China tightens scrutiny and competition rules for tech companies

China market regulator has published a draft of new rules on Tuesday to tighten control and tackling unfair competition of its technology sector and companies’ handling of critical data.

Beijing has been trying to firm its grip on tech companies since the clash between Chinese billionaire and Alibaba founder Jack Ma and the government, citing the risk of monopolistic market power, misuse of consumer data, and violation of consumer rights.

Earlier, the Chinese government issued hefty penalties to internet giants Alibaba Group and Tencent Holdings in anti-monopoly cases as part of a widening crackdown.

The State Administration for Market Regulation (SAMR) on Tuesday issued a set of draft regulations banning unfair competition and restricting the use of user data, which the government was previously taking in a more laissez-faire approach.

New York-listed shares of Alibaba Group Holding Ltd dropped 4.2%, while JD.com Inc and Baidu Inc fell 3.5% each at the press time.

Tencent Music Entertainment Group dropped more than 13% and was set to extend losses for a sixth straight session.

“The proposed regulations’ specificity evidences a clear set of priorities in setting the ‘rules of engagement’ for online competition,” Michael Norris, research and strategy manager at Shanghai-based consultancy Agency China, told Reuters.

“If promulgated, the regulations will likely increase compliance burdens for transaction platforms, including e-commerce marketplaces and shoppable short video apps.”

Tech companies “must not implement or assist in the implementation of unfair competition on the Internet, disrupt the order of market competition, affect fair transactions in the market,” SAMR wrote in the draft.

The regulator has mentioned that companies should not use data or algorithms to hijack traffic or influence customers and also should not use technical means to use other business operators’ data illegally.

Companies would also be barred from fabricating or spreading misleading information to damage the reputation of competitors and need to stop marketing practices like fake reviews and coupons or “red envelopes” - cash incentives - used to entice positive ratings.

The State Council on Tuesday said it would also implement regulations on protecting critical information infrastructure operators, who must conduct security inspections and risk assessments every year and prioritize buying “secure and credible network products and services.”

Beijing has also taken 1% stakes in the domestic units of social media giants ByteDance and Weibo each, Reuters reported citing corporate filings. Shares of Weibo Corp dropped 6.1%.

Earlier this month, The Information reported that the Cyberspace Administration of China (CAC) had established a fund along with the Ministry of Finance, and it has already invested in at least 40 tech companies, amid a surge in antitrust probes, including firms that have been hurt by the recent crackdown.

While it is common in many countries for sovereign wealth funds and government pension funds to invest in companies, it’s unusual for a regulatory body to launch a fund investing in the companies it oversees.

Picture Credit: StartupSavant