Tech Regulation in China Brings in Sweeping Changes

When Jack Ma, the billionaire founder of internet giant Alibaba, told China’s financial elites on October 24, 2020 that their incompetence had created a severely underdeveloped financial system and insinuated that his fintech may be the cure, his words marked the moment when Beijing shifted its relations to big tech giants from toleration to confrontation.

Ma was perhaps unaware that the same day saw the launch of “Operation Cyber Sword,” a wide-ranging campaign involving 14 ministries and agencies aimed at reigning in China’s tech sector. The regulatory actors were given six tasks: regulating live-commerce platforms, cracking down on unfair competition in online markets, strengthening the supervision of internet advertising, centralizing control of online sales, and ending illegal animal and plant trade on e-commerce platforms.

What has followed over the ensuing 12 months is an unprecedented and ongoing regulatory onslaught. Hundreds of companies have been fined north of $3 billion, apps have been taken off stores, and Jack Ma – until then China’s richest man – inexplicably went missing for three months. The Chinese government was sending a message. As the People’s Daily put it: “There was never such as thing as Ma’s era, just an era that Ma happened to live in.”

China’s Cyber Sword is being wielded not just at individual companies or apps but at entire industries and ecosystems. A whole range of antitrust guidelines and rules have been introduced and applied to e-commerce platforms, social media providers, and live-streaming services.

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Behind the regulatory onslaught is a paradigmic shift, the result of long-term preparation by the Chinese Communist Party’s (CCP) leader Xi Jinping. Xi declared 2021 to be the beginning of the “New Development Stage” for China. The CCP has fulfilled the promise of former paramount leader Deng Xiaoping – achieving a “moderately prosperous society” through market reforms, partial opening and liberalization and other means over the past 40 years.

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The new goal set by Xi for “New China” is to become a “Modern Socialist Country” by 2049. Exact benchmarks to achieve that goal are not set in stone. What is clear thus far are the core elements of Xi’s vision – namely technological self-sufficiency, a closely steered government economy, and China’s ambition to become a technology superpower.

The strict regulation of big tech companies we are witnessing at the moment is therefore not the genuine focus of policymakers, but merely the first, immediate result of implementing the larger national vision over the next 30 years.

This vision was gradually introduced in recent years in the form of new institutions with a rapidly expanded legal framework. Bolstered with fresh manpower resources, enforcers are empowered to test these new institutional powers.

The State Administration for Market Regulation (SAMR), for example, was only founded in 2018. Aimed at market regulation, it enforces the Anti-Unfair Competition Law that has been in effect since 2019. The SAMR has successfully investigated more than 3,000 cases of unfair competition and collected 206 million renminbi (RMB) in fines in the first half of 2021. It has also made use of the new E-Commerce Law, effective since 2019, and the recently updated Anti-Monopoly Law.

Meanwhile, China’s new cyber watchdog, the Cyberspace Administration of China (CAC) found in 2014, has focused on implementing the 2017 Cyber Security Law and the 2021 Data Security Law. It found more than 100 apps in violation of collecting users’ personal information and ordered Didi, China’s biggest ride-hailing app, to be taken off app stores.

Didi and other Chinese tech behemoths saw exponential growth in the last decade attributed, in part, to an absence of regulatory oversight. To drive sales and revenue, companies engaged in business models that came with a host of financial risks and “regulatory problems.” Now the government is keen to tackle those issues in the name of safeguarding consumer rights against freewheeling businesses.

A clean-up of unfair business practices is long overdue. As a result, China’s internet sector, once the hotbed of tech innovations, is now forced to undergo profound changes. Eighty percent of misleading advertisements to third party webpages, a vital source of income for many apps and websites, have been taken down. Financial pressure aside, restructuring businesses to comply with the rules has also resulted in lay-offs not just in ad sales, but in gaming and private tutoring, the other two sectors hardest hit by the regulations.

Foreign firms operating in China have not been spared. Caving to regulatory pressure as new data and privacy laws came into effect , Microsoft’s LinkedIn pulled its social media services in the country and Yahoo bowed out of China, both citing the “challenging environment” as reason.

Further adjustments lie ahead in 2022, not least because of the planned three-year clean-up program for algorithms. A fresh suite of draft regulations overseeing cross-border data transfer, and amendments for tighter enforcement of the Anti-Monopoly Law only adds to the uncertainty and pressure looming for firms to comply and conform to Xi Jinping’s “New China.”

Artmotion China

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