As wave after wave of regulatory crackdowns have dominated China tech news in 2021, one can be excused for losing track of what is being regulated, who is doing the regulating, and what exactly the regulations are. From fintech to data management to education, the rules of the game are being re-written by a range of agencies, often at a rate faster than all but the keenest observers can follow.
Having already levied hefty fines on the likes of Alibaba and Meituan, recent developments suggest that SAMR is only getting started. On October 13, Reuters reported that China is considering upgrading the antitrust bureau within SAMR to deputy-ministerial status, under the name of the National Antimonopoly Bureau.
For antitrust, a newly-empowered bureaucratic entity appears to be sending the signal that we are only at the beginning of a large-scale reorganization of how Chinese internet firms interact with consumers, vendors, and the state. Formed only three years ago as a merger of already-existing agencies, the State Administration of Market Regulation (SAMR) has quickly become a force to be reckoned with, reshaping how companies view risk and opportunity in the market with the world’s most internet users.
The elevated ranking would reportedly help antitrust investigators gain resources when examining mergers and acquisitions and would also help to strengthen SAMR’s in-house capability to conduct research that it has previously had to outsource. This would be aligned with previous reporting that the agency had been planning to considerably expand its workforce.
Trusts and the antitrust blowback
That portends further choppy waters for China’s tech giants and others competing for market share. It’s also rapidly changing the investor calculus of how to value some of the fastest-growing companies in the world.
This sort of regulatory blowback is hardly unprecedented. Known for its opulence and extreme inequality, the “Gilded Age” of the decades that followed the American Civil War saw the rise of the U.S. as an industrial and economic superpower. The period was marked by a weak central government and the rise of the country’s hyper-wealthy corporate interests and industrialists with names like Rockefeller, Carnegie, and Morgan, whose monopolies dominated economics, politics, and society.
While a time of great innovation and dynamism, its excesses also brought about the corrective measures of Theodore Roosevelt’s Progressive Era at the turn of the century, in which regulatory measures were taken to conserve natural resources, protect consumers and break up corporate monopolies.
As several observers have noted, present-day China has more than a few parallels with America as it transitioned from the Gilded to the Progressive Era: with a country stricken by social inequality, environmental degradation and behemoth corporate interests, Xi Jinping has consolidated control over the reins of the state and is attempting to curb the excesses that have resulted from decades of transformative growth. Like Roosevelt, Xi appears to view his country’s most valuable corporations as oversized giants whose dominance threatens the long-term health of its economy and society. Yet while Roosevelt busted oil and railroad monopolies, Xi seems to have his sights set squarely on China’s world-leading internet companies.
Redefining “monopoly” for the platform economy As China’s leaders seek to turn the page on the country’s Gilded Age through digital-era trust-busting, it is also looking to re-examine how monopolies are defined. For China and the rest of the world alike, this means crafting regulations that address the unique characteristics of market power in the digital economy. “As many of the large internet platforms are two-sided marketplaces, regulation needs to consider both consumer and merchant protections,” explains Michael Norris, a Shanghai-based analyst for market research firm AgencyChina. “Effective regulation needs to walk a tightrope between consumer protections, merchant interests, and platform economics.”
This stands in contrast to the longstanding established norm in the U.S. of the Consumer Welfare Standard, which directs courts and regulators to focus on the effects that challenged business practices have on consumers, rather than on alleged harms to specific competitors. For a digital economy in which the largest players such as Alibaba or Amazon function largely as intermediaries between vendors and consumers, and which use their massive scale to outmatch their competition, increasing numbers of policymakers have argued that the Consumer Welfare Standard is insufficiently comprehensive. SAMR appears to be taking that position as well, given the targets of its investigations and the penalties it has levied thus far. Alibaba and Meituan have each been slapped with fines of 3-4 percent of annual revenue for their longstanding “choose one from two (er xuan yi 二选一)” practices, in which merchants were pressured to use the platform exclusively. While this practice was at times explicit, it often was exercised through more subtle or deceptive means, exploiting the data and recommendation algorithms that play such a prominent role in determining a merchant’s success. Some such tactics were listed in the recent SAMR announcement as it concluded its Meituan investigation.
Along such lines of forced exclusivity, China’s Ministry of Industry and Information Technology (MIIT) has also directed internet firms to tear down their “walled gardens,” and cease their formerly common practice of blocking competitors’ links on their platforms. Though adding complications for some firms, the banning of such behavior seems to be welcomed among Chinese consumers, as the inability to share Alibaba’s links on Tencent’s WeChat platform was a common annoyance. SAMR has also ordered Tencent Music Entertainment to cease its exclusive deals with record labels, levying a minor fine of 500,000RMB (roughly $77,000), but also calling into question the business models of other content platforms whose business models rely heavily on exclusive deals with sought-after content producers.
A challenging time for investors For investment firms, a greater concern may be in the heightened scrutiny over mergers and acquisitions. In July, a $5.3 billion merger between China’s leading game-streaming platforms Huya and Douyu was terminated two days after a SAMR decision to prohibit it, the first “adverse” merger control decision adopted by SAMR and its predecessor against a transaction without foreign participation.
- The rapid change in investors’ reckoning of China’s tech giants
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