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The Chinese Government’s Grip on Tech Companies

Authors: Jade Yong Yu Jia and Leong Ke Xin Cherly

Research Head: Jade Yong Yu Jia

Editors: Sasthaa Gingee Babu (Uday)


Introduction


For the first time in 12 years, government regulators in China now have their attention on tech giants whose products and services have established a stronghold in the lives of many Chinese consumers. One company drawn to the limelight is none other than Alibaba and its affiliate, Ant Group, on grounds of antitrust law violations and their products’ precipitation of threats to the Chinese economy.


“Pick One of Two” - A Recipe to Invite An Antitrust Probe


On the 24th of December 2020, investigators and market regulators penetrated Alibaba’s headquarters in Hangzhou, with the mission of preventing “disorderly expansion of capital” (Yang, 2021). At the very heart of this mission laid the government’s antitrust probe into one of China’s largest corporations, with services that permeate the lives of most Chinese individuals.


Singles’ Day is one of China’s most significant sale events, with Alibaba racking up sales amounting to USD74.1 billion in 2020 (Kharpal, 2020). Behind this remarkable feat lies a questionable sales tactic known as “Pick One of Two”, where tech companies have been accused of forcing merchants to sell their platforms exclusively for years (Yu, 2020). Should merchants fail to “pick one”, they would suffer from consequences such as the restriction of customer traffic directed to their shop-fronts by the e-commerce platform. In 2019, Galanz Group, the world’s largest microwave-oven maker, accused Alibaba of directing traffic away from its store on Tmall after it signed a deal with Pinduoduo, a rival of Alibaba. By failing to show loyalty to Alibaba, Galanz Group paid a hefty price through an alarming drop in sales. Alibaba declined to comment in response to the lawsuit.


Yu’E Bao - A Direct Threat to State-Owned Banks


Alibaba’s affiliate company, Ant Group, has also been targeted for investigations, this time by China’s central bank. This was first sparked by a controversial high-profile speech that Jack Ma gave on the 24th October 2020, where he criticized the tendency of state-owned banks to “sacrifice innovation on the altar of stability”. This statement invited the wrath of Xi Jin Ping, who made the final decision to halt Ant Group’s Initial Public Offering (IPO) according to those involved in the process.


In a bid to overcome the “lack of innovation” rampant in state-owned banks, Ant Group’s Alipay launched Yu’E Bao, a money-market fund, in 2013. With a deposit as low as RMB1, anyone in China can earn more interest than they could for an equivalent amount in a savings deposit account. In 4 years, it surpassed JPMorgan’s US government money-market fund to become the world’s largest money market fund.


Unsurprisingly, Ant Group became one of the state-owned bank’s largest threats and more so to the officials who regulate them. The People’s Bank of China (PBoC) has long had the agenda of collating vast amounts of credit data to assess creditworthiness more accurately given the rise in consumer loan defaults (Yu, 2021). In light of this, the PBoC has amplified concerns over the sheer size of Ant Group, which it claims to have “inappropriate collection and control of data” by “leading internet platforms that have abused their market monopoly”.


Evaluating the Regulations Through an Economic Lens


The implementation of anti-monopolist measures enhances economic efficiency in the technology industry in China. By preventing the companies from restricting competition and using algorithms to exploit the technology market, it ensures a fair competition in the industry. This will then allow the firms to compete on the same level playing field to ensure an effective allocation of resources. Additionally, anti monopolist measures can also help to promote innovation in the industry. With greater competition in the market, companies will be more incentivised to engage in research and development so as to differentiate themselves from the rest and gain a greater market share. Thus, the implementation of anti-monopolist measures enhance the economic efficiency in the technology industry in China as it promotes a healthy progression in China’s technology market.


However, the implementation of anti-monopolist measures may result in a fall in the level of investment within the technology sector. China’s technology shares tumbled and wiped out more than US$200 billion in value (Hermesauto.,2020).The regulations will also hit the profitability of China’s internet giants, analyst at Gavekal Dragonomics wrote in a report. As these companies rely on economics of scale for growth, not allowing them to offer subsidies strikes the heart of their business model (Sun, N. ,2020). Thus, this may shake up investor’s confidence in the technology sector in China as these regulations will negatively affect the growth rate in the China technology industry at least in the short run.


The Aftermath of the Crackdown


The most direct impact of the increased regulations will be the fall in stock market performance of the technology companies. For instance,the share prices of Alibaba, Tencent Holdings, JD.com and Meituan fell between 11% and 19%, two days after the announcement of the regulations(Sun, N., 2020). However, the impact of the fall in stock market performance varies. It is more likely to hit the bigger companies as they were engaging in monopolistic practices such as offering exclusive merchants on its platform before the regulations kicked in (Sun, N. , 2020). As for the smaller companies, the impact may not be as detrimental as the regulations eliminate the unfair practices of the bigger firms, potentially allowing them to earn greater profits. To boot, the market share of these small companies are not as high as the bigger firms to begin with and hence, the impact on their stock market performance may not be as bad.


The impact of the increased regulation on Ant Group was undoubtedly one of the most severe. Ant group had to suspend its initial public offering of US$37 billion when regulators launched an antitrust investigation on Ant Group (Hermesauto.,2020). Ant’s group valuation is also expected to fall to $143 billion and is expected to fall even further if its payment unit is being forced to break up due to the potential antitrust measures by China’s central bank (Hermes.,2021). The chances that the Ant Group will be able to pick up again seems bleak as Ant Group will be subjected to similar supervision as a traditional bank which increases its cost of risk control( Yuanyuan, P.,2020). As such, they may have to give up part of their business if they are not able to sustain the increasing cost.


What’s Next for Alibaba?


Alibaba expressed that it would cooperate with regulators and that its businesses were operating normally in the meantime. Ant Group has committed to “seriously study[ing] and strictly comply[ing] with all regulatory requirements and commit full efforts to fulfill all related work.”


In spite of these statements, Ant Group has shared little of the consumer data that the PBoC has demanded for, leading to the latter’s discontent. Ant has blamed privacy laws, as users must give their approval before the company can send their information to the central bank and only a fraction have agreed to do so. Clearly, the increased regulation in China’s Technology sector is still a work in progress and there is a need for the Government to continue to refine the policies to prevent companies from bypassing them through regulatory loopholes.



References


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