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Tech companies and investors respond to China’s regulatory crackdown

Stephen MulrenanMonday 22 November 2021

In October 2020, Jack Ma, the billionaire founder of Alibaba Group, publicly criticised China’s regulatory system. A month later, Chinese regulators cancelled the Hong Kong initial public offering (IPO) of Alibaba’s internet finance arm Ant Group which, at $37bn, would have been the world’s largest IPO.

Then, in December, China’s antitrust regulator, the State Administration for Market Regulation, announced its antitrust probe into the company. The investigation resulted in Alibaba receiving a record $2.75bn fine in April for abusing its market dominance in violation of China’s anti-monopoly law.

Since these events began to unfold, the world has become increasingly conscious of an apparent campaign by the Chinese government to crack down on its own technology conglomerates.

Alibaba is by no means the only target of the Chinese authorities. For example, the Chinese government filed a lawsuit in August against Tencent based on concerns about its WeChat messaging app’s ‘Youth Mode’. Tencent stated in response that it’ll investigate the claims, ‘accept user suggestions humbly and sincerely respond to civil public-interest litigation’.

In a conference call in mid-November, Tencent President Martin Lau reportedly acknowledged a tougher regulatory environment for tech companies in China and noted the company’s work with regulators.

Meanwhile, state media has been critical of gaming apps, with consequences for the stock prices of companies in this area. And, in July, China's internet watchdog began an investigation into Didi Global in connection with China’s national security law and cybersecurity law, just two days after the ride-hailing giant’s New York stock market debut.


A statement from Didi at the time said that the company would ‘conduct a comprehensive examination of cybersecurity risks and would cooperate fully with the relevant government authority’.

‘The IPOs have obviously been a flashpoint,’ says Peter Bullock, a partner at King & Wood Mallesons in Hong Kong. ‘It is all to do with what authority is needed from Beijing to go overseas for capital raising. If you interfere with a company’s ability to raise capital, then that’s fundamental to how a fast-growing company can operate.’

It has been estimated that global investors have lost approximately $1.5tn of value from tech stocks as a result of the recent campaign. This includes from newly listed Didi Global to those already listed in the US, in Hong Kong, and even domestically on China’s exchanges. Leading Japanese investor Softbank, which holds stakes in many Chinese tech players such as Alibaba, Tencent and Didi, confirmed in August that it’ll ‘significantly cut back’ its investments in China amid the current uncertainties, leading some commentators to conclude that the gold rush days of China tech investment are over.

You might well ask, why on earth would China want to clamp down on this when these IPOs are the natural consequence of the excellence of the tech sector in the country

Peter Bullock
Partner, King & Wood Mallesons

‘We’ve all read how much capitalisation has been wiped off’, adds Bullock. ‘So, you might well ask, why on earth would China want to clamp down on this when these IPOs are the natural consequence of the excellence of the tech sector in the country.’

With Beijing’s shifting policies not priced into stock markets beforehand and investors getting increasingly nervous, an op-ed published by the state-run Economic Daily in late August sought to soothe market fears by outlining the government’s agenda. It argued that instead of targeting capital or specific industries and companies, the so-called crackdown aimed to ‘maintain fair and reasonable market competition’ and is ‘normal market governance’.

Other affected sectors include education, where regulations have been introduced that bar private, for-profit tutoring companies from raising capital overseas.

Beijing argues that its campaign in the tech sector is a short-term cost that must be paid to ensure the long-term growth of China’s digital economy. But investors are not known for their patience and have responded with action. While IPOs in China have slowed, approximately $8bn has been raised this year from first-time share sales by tech companies from India, Southeast Asia and South Korea – surpassing the previous annual peak.

Most of the recent regulatory developments centre on concerns around antitrust rules and data protection. ‘The regulators are responding to criticisms made by the public in these areas’, says Ian Wang, a partner at DeHeng Law Offices in Beijing.

But these concerns are not unique to China, adds Bullock. ‘American companies such as Alphabet, Apple and Facebook have all been in this situation. It’s a cat-and-mouse game in Europe, particularly in the US, and now in China. This is not surprising as you don’t want to have companies that are larger than individual states.’

China finally passed its Personal Information Protection Law (PIPL) in August after three rounds of review. Effective as of 1 November, the PIPL is a unitary law for data protection along the lines of the EU’s General Data Protection Regulation (GDPR). Together with 2017’s Cybersecurity Law and September 2021’s Data Security Law, it completes China’s legal infrastructure around network security.

The PIPL makes it very difficult for any large tech business in China to operate. Firstly, there are certain areas where the PIPL is mutually incompatible with laws in Europe and the US. For example, unlike GDPR, the PIPL does not allow for ‘legitimate interests’ as the basis for processing data, which makes it extremely difficult for tech companies to secure the necessary consent.

Hu Ke, a partner at Jingtian & Gongcheng in Beijing, says organisations face major headaches, such as ‘how to understand “separate consent” and harmonise it for specific types of data or specific processing activities with the current practice of notification and consent based on business functions; and how to achieve “separate consent” through product design’ and further whether it can be recognised by competent authorities and judicial authorities.

Secondly, entrepreneurs in China typically run ahead of regulation and try to make money in an unregulated fashion, with underground banking and peer-to-peer lending being two examples of this. ‘If you’ve built a billion-dollar empire on that sort of approach and then you get hit with not just GDPR but GDPR-plus-plus-plus […] your business model then falls over because it’s completely at odds with the regulation’, says Bullock.

The third element is the data sovereignty debate, with Beijing seeking to ‘contain the disorderly expansion of capital’ – a policy goal articulated in early 2021 to limit China’s perceived exposure from capital exercises undertaken by China’s tech sector. This is where the Cyberspace Administration of China, as the big regulator in this area and child of the Cybersecurity Law, plays an important role as gatekeeper for the export of data. ‘The end result is difficulties for both the tech giants in China and international companies trying to do business in China’, says Bullock.

As a result of these regulatory burdens, China’s tech companies have escalated their hiring of legal and compliance specialists and set aside funds for potential fines. But it’s not just Chinese regulation that firms need to be concerned about. Recent US securities legislation enforces financial and customer data disclosure by foreign companies listing in the US.

In the case of Didi, says Xudong Tao, a partner at JunHe in Shanghai, this created national security concerns from the Chinese government perspective ‘because even government officials working in the ministries in Beijing all use Didi after work’.

‘My worry now is that if a Chinese company holds lots of data, its only choice to raise capital will be to go to Hong Kong’, he adds.

Image: Ivan Marc/ Shutterstock.com

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