What next for China big tech

At its peak the American Telephone and Telegraph Company was one of the world’s most valuable businesses, owning all the wires and telephones in the United States. Known as ‘Ma Bell’ the monopoly was broken up into several ‘baby Bells’ in 1984, following an antitrust crackdown.

Microsoft was very nearly broken up too after losing an antitrust lawsuit in 2000 over the bundling of its Internet Explorer web browser with its dominant Windows operating system.

Fast forward to present day China where investors have been looking back at litigations like these with more interest. That’s because Beijing appears to have borrowed a page from US corporate history as its newly empowered antitrust regulators turn their focus to the country’s powerful internet firms.

For the past decade, China’s internet giants have been largely allowed to grow their core businesses and diversify into new sectors without too much regulatory hindrance. Economic planners even saw them as a quasi-tool for achieving broader goals. For instance, the booming e-commerce sector was a key factor in helping the economy reorientate away from exports to domestic consumption as the main growth engine.

But events that began to unfold late last year now have people wondering whether the rise of China’s top internet firms has hit a political ceiling.

Things started to go awry in November when financial regulators stepped in at the eleventh hour to derail Ant Group’s dual-listing plan in Shanghai and Hong Kong. The fintech unit of e-commerce behemoth Alibaba was hours away from concluding what would have been the world’s biggest ever IPO. Instead, the share sale was axed and the company has been pummelled by a series of regulatory announcements (see WiC519), most notably a set of draft rules from the State Administration for Market Regulation (SAMR) aimed at preventing monopolistic behaviour by internet firms.

The Chinese government clearly wants to assert itself against companies that have previously mostly been cast as innovators and pioneers. Another signal of that came recently from the very top of the Chinese Communist Party (CPC). Following the annual Central Economic Work Conference last month, a statement was published announcing intensifying “anti-monopoly supervision” and prevention of “disorderly capital expansion” as key priorities for 2021. “Laws and regulations concerning the identification of platform monopolies, management of data collection and the use and protection of consumers’ rights and interests will be optimised,” the post-meeting statement added. “Financial innovation must be advanced under prudent supervision.”

Regulators did not even wait for the new year to put these principles into practice. Just before Christmas SAMR announced that it had initiated an antitrust investigation into Alibaba. In a brief statement, the regulator said it would be looking into suspected monopolistic behaviour, including a tactic of requiring retailers to sell exclusively on its e-commerce platform, a practice known locally as “choosing one from two”.

Alibaba made all the right noises in response, saying that it would “actively cooperate” with the investigators, and assuring investors that its business operations were being conducted as normal. Yet on the same day, state news agency Xinhua reported that senior officials from Alibaba’s sister firm Ant had been summoned by financial authorities for another yuetan session (literally a ‘sit down’ with the regulators).

Such meetings are usually demanded when the government believes a company needs to bring its commercial activities back into line with pre-existing rules or if they are in conflict with the public interest (in 2011, when the government was battling to contain inflation, officials even met with noodle makers and talked them out of raising prices).

That is Alibaba sister firm Ant Group’s second yuetan in as many months – the prior meeting was arranged shortly before the fintech’s IPO was spiked in November.

Over the last couple of months, Chinese social media has been flooded with comments trashing Ant’s microloan business. Many have questioned if Ant was encouraging reckless borrowing by young people (see WiC517). Regulators called Alibaba bosses back a second time, unhappy that Ant had not acted quickly enough over their earlier guidance. Or maybe the Central Economic Work Conference has instilled a new sense of urgency, demanding that Alibaba respond to the government’s wider concerns.

The People’s Bank of China ­– China’s central bank – has taken an active role in reining in the fintech giant too. In a rare statement that sheds some light on the second yuetan, PBoC Deputy Governor Pan Gongsheng described Ant’s corporate governance as “not sound” and noted that a lack of legal understanding at the fintech firm had led to “defiance of regulatory demands”. The group was advised to “return to its origins” as a payment services provider, he said, and a separate holding firm is now being set up to make sure that Ant meets capital adequacy and regulatory compliance goals. Pan added that the firm should not engage in “unfair competition”.

In the trading session that followed this statement, Alibaba’s New York-listed shares plunged 13% in their biggest one-day decline since the company listed in 2014.

Alibaba’s market cap has shrunk more than 20% over the last two months and investors are clearly rattled by the government’s newfound determination to class the company and its powerful ecosystem as an antitrust threat. The change in sentiment at a political level has also reignited concerns about the fluctuating fortunes of China’s best-known entrepreneurs. Wilder speculation on this score was fanned after Alibaba founder Jack Ma disappeared from public view.

Newspapers started remarking on the whereabouts of Ma over the last few days, with the Wall Street Journal reporting that he has not been seen in public since he spoke at the Bund Forum in late October (his public criticism of the Chinese banking sector that day is said to have irked Chinese leaders and triggered the cancellation of the Ant IPO).

The newspaper even suggested that Beijing’s tougher treatment of Ma might end up with the government taking a stake in his companies, while speculation about the tycoon’s personal position intensified this week after the Financial Times reported that Ma had been replaced as a judge in the final episode of a business-focused TV game show that he had himself created.

Citing people familiar with the situation, Bloomberg then reported that Ma had been advised by the Chinese government to stay in the country, while CNBC quoted its own sources as claiming that Ma wasn’t actually missing but “lying low for the time being”.

Towards the end of this week the FT reported that Chinese government censors had told local media not to mention Ma or the Alibaba antitrust probe in their coverage. “The move by authorities to exert control over the media coverage of the prominent group’s woes shows that the issue has become a matter of national sensitivity in China,” the FT opined.

An editorial in the People’s Daily had earlier described the probe as part of an effort to encourage healthy competition and innovation across the sector. “This investigation does not mean that the country’s attitude towards the encouragement and support of the [internet] platform economy has changed,” the newspaper added.

That claim might not convince Ma’s billionaire peers. To use another analogy from American corporate history, if the last two decades can be said to have created ‘robber baron’ conditions for many of China’s most successful moguls, they now seem to have been put on notice that a less permissive commercial climate has arrived.

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