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Alibaba Antitrust Fine Is As Instructive As Punitive

Screenshot of Alibaba website

THE ANTITRUST FINE on Alibaba is hefty — a record in yuan terms –but not as punitive as it could have been.

The 18.2 billion yuan ($2.8 billion) that the e-commerce giant will have to pay for abusing its market dominance tops the $975 million imposed on the US chipmaker Qualcomm in 2015 but is equivalent to only 4% of Alibaba’s revenues. Qualcomm’s was 8%, and the maximum penalty authorities can impose is 10%. Further, the State Administration for Market Regulation (SAMR) took a narrow view of Alibaba’s revenue, counting just those from its e-commerce businesses.

None the less, this amounts to more than just a slap on the wrist. It also reinforces a message that has been repeatedly sent for several months.

Authorities are reining in the power of the tech platform giants, among whom Alibaba and its sprawling empire of associated businesses is the poster child. They thrived in a sector that never had the moderating influence of large state-owned enterprises. Alibaba was disingenuous when it said in its post-fine letter of contrition:

Alibaba would not have achieved our growth without sound government regulation and service, and the critical oversight, tolerance and support from all of our constituencies have been crucial to our development.

It and its main rival Tencent grew massive because of the absence of state guidance. Party leadership is being plain that the Party calls the shots, no matter how large the tech platforms’ social and economic influence grows. The da y’s of light regulation are over. The tech sector will become subject to the same level of regulatory oversight as any other.

Attacking Alibaba and its main rivals on antitrust grounds – the specific charge against Alibaba is that it restricted competition by forcing vendors on its Tmall and Taobao online shopping platforms to deal exclusively with it — provides consumer-protection gloss to the actions. A dozen companies were fined last month for antitrust violations, including Tencent and Baidu (the other two of the ‘big three’ Chinese internet giants) and the ride-hailing app Didi Chuxing.

Financial regulators are also concerned that the rapid expansion of fintech — services such as AliPay — beyond payments systems is creating new avenues of unregulated shadow banking that will add to the overall leverage within the economy that already greatly concerns authorities. Preventing what is termed ‘disorderly expansion of capital’ is now policy. Regulators forcing Alibaba’s spun-off fintech, Ant Group, to pull its proposed blockbuster $37 billion initial public offering last November was another indication of that.

Jack Ma, Alibaba’s founder and China’s most prominent and outspoken tech billionaire inside and outside the country, has been particularly in authorities’ crosshairs. Last week, his Hupan University, an elite business academy that teaches entrepreneurship, was made to suspend new enrolments. Elite educational establishments outside Party control are viewed with official distrust.

Alibaba has also been pressed into divesting its media assets. It owns video streaming and sharing sites in China and Hong Kong’s leading English-language newspaper, the South China Morning Post.

More worrying is that the crackdown may bring restrictions on its ‘secret sauce’: its ability to combine the many businesses it has diversified into, from physical retail to food delivery and cloud computing, with its core e-commerce and social platforms, thus turbo-charging its ability to cross-sell.

In November, SAMR released draft rules to prevent price-fixing, predatory pricing and unreasonable trading conditions. They also included restrictions on using data and algorithms to manipulate the market, which could curtail the platforms from data cross-subsidisation to target specific customers. That would be a wounding blow to the big platforms’ business models.

It may also bring them closer into line with national economic objectives. By making the platform companies exit non-core operations and forcing more competition in their core business, Beijing may be co-opting them to the cause of global leadership in high-tech industries. Without access to the easy money from monopolistic practices, the tech giants will instead undertake more fundamental R&D and innovation to support national technological self-sufficiency. Or at least, so the theory goes.

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Beijing Reins In China’s Internet Giants

Screenshot of Alibaba web page, captured November 2020

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.

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Beijing Wants A Cadre Of ‘Reliable And Useful’ Entrepreneurs

WECHAT AND TIKTOK have both secured stays of execution of their US bans: ByteDance’s TikTok by dint of an alliance with Oracle and Walmart that US President Donald Trump has ‘blessed in concept’, whatever that means (probably that it is OK because his friend and Oracle boss Larry Ellison has set it up, even if it does not meet the president’s order that TikTok’s US business be divested to US owners); Tencent’s WeChat thanks to a federal judge in San Francisco issuing a preliminary injunction blocking the Trump’s executive order to shut the app down in the United States.

The tick-tock on TikTok will continue as the deal is yet to be finalised. However, what caught this Bystander’s eye in the WeChat ruling was Magistrate Judge Laurel Beeler’s comments in her written remarks that while the general evidence about the threat to national security related to China regarding technology and mobile technology — the heart of the administration’s argument for the ban — is considerable, the specific evidence about WeChat is modest.

Why this caught this Bystander’s eye was last week’s instructions from President Xi Jinping to the United Work Front Department about the role — and duty — of the private sector and a parallel opinion issued by the Party ahead of the United Front’s work conference on the private sector. The gist of both was the need for tighter Party control over private enterprises and entrepreneurs to focus them on national goals and to create a cadre of within the private sector that is ‘reliable and useful at critical moments’.

This will confirm all the suspicions outside the country that the line between the private and public sectors is becoming ever more blurred and that private ownership of firms does not mean independence from the interests of the state or Party. For Chinese firms operating globally, existing distrust will intensify. The new National Intelligence Law already makes it nigh impossible for them (or any other Chinese firm) to rebuff authorities’ requests that they support national intelligence work.

The new guidance to the private sector will, if anything, widen the scope of how it will be expected to put the national interest ahead of its own. In July, Xi told a symposium for entrepreneurs:

First, I hope everyone will enhance their patriotism. Enterprise marketing knows no borders, and entrepreneurs have a motherland. Excellent entrepreneurs must have a lofty sense of mission and a strong sense of responsibility for the country and the nation, closely integrate the development of the enterprise with the prosperity of the country, the prosperity of the nation, and the happiness of the people, and take the initiative to bear and share the worries for the country.

It remains to be seen how this will play out in practice. In particular, how far will supporting national goals go beyond playing a part in economic recovery from the Covid-19 pandemic and meeting national security obligations? Will it mean playing a directed role in the development of indigenous next-generation technologies and industries that will be needed in a more decoupled world?

Entrepreneurs and firms that understand and adhere to the Party line will likely see significant benefits for their businesses domestically. Foreign firms operating in China will have to find an accommodation with that, even if they are granted some laxity in demonstrating the patriotism that will be expected of indigenous firms. That said, the flip side of a level playing field regardless of a company’s origin is that all firms in China are treated equally.

Next year’s introduction of the 14th Five-Year Plan will provide some clarity. But meeting the plan’s goal of delivering ‘a well-off society‘ will require the innovation of the private sector to be harnessed but not shackled, never an easy balance for industrial policymakers to strike.

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China Mirrors US List Of Unreliable Entities As US Bans TikTok and WeChat

Screenshot of China Ministry of Commerce announcement of the provisions of the Unreliable Entity List, captured September 19, 2020

IN THE MIDDLE of last year, Beijing announced that it was creating an ‘unreliable entity list’. This mirrored the US administration’s use of its cold-war-era entity list of companies, organisations and individuals Washington held to be involved in ‘activities contrary to the national security or foreign policy interests of the United States’.

Beijing today published the regulations of how its version will work — although not the identities of those companies or other entities that are on it. The list will catalogue any entity that poses a threat or potential threat to China’s sovereignty, national security, development and business interests; and those that discriminate against or harm Chinese businesses, organisations or individuals. Those on the list face sanctions from bans on investment to restrictions on work and residence permits and fines. Those come into effect immediately, although listees may be granted a grace period to set right their alleged transgressions.

The new rules were published the day after the US administration banned downloads and transactions related to two Chinese apps, WeChat and TikTok. The restrictions on downloads of the two apps from the Apple and Google app stores take effect from tomorrow (September 20) as does a prohibition on third-party companies providing services within the United States to WeChat such as internet hosting, content delivery networks or peering services.

The third-party services restriction on TikTok is due to take effect on November 12. The stay is to give time for the administration to review a proposed deal whereby the US enterprise-tech giant, Oracle, will take a minority stake in the US and some other international assets of TikTok to satisfy US national security concerns about the video-sharing app’s use of the data it holds on US citizens.

There was a rush to download the apps from the Apple and Google app stores before the bans took effect. It is unclear what penalties US users of the apps will face if they contravene the bans, although the US Treasury is indicating that neither criminal nor civil prosecutions are likely.

The prohibition on using WeChat and its parent Tencent for messaging and for financial transfers and payments aims further the Trump administration’s desire to decouple the two economies. The app is widely used by US businesses and Chinese expats to conduct business with contacts colleagues and customers in China. It has a reported 19 million active daily users in the United States. The Reuters news agency reports that Tencent has quietly developed an enterprise version of WeChat, rebranded as WeCom to avoid the ban, but which it is keeping under-ther-radar in the United States.

As an aside, Beijing recently granted TikTok’s parent, ByteDance a rare new licence to conduct online payments, enabling its Chinese service to move into e-commerce in competition with Alibaba and Tencent, a revenue stream that is out of the question for its US operation, however the ownership of that ends up.

Tencent has said that it will pursue further discussions with the US government while TikTok took the more assertive line that it will continue to challenge what it calls an unjust executive order. The Ministry of Commerce condemned the bans on both apps, promising ‘necessary measures’ to protect the legal interests of Chinese firms, without saying what those might be. Banning US apps in retaliation is not an option as they are already mostly excluded from China.

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Details Emerge Of China’s New Privately-Owned Banks

DETAILS ARE SEEPING out about the pilot programme announced in January to establish a handful of new private banks this year. These are intended as a first step towards providing competition to China’s giant state-owned banks and an alternative to the shadow banking system for small businesses in need of mainstream banking services.

Earlier this week, Caixin quoted a China Banking Regulatory Commission official outlining arrangements that paired some deep-pocketed investors, including internet company Alibaba, which operates China’s largest e-payment service, Alipay, with autoparts maker Wanxiang Group, and Tianjin Shanghui Investment with copper producer Huabei Group. Each of the five pairs, it seems, will focus on a specific customer segment and test a different banking business model. Initially, at least, the new banks being kept from going in direct competition with the big state banks’ existing businesses.

The Alibaba-Wanxiang partnership is intended to serve small and family businesses, which are likely to already by Alibaba customers, whereas the Shanghui-Huabei pairing would take only corporate clients. The Alibaba-Wanxiang bank will have caps on the size of the loans it can make and deposits it can take. Another pairing, social networking and online gaming company Tencent and Shenzhen-based Baiyeyuan Investment, will also have a cap on its loan size but will have a deposit minimum, not maximum.

What is not clear is the niche being carved out for the other two pairings, Shanghai investment companies JuneYao Group and Fosun Group, and Zhejiang’s electrical equipment maker Chint Group and industrial chemicals producer Huafon Group. Something in wealth management or personal finance seems likely for JuneYao-Fosun.

The five new private banks will be set up in Shanghai, Tianjin, Zhejiang and Guangdong. The banking regulator says they will start operating once they meet required standards, including forming a “living will” that will outline how the bank will shut down in an orderly manner in the event of a failure.

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How Sino-Centric Is The World Wide Web?

As Mark Zuckerberg, the founder of Facebook, wanders around Shanghai, he will no doubt reflect, and not for the first time, on the fact that China accounts for barely 500,000 of his highly successful social network’s 400-plus million users around the world. He might also like to consider this: by 2016 China will have more internet users, at nearly 800 million, than the U.S., the U.K., France, Germany, India and Japan — combined.

That forecast comes from The Connected World, a Boston Consulting Group report published at the time of the annual Davos shindig in January. If more than a quarter of the 3 billion people in the world the report reckons will be online by 2016 are in China, compared to a tenth in the U.S., should we be thinking of China as being at the center of the Internet and the global digital economy rather than the U.S.?

It may be misguided to think of anything as distributed as the Internet as having a center. Yet sheer weight of population is fast swelling the China node, and challenging the notion that China, by its own volition, can be a web world of its own.

The first e-mail sent from China contained the message, “Across the Great Wall, we can reach every corner of the world” — even if the opposite hasn’t proved particularly to be the case. Yet more and more of that world is increasingly inside the Great Wall. With a population of 1.3 billion and an internet penetration rate of 38.3% at the end of last year, there is plenty of scope for grow the ranks of netizens. In raw number of internet users, China passed the U.S. in 2008, though fewer than one in four Chinese was online then compared to almost three out of four Americans. Between 2007 and 2010 China added more Internet users than exist in the U.S. It now has 513 million netizens. The U.S. has 245 million. If China now had America’s current online penetration level (78.3%), it would already have more than 1 billion internet users.

China, like other emerging economies, is also riding a second underlying trend, a world going digitally mobile. It doesn’t have to put a PC on every desk to get its citizens online, just put a smartphone in their hand. Two-third’s of China’s online population accesses the Internet via mobile phone. This year, for the first time, more smartphones will be bought in China than in any other country. China can leapfrog the desktop just as some emerging economies skipped the landline in telephony.

It can also go straight to the social Web. Tencent’s QQ messaging service is what set the company on the road to becoming China’s largest Internet company by market capitalization. Its Weibo (microblogging) service is easing ahead of rival Sina’s (they have more than 500 million users between them). Its Weixin mobile app took barely 400 days to acquire 100 million users. Social networking is a substitute for having no siblings to talk to at home, we are told. Well perhaps. More likely, weak IP protection and weak competition from TV has driven heavy use of the Internet in China for entertainment, particularly online music and videos, and the conversations that follow that. Tencent has adeptly cashed in on that with online games and entertainment. Consumers expect to pay for mobile phone services. They have grown used to them being free on a PC, to the detriment of any business in a country that was an early adopter of desktop computing.

China has also walled off its domestic market to censor and protect domestic industries. There are only two major economies where Facebook isn’t the leader in social networking and Google in search. One is Russia. The other is China, where Renren leads in social, and Baidu in search. Google’s problems in China are too well documented to need rehearsing here, but it is worth noting that Zuckerberg’s 500,000 Facebook users in China constitute a 0.0004% local market share. It has 50% in the U.S.

China’s Internet companies have been in the happy position of being fast followers of the leading global companies, able to learn from them without facing undue competition from them and all the while riding a fast growing economy playing catch-up in Internet use. It seems inevitable that there will be foreign pressure to open up China’s Internet market, just as there has been to open up other sectors of the economy. Domestic Internet companies are starting to position themselves for that eventuality. The recently announced proposed merger of the online video sites Youku and Tudou is sector consolidation to that end.

% of online population whose first language is English or ChineseEach country will fashion the Internet in its own image to a certain extent. Whether the Internet more globally is Anglo- or Sino-centric is determined not only by users but also by usage and content. More than half the content on the Internet is still in English. That is despite the fact that the share of all Internet users who count English as their first language is shrinking (the blue line in the chart to the left). In 2000, it was almost two in five. As of March last year, the latest available figures, it is, at 27%, barely one in four. Over the same period the share of native Chinese speakers (the green line in the chart) has risen to 24%, or almost one in four, from 9% or one in eleven. Native Chinese language speakers are the second largest group online after English speakers. (Japanese, Spanish and German round out the top five languages online, accounting for a dominating 68%).

Where Chinese’s sway falters is that English is the dominant second language and language of business. Even if the official push to promote China’s culture increases the volume of Chinese language cultural and entertainment material online, the international audience for it will be relatively limited. A tonal language like Chinese is ill-suited to the battering it gets when spoken by non-native speakers. English has proved far more robust. It has even spawned a variant, Globish, for just that purpose.

A shift in geographic center towards the emerging economies is not the only change shaping the Internet. Bits and bytes now follow the Brics, as trade once followed the flag, perhaps. Reflecting the shift from nation states to a global economy bestrode by mulitnationals, it is also forming around digital ecosystems that have companies at their center, such as Google, Facebook and Apple in the U.S., Tencent and Baidu in China and Yandex in Russia. They are shaping an Internet economy that cuts across old national boundaries. BCG forecasts the Internet economy will be worth $4.2 trillion in the 20 richest nations by 2016. By that time, IBM has forecast, 1 trillion devices, from phones to fridges and control systems will be connected to it. BCG says the Internet economy will account for 8% of G-20 nations’ GDP, up from 4.1% in 2010. That would be like adding another Italy or Brazil to the G-20 (we are a sucker for such analogies; and, yes, we know GDP figures are probably not adept at capturing Internet economic activity).

Yet China’s Internet giants have a long way to become the corporate hubs of global digital ecosystems. The commercial growth to come domestically may act as a deterrent to them becoming so. In 2010, the search engine market was worth $1.75 billion and is forecast to reach $14.5 billion by 2015. But over the same period, e-commerce is forecast to expand from $75 billion to $315 billion, at which point it would pass the value of e-commerce in the U.S., estimated to grow from $180 billon to $304 billion in 2010-2015.

China’s sheer size makes national bricks and mortar retailing difficult. E-commerce is further boosted by cheap shipping and high rates of urban broadband penetration, already on a par with America’s at 68%. However, as BCG says, broadband infrastructure alone isn’t enough to push a country to the forefront of the Internet economy. Also needed are “a favorable regulatory environment, strong payment systems, consumer protection for e-commerce transactions, and a willingness on the part of governments, business and consumers to go online”.

Forecasts about the Internet in China should always carry a large caveat not only about the commercial environment, but also about the political uncertainties surrounding them. China censors its social networks internally and the wider web externally with its Golden Shield, more familiarly known as Great Firewall. Leaders brought up in the era of state-run broadcasters and newspapers have very different hopes, fears and aspirations for the Internet than the generation that is growing up with it. China’s digital natives have just as much scope to use it to change society and commerce as their equivalents elsewhere. The question is the degree to which they will be constrained from doing so. What is certain is that the rising tides of the global web, like those of the global economy, are shifting in their direction.

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Li Ka-shing, Facebook and QQ

East Asia’s richest man, Li Ka-shing, has pumped another $60 million into the social networking site Facebook run by Mark Zuckerberg, a fellow billionaire if one less than a third Li’s age.

Li said during a Hutchison Whampoa earnings conference call on Thursday that he was upping his previous $60 million investment, made last November and which gave him 0.4% of the company. But he didn’t say by how much, and clearly no one thought to ask him. Reuters has now run down a number.

What does Li hope to get for his $120 million? One clue comes from what he said on Thursday, that he saw some synergy between Facebook and the 3G services of Hutch’s mobile phone business. That makes some sense given that China has 465 million mobile phone users but only 172 million Web ones.

And while Facebook is having a hard time figuring out how to make money out of all the users of its Web site, you don’t need to be a rocket scientist to make money off IM and SMS mobile phone services. Just look at Tencent/QQ. In 2007, at $523 million, it had four times Facebook’s revenue, with a fifth of that coming from mobile services. Tencent also reported a $224 million operating profit last year. Facebook lost $50 million.

Li has a head that is both old and wise. If he can crack the China market for Facebook that $15 billion valuation on Zuckerberg’s site won’t look quite so mind-boggling.

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