Bloomberg News November 13, 2020

China’s hands-off approach to the technology sector has minted billionaires and giant companies at a breathtaking pace. Now President Xi Jinping’s government is reining in the country’s most powerful corporations, including Alibaba Group Holding Ltd., Tencent Holdings Ltd and Didi Global Inc., along with their billionaire founders. The scrutiny is shaping up as one of the largest concerted actions against private enterprise in decades and raising the prospect that the leeway enjoyed by entrepreneurs like Jack Ma, founder of both Alibaba and the sprawling Ant Group Co., might be coming to an end.

1. Who is China targeting?

Maintaining social stability is one of the signature goals of Xi and the ruling Chinese Communist Party, so any company or person it perceives as threatening that can find themselves in the cross-hairs. Such a sweeping definition also means just about any large business could find itself the subject of a crackdown. Alibaba was targeted by antitrust authorities for its dominance and actions in e-commerce while Meituan is scrutinized for food delivery. Didi’s position as the biggest ride-hailer in China, and the massive amounts of data that generates, caught the attention of the Cyberspace Administration while the Ministry of Education went after after-school tutoring firms who profit from the intense competition to get into the country’s top universities.

2. How is China cracking down?

With fines, regulatory orders and forced restructurings. Ant, which was about to go public before being stopped by regulators in November 2020, agreed to turn itself into a financial holding company, making it subject to capital requirements similar to those for banks. Regulators levied a record $2.8 billion fine against Alibaba for alleged monopolistic conduct and ordered it to change its business practices. Didi had to remove its main app and dozens of others from smartphone stores as it faces the prospect of unprecedented penalties. Tencent, operator of the WeChat super-app, has been ordered to give up exclusive music streaming rights while Meituan and Pinduoduo Inc. have also fallen foul of regulators. The speed of change has been dizzying with rules to curb monopolistic practices drafted and finalized in just three months. The tutoring sector, where companies such as TAL Education Group garnered multibillion-dollar valuations, saw its future redefined in one sweeping order that banned them from making profits, raising capital and limited what they can teach.

3. How much is at stake?

To cite just one example, measures proposed to curb market concentration in China’s online payments market could slash Ant’s valuation by roughly two-thirds to just over $100 billion, according to Bloomberg Intelligence. It could also endanger the growth of Tencent’s fintech division, estimated to be worth $120 billion before the crackdown. Meituan shed $60 billion of market value in just two trading sessions after regulators ordered food platforms to ensure delivery workers earn at least the local minimum income and TAL’s shares dropped 71% the day changes to after-school tutoring were reported

4. What explains the crackdown?

While China’s leaders have said little about their underlying intentions, analysts and investors float various theories. Some say regulators are simply reasserting their oversight power, or maybe those in power grew frustrated with the swagger of tech billionaires and wanted to teach them a lesson. Alibaba, Tencent and Ant had a combined market capitalization of nearly $2 trillion in 2020 — easily surpassing state-owned behemoths like Industrial & Commercial Bank of China Ltd. as the country’s most valuable companies. And it’s clear that the Communist Party had grown increasingly concerned about the growing clout of internet firms, which are mostly private entities over which it has little direct control of management. Much of that concern centers around their grip on the massive hoards of data that they hoover up from hundreds of millions, considered key to both driving the country’s economic and geopolitical goals and shoring up the Party’s power base. The Cyberspace Administration of China, the internet watchdog, cited data and national security as its prime reason for investigating Didi and now mandates a data security review for all companies seeking overseas listings. More broadly, Xi’s administration blames widening social disparities on the online boom, particularly in the pandemic era, and is moving to address discontent among the populace that could threaten its authority.

5. Is there more coming?

It seems so. Xi has declared he will go after “platform” companies that amass data and market power. His administration is particularly concerned about eradicating systemic risks — such as unsupervised growth of consumer debt — in part to ensure the Communist Party’s dominion. In addition:

  • The cyberspace watchdog expanded its national security review beyond Didi to apps operated by Full Truck Alliance Co. and recruitment firm Kanzhun Ltd., both of which had recently listed in New York.
  • In April regulators told Tencent, Meituan and others including TikTok owner ByteDance Ltd., search leader Baidu Inc. and shopping portal Inc. to “heed Alibaba’s example” and curb anti-competitive practices such as exclusivity requirements.
  • Almost any business trying to go public outside of China now needs to get approval from Beijing first.
  • Beijing may also seek greater oversight over mergers and acquisitions, including the hundreds of startups backed by the biggest technology firms.
    • Regulators have begun issuing token fines for deals closed years ago, spurring fears of a bigger probe into M&A.
  • The government is said to have proposed a state-backed venture with the tech giants that would oversee the lucrative data they collect from hundreds of millions of consumers.

6. Is this really so surprising?

In some respects, it is. The government has played an important role in developing the tech sector in a way that facilitated the development of behemoths. China effectively created its own version of the web, one blocked off from the rest of the world by what’s known as the Great Firewall. In the absence of Facebook Inc. or Twitter Inc., WeChat and Sina Corp.’s Weibo flourished as social networks. On the other hand, China has a tradition of cracking down in fits and starts, or making examples out of high-profile companies. For instance Tencent became a target of a campaign to combat gaming addiction among children in 2018.

7. Will Ant or anyone else get broken up?

Not Ant, it seems. It agreed with regulators on a restructuring plan that will turn it into a financial holding company. After the $2.8 billion fine, Alibaba executives said they were unaware of any other antitrust investigations. The government remains concerned about Alibaba’s influence over public opinion given its diverse media assets and a significant stake in Weibo. Beijing is said to want the e-commerce giant to sell some of them, including the South China Morning Post in Hong Kong. In an example of how sensitive the issue is, Weibo was penalized by the internet watchdog for interfering with the spread of opinions after posts about a scandal involving a senior Alibaba executive were deleted. Overall, authorities in Beijing are expected to tread cautiously, looking to rein in the growing clout of the tech giants without undermining some of the country’s biggest corporate success stories. Education firms are overhauling what they teach, and how they charge for it, to comply with the new rules. Some have cut back on advertising to eliminate a key area of criticism about how they market services to students and parents. Analysts also anticipate that at least some of the major education technology players will have to restructure their business, either spinning off divisions in violation of the new regime or even delisting.

8. Was Jack Ma being singled out?

While the aborted Ant IPO in 2020 made the charismatic impresario the highest profile target, the breadth of the subsequent crackdown shows it was just the start of a wide-ranging effort. Ma has all but vanished from public view after once being a regular fixture of the global conference circuit. Tencent founder Pony Ma (no relation) — a delegate to the country’s top lawmaking body — has been far less vocal than his globe-trotting compatriot; in March he initiated a voluntary meeting with antitrust officials as part of their regular chats. Meituan Chief Executive Officer Wang Xing was warned to keep a low profile after posting a poem some interpreted as critical of the government. His appearance two weeks later at an official state celebration signaled he and his company may be back in favor in Beijing.

9. How is big technology responding?

All of the companies are pledging to atone for their transgressions, a common response when China applies scrutiny. Some high profile deals have been scrapped, including the IPO of e-commerce startup Xiaohongshu and a merger of video game streamers that was valued at $6 billion when it was proposed. But that hasn’t stopped Tencent’s deal to buy the rest of British game maker Sumo Group for more than $1 billion. Some tycoons are donating billions from their vast fortunes to charities as the country, and Xi Jinping himself, become increasingly concerned about inequality. Xiaomi Corp. co-founder Lei Jun handed over $2.2 billion of shares in the smartphone maker to two foundations and Meituan’s Wang Xing gave away a $2.3 billion stake. ByteDance’s Zhang Yiming gave about $77 million to an education fund in his hometown while Tencent’s Ma has pledged $7.7 billion of the company’s money toward curing societal ills.