Beijing Reins In China’s Internet Giants

CHINA’S PRIVATELY OWNED internet companies flourished in large part because they created a de novo area of the economy and thus had no state-owned competitors from the outset. That space is now being closed down, or at least being put under state sway.

New restrictions on the fintech sector led to last week’s abrupt suspension of Ant Group’s proposed blockbuster initial public offering and a public embarrassment of Jack Ma, its billionaire founder. This week, draft regulations have been announced that, when implemented (formally they are out for public comment), would curb monopolistic practices by internet platform and e-commerce companies such as Alibaba Group, also founded by Ma, and Tencent Holdings, the operator of We Chat founded by another of China’s richest men, Pony Ma.

The corporate behaviour that would be proscribed includes collusion to share sensitive consumer data, alliances to squeeze out smaller rivals and to subsidise services at below cost to eliminate competitors. The internet platforms may also have to apply for an operating licence if they use the governance structure known as a Variable Interest Entity, which is standard for internet companies as it lets them have foreign investors and list on overseas exchanges but exists in something of a grey area when it comes to Beijing’s blessing.

After a meeting earlier this month between antitrust and cyberspace officials and two dozen tech giants, authorities issued a statement giving fair warning of the new mood:

Internet platforms are not outside the reach of antitrust laws, nor are they the breeding ground for unfair competition.

Nothing will happen immediately. The State Administration of Market Regulation watchdog is taking public comments until the end of this month. As always, it will be the application of the administrative rules once the regulations are formalised that will matter.

The State Council has also said new regulations on internet transactions will be coming next year. Yet the message from the Party to some of the country’s most powerful companies and private billionaires is clear. The bonus for authorities is that the new rules should also bring some protections for consumers and small businesses, which will be popular.

China is far from the only country struggling with the power and disruptive horizontal spread of big tech. The EU and the United States are facing variants of the same issue.

However, in China, the Party has the additional complication of having to stop the horizontal spread of the platforms into areas, such as banking, in which state-owned enterprises are not only dominant but also essential policy tools.

Authorities also have to balance promoting internationally competitive Chinese tech companies with keeping them under firm control at home — a microcosm of what will be one of the most significant challenges for the Party in moving the country up the development ladder to the innovation-based economy.