Jack Ma might be China’s richest man (for now, at least), but in the span of a week, Beijing’s decision to postpone the planned IPO/spinoff of Alibaba’s Ant Financial unit offering in Shanghai, preceded, according to reports, by onerous new regulatory measures (which, analysts say, could cut the company’s value in half) has brought Ma to heel.
What could Ma, whose membership in the Communist Party is a matter of public record, have possibly done to provoke such a painful rebuke? He had the audacity to criticize China’s financial regulations during an appearance at a high-profile industry conference in October. Ma’s comments didn’t make waves at the time, but nothing escapes the CCP.
Following a year where China has delivered perhaps its biggest repudiation yet to international hopes for economic and political liberalization (the Hong Kong natsec law and brutal COVID lockdowns are probably the two most vivid examples), it appears President Xi and the Politburo are launching a full-on campaign to rein in the power of China’s tech/fintech billionaires (a group that also includes Tencent founder Pony Ma).
Why? Because, as we first explained the other day, Beijing has probably long been uncomfortable with the growing global power, influence and visibility of China’s private-economy billionaires. Ma’s insouciance, likely seen as an act of profound disrespect, however obtuse, was simply the straw that broke the camel’s back. So, we were hardly surprised Tuesday morning when Bloomberg reported that the crackdown on China’s fintech giants appears to be expanding, rattling China’s domestic equity market, as the new “regulations” Beijing promised earlier this month have finally been unveiled.
One Beijing-based lawyer told the foreign press that this is nothing short of a “watershed moment” for China’s tech industry, the world’s biggest, after the US.
Xi Jinping’s Communist Party is stepping up efforts to rein in some of China’s most powerful companies, jolting investors and dealing a blow to the country’s richest entrepreneurs.
Beijing on Tuesday unveiled regulations to root out monopolistic practices in the internet industry, seeking to curtail the growing influence of corporations like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. The rules, which sent both stocks tumbling and sparked a wider selloff in Chinese equities, landed about a week after new restrictions on the finance sector that triggered the shock suspension of Ant Group Co.’s $35 billion initial public offering.
While Xi’s government has been steadily tightening its grip on the world’s second-largest economy, it has until recently taken a relatively hands off approach toward businesses that dominate China’s burgeoning internet, e-commerce and digital finance industries. Authorities are concerned the companies have become too powerful, according to Ma Chen, a Beijing-based partner at Han Kun Law Offices.
“This is a watershed moment,” said Ma, who specializes in antitrust.
Beijing has, not entirely unreasonably, couched its new regulations as intended to break up a private-market monopoly, a narrative that will imagine would be much easier for the public to accept.
China’s antitrust watchdog is seeking feedback on a raft of regulations that establish a framework for curbing anti-competitive behavior such as colluding on sharing sensitive consumer data, alliances that squeeze out smaller rivals and subsidizing services at below cost to eliminate competitors. They may also require companies that operate a so-called Variable Interest Entity – a vehicle through which virtually every major Chinese internet company attracts foreign investment and lists overseas – to apply for specific operating approval.
The latest proposal follows heightened scrutiny of technology companies worldwide, as regulators investigate the extent to which internet giants from Facebook Inc. to Alphabet Inc.’s Google can leverage their dominance. Consumers in China – home to some of the world’s largest corporations from e-commerce giant Alibaba to WeChat-operator Tencent – have in recent years protested against the gradual erosion of their privacy via technology from facial recognition to big data analysis.
Notably, as BBG reminds us, the crackdown isn’t completely out of the blue: It began last year with an investigation into Tencent’s music arm and its exclusive agreements with publishers.
“There seems to be a broader China government sentiment that internet platforms are becoming too powerful,” said Hoi Tak Leung, a Hong Kong-based lawyer specializing in Chinese internet companies at Ashurst LLP. “This would be consistent with worldwide developments as well.”
These latest new rules – according to the government, anyway – build upon a new Anti-Monopoly Law passed in January, which included broad language allowing the state wide latitude to target Internet companies, an issue that’s also playing out in the US.
Ironically mirroring the Trump Administration’s drive to hold the biggest American tech firms accountable for allegedly monopolistic practices, Beijing’s crackdown, which is expected to have the biggest impact on Tencent (which owns the ubiquitous payments app WeChat) and Alibaba, could also create new opportunities by giving smaller Chinese tech firms more space to compete.
Alibaba and Tencent now dominate e-commerce and gaming, but are also key backers of leaders in adjacent businesses such as Wang Xing’s Meituan and car-hailing leader Didi. They’ve together invested billions of dollars in hundreds of up-and-coming mobile and internet companies, gaining kingmaker status in the world’s largest smartphone and internet arena by users. Companies like ByteDance and Tencent-rival NetEase Corp., controlled by William Ding, that have risen to prominence without backing from either of the pair are viewed as rare exceptions. In other areas, Robin Li’s Baidu Inc. dominates online search.
“The Party 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,” said Kendra Schaefer, head of digital research at the Trivium China consultancy in Beijing. “The horizontal spread of Chinese big tech makes anti-monopoly regulation that much more urgent for Chinese regulators.”
Han Kun Law’s Ma said the specific regulation pertaining to VIEs requiring approval should be of concern to much of the industry as well. The model has never been formally endorsed by Beijing but has been used by tech titans such as Alibaba to list their shares overseas. Under the structure, Chinese corporations transfer profits to an offshore entity with shares that foreign investors can then own. Pioneered by Sina Corp. and its investment bankers during a 2000 initial public offering, the VIE framework rests on shaky legal ground and foreign investors have been nervous about their bets unwinding overnight.
“It will not only have a huge impact on Alibaba but also all the companies that use a platform business model and a VIE structure,” Ma said.
Anybody who doesn’t immediately recognize the irony in the notion that the CCP is merely trying to make its markets fair and competitive for the “little guy” probably doesn’t truly understand the nature of the relationship between the Party, and the Chinese economy. Fundamentally, before everything else, it’s about control, not fairness.