Home Views Tech

Remaking China's Internet ecosystem

Assif Shameen
Assif Shameen4/23/2021 07:00 AM GMT+08  • 10 min read
Remaking China's Internet ecosystem
China’s Internet has been akin to a walled garden and the clampdown of top players by Beijing is helping tear down those barriers.
Font Resizer
Share to WhatsappShare to FacebookShare to LinkedInMore Share
Scroll to top
Follow us on Facebook and join our Telegram channel for the latest updates.

For some months now, big Chinese Internet firms have faced intense scrutiny from regulators not unlike the pressures that large US Internet platforms such as social media giant Facebook, search behemoth Google and e-commerce leader Amazon.com are under in Washington.

The storm began brewing last October when Jack Ma, the billionaire founder of e-commerce juggernaut Alibaba Group Holding and its giant financial technology affiliate Ant Group, attacked the local banking system for its “pawnshop mentality”. Whether Ma knew that a crackdown, on FinTech firms in particular and the Internet sector in general, was imminent and spoke out to prevent it, is still unclear. But Beijing did clamp down on Internet giants, and more heavily on FinTech firms. The hardest hit was Alibaba, and its affiliate Ant was the first to face the blows.

On April 10, China’s State Administration for Market Regulation (SAMR) announced that it had completed the anti-trust investigation. Alibaba had violated Chinese anti-trust laws with its “picking one from two” practice, which forces e-commerce merchants, mostly well-known brand owners, to choose one e-commerce marketplace as their exclusive online distribution channel, SAMR noted. The practice, known as POFT, was first highlighted in 2019 when microwave maker Galanz sued Alibaba for forcing it to choose between itself and JD.com.

The regulator ordered the e-commerce giant to cease the unlawful practice and pay a fine of US$2.8 billion ($3.72 billion) based on 4% of its domestic revenues in calendar year 2019, including those from its fast-growing cloud infrastructure business. China’s anti-trust law stipulates that any company found to be committing monopolistic practices shall be subject to a fine of between 1% and 10% of its total sales in the year before it broke the law. “The amount of the fine was likely carefully weighed by the regulator to serve as a deterrent to other big platforms, but not too big to hurt Alibaba’s operations severely,” Jialong Shi, China Internet analyst for Nomura Securities in Hong Kong noted in a recent report.

Beijing’s regulators might just be getting started on reining in the giant Internet firms. On April 13, regulators hauled in 34 of the largest Chinese tech firms including Tencent Holdings, short video firm TikTok owner ByteDance, delivery firm Meituan, e-commerce firm Pinduoduo and ride-hailing pioneer Didi Chuxing Technology Co for a dressing-down to make sure they got the message from the US$2.8 billion fine on the Alibaba firms.

Learning from Alibaba’s mistakes

Bad behaviour now frowned upon include e-commerce firms forcing merchants to pick one platform, abusing a dominant market position, making hostile bids to acquire top players in specific market segments, misusing big data to charge certain clients unfair pricing, turning a blind eye to inferior-quality products, leaking customer data and evading tax payments. The anti-monopoly guidelines will help reduce switching costs for merchants and put more power back in their hands. State-run People’s Daily noted that the anti-trust regulation’s goal was to foster the healthy development of the Internet platform economy, dominated by private-run enterprises that have played a key role in making China the leader in the global digital economy.

To be sure, Beijing has long frowned upon Chinese Internet platforms that harvest personal data they collect to push products and services and pressure consumers to take up more debt and buy things on credit. If you think Facebook and Google surreptitiously collect a lot of data on users around the world and then use it to stifle competition, you have no clue just how much more powerful Internet platforms are in China and just how much leeway they have had until now in collecting and harvesting all sorts of personal data.

Beijing’s clampdown on top digital players is helping remake the Internet in the world’s second-largest economy. Until now, China’s Internet has been akin to a walled garden. If you use Tencent’s WeChat super-app, you could only shop on JD.com and Pinduoduo, in which WeChat’s parent Tencent has stakes, but not on rival Alibaba’s Tmall or Taobao. Regulators are now trying to tear down those walls and turn the entire ecosystem into an open Internet. Alibaba recently launched its bargain deals app Taobao Tejia for less affluent customers on WeChat, something that would have been unimaginable just a few weeks ago. Regulators are reportedly also keen to force Alibaba to accept WeChatPay on Taobao and Tmalls, and for WeChat and Tencent’s affiliate Meituan to accept rival AliPay on its platform. A logical next step might be for JD.com and Pinduoduo to use Alibaba’s Cainiao logistics network and for Alibaba to use Meituan’s grocery delivery for its supermarkets.

The biggest losers are the largest digital platforms — Tencent, Meituan, Alibaba and Ant Group which was spun out of Alibaba 10 years ago. Among the winners will be challenger platform companies like ByteDance, JD.com, Meituan, Pinduodou, ride-hailing firm Didi Chuxing but also third-tier Internet firms like mobile phone maker Internet services firm Xiaomi, mobile gaming firm NetEase and short-form video firm Kuaishou Technology. President Xi Jinping now wants a more robust Internet ecosystem in China rather than one with just the two dominant players of Alibaba and Tencent.

Letting a thousand flowers bloom

Alibaba and Ant’s problems may now also be nearing some sort of resolution. There had been speculation for months that Beijing was considering a possible break-up of Alibaba. There were also reports of Alibaba being forced to divest its media assets and Beijing forming a joint venture with tech giants to control all consumer data in China, but analysts say the US$ 2.8 billion fine is all Alibaba needs to pay for now. Reuters reported last week that Ant Group was working on a deal with regulators that would see Alibaba’s founder Jack Ma exit as a shareholder of Ant Group in which he has a 10% personal stake. Alibaba retains a 33% stake in Ant and Ma has a small 6% stake in the e-commerce firm. Wall Street Journal reported earlier this year that Ma had offered to hand over parts of Ant to the Chinese government in a November meeting with regulators. It is unclear whether Ma will sell his Ant stake to Alibaba, other Ant Group shareholders, or to the Chinese sovereign wealth fund.

Jack Ma’s exit could help clear the way for Ant to revive plans to go public. Ant was on the verge of the biggest IPO in history, with a Hong Kong and Shanghai dual listing raising over US$35 billion, which would have valued it at nearly US$330 billion. Just days before its Nov 5 public debut, Beijing stepped in with new FinTech rules that forced the cancellation of the mega IPO. Apart from its core AliPay mobile payments platform with 80 million active merchants and over a billion users, Ant extends unsecured short-term loans, provides access to investment management platforms, sells insurance and keeps track of credit scores for hundreds of millions of Chinese households.

Beijing recently announced a new regulatory regime for FinTech firms that will force Ant to restructure itself as a financial holding company, like banks. Like other financial regulators around the world that are trying to get a grip on the burgeoning FinTech ecosystem that threatens to undermine heavily regulated traditional banks, officials in China want to rein in companies like Ant after years of explosive growth in the country’s financial technology sector. Regulators accused Ant of “regulatory arbitrage” — behaving like a financial institution without any of the scrutiny that other regulated financial institutions face. Chinese regulators value financial stability and analysts say their actions should be seen in the context of rising systemic risks to the financial system.

While Beijing recognises that the Chinese banking system needs to be overhauled and upgraded, and “national champions” like Ant Group can play a big role in modernising the country’s outdated financial system and infrastructure, it does not want to lose control, nor does it want private firms to become too powerful at the expense of state-owned banks. It is a delicate balancing act because there is recognition in Beijing that traditional banks have until recently not served the growing needs of small businesses as well as increasingly sophisticated consumers, and tech giants have only stepped into the breach.

Beijing’s increasing control and a more hands-on approach towards private enterprise, particularly the hugely profitable Internet companies that had quietly begun to flex their muscles much to the chagrin of the Communist Party leadership, means that tech giants like Alibaba, Tencent and Meituan will become more responsible corporate citizens. That will not make them any less attractive to investors, provided they play by the rules. Players like Alibaba and Tencent may have used unfair tactics to stop rivals from intruding into their turf in the past, but they can continue to thrive in a more competitive environment.

A more open Internet in China will mean less power for larger players like Alibaba and Tencent that have become near-monopolies, and a more vibrant ecosystem where challenger platforms like ByteDance will be able to more effectively compete against the incumbents. It is unclear whether stringent new Internet rules will stifle innovation in the digital realm over the long term. One thing is clear, however, if China’s audacious Internet experiment succeeds, US regulators will be tempted to take a leaf out of that playbook and rein in Facebook, Google and Amazon and let a thousand digital flowers bloom.

Assif Shameen is a technology writer based in North America

Loading next article...
The Edge Singapore
Download The Edge Singapore App
Google playApple store play
Keep updated
Follow our social media
Subscribe to The Edge Singapore
Get credible investing ideas from our in-depth stock analysis, interviews with key executives, corporate movements coverage and their impact on the market.
© 2022 The Edge Publishing Pte Ltd. All rights reserved.