-Sino tension. China has been bolstering its domestic economy ever since the trade war began. An imbalanced domestic economy will put the nation’s long-term interests at risk. Powerful private enterprises driven by the market economy are also challenging the economic clout of state-owned enterprises (SOEs), which President Xi has made clear, are “important material and political foundations”.
Ensuring Fair Competition
Alibaba, JD and Pinduoduo together take up 83.6 percent of the retail e-commerce market in China, as the preferred platforms for international brands looking to enter this massive market. Alibaba is often singled out for its unfair “choose one out of two” policy that forces merchants to sell exclusively on its platforms at a controlled pricing, which forms the basis of the antitrust probe. However, the problem is deep-seated in the Chinese e-commerce play field. Douyin (the Chinese TikTok) and WeChat, among others, have also banned third-party links to rival platforms, including Tmall and Taobao, to protect their own e-commerce interests.
The tech giants have also failed to seek approval before proceeding with some acquisitions. For instance, Alibaba’s increased stake in InTime Retail Group and Tencent’s merger with two of the largest game streaming platforms have raised an alarm among antitrust regulators. The ambitions of these big tech firms know no boundaries; their expansive business ecosystems spanning a broad range of industries from e-commerce and social media to logistics are seen by the government as “predatory competition.”
The government is concerned that this form of competition will prevail after the COVID-19 pandemic, as consumers expand their online shopping to a wider range of products and services. From Pinduoduo to Alibaba and Meituan-Dianping, the e-commerce players’ aggressive push into group buying, especially for fresh produce, a previously uncharted ground for e-commerce, puts Beijing on high alert about potential risks to jobs and economic stability. The SAMR claims that “community group buying services provided by internet platforms are eroding local employment with unfair competition tactics.”
To create a healthier, competitive and sustainable domestic economy, the anti-monopoly draft has spelled out guidelines “to prevent and stop monopolistic practices in internet platforms’ economic activity, to lower compliance costs for law enforcers and business operators, to enhance and improve antitrust regulations on the platform economy, to protect market fairness, to ensure the interests of consumers and society, and to encourage the healthy and continuous development of the platform economy.” Regulators plan to release new rules governing internet transactions by June 2021, according to a statement released by State Council.
The availability of digital consumer credit and loan products with low interest rates and favorable terms, such as Huabei and Jiebei offered by Alipay, Baitiao by JD and Weilidai by WeChat, has provided easy access for consumers to boost their consumption power. In a report released by Huabei, 68 percent of the credit facility’s customers belong to the post-1990s generation. To the authorities, this presents a risky scenario of reckless spending and snowballing debt.
In the wake of the crackdown, Alipay has lowered its Huabei credit limit from RMB 6,000 (USD 920) to RMB 3,000 (USD 460), framed as promoting more responsible spending behavior among its young users. Ant Financial has also removed the online deposit products offered by banks on its platform, in line with regulatory requirements for online deposit services. Following Ant’s lead, the financial services arms of Tencent, JD, Baidu, Didi Chuxing, Meituan-Dianping, Xiaomi and Lufax have stopped offering products that allow customers to use their online platforms to make deposits with brick-and-mortar lenders.
Although the new restrictions on digital financial services might reduce the risk of overspending, it will also greatly limit consumers’ access to cash, particularly when they cannot qualify for bank loans, to tide over temporary financial difficulties.
Chinese consumers have also protested against the gradual erosion of their privacy via technology from facial recognition to big data analysis. The use of data to target consumers through personalized ads on WeChat, a common practice virtually everywhere, has caught the attention of the Shanghai Consumer Council. The inability to dismiss an ad in a single click has raised red flags for the consumer watchdog, which believes WeChat is deliberately making it difficult for people to opt out of personalized advertising.
A wider crackdown on targeted ads is a double-edged sword. On one hand, it will hinder the development of New Retail, whose success hinges on a seamless and highly personalized shopping experience. Their inability to use as much data to effectively target users will also greatly reduce the appeal of online platforms to brands. However, working within these constraints could inspire innovation that offers alternative channels where consumers can resume control over their own data.
The antitrust laws will also, hopefully, promise fair distribution and access to resources in strategic industries, such as financial and healthcare services, which are digitizing fast. The regulations will assure consumers that private firms do not marginalize disadvantaged groups, for instance, the elderly who are caught in the digital gap. The Chinese government has been stepping up efforts to ease this segment of consumers into the digital economy.
China’s latest antitrust crackdown on internet giants is only the beginning of more law and regulation to come into this space, as the country bolsters her economic prowess in an uncertain global environment. Beyond the obvious intention of ensuring a fairer marketplace and protecting consumer interests, the regulators have a few other agendas in mind.
In keeping with anti-monopoly regulations at home, it could condition Chinese firms to better align themselves with similar international requirements for global expansion. Kendra Schaefer, head of digital research at the Trivium China consultancy in Beijing, observed, “The government 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. The horizontal spread of Chinese big tech makes anti-monopoly regulation that much more urgent for Chinese regulators.”
The government is also casting a firm grip on how and where Chinese firms are raising capital to avoid over reliance on foreign funding in a hostile political climate. It may require firms that operate the so-called Variable Interest Entity (VIE)—a vehicle through which virtually every major Chinese internet firm attracts foreign investment and lists overseas—to apply for specific operating approval.
In the meantime, the Chinese leadership is solidifying the market power of SOEs, which President Xi plans to make “stronger, better, and bigger.” Keeping the private sector under control will prevent the erosion of SOEs’ market share, and create a safe bubble for the government to maintain control over strategic economic sectors, unchallenged by successful private enterprises.
However, the government must recognize that its private sector has spawned some of the most dynamic players in the Chinese economy. An unfair advantage rendered to SOEs might eventually diminish private sector confidence, with dire impact on the country’s already slowing GDP growth. China must toe the fine balance between keeping private firms in line and fortifying SOEs, while continuing to encourage productive and innovative economic activities in both.
1 BAT is Baidu (BIDU), Alibaba (BABA), Tencent (TCEHY)
2 FAANG is Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), Google (GOOG)