On Wednesday, China’s media regulators released a new regulation to tighten scrutiny on livestream hosts’ behaviors. 

Why it matters: The rules require online streamers to adhere to a set of similar standards applied to the country’s tightly regulated traditional media hosts, a sign of further tightening the fast-growing and lucrative industry. 

• Livestreaming e-commerce and entertainment have become part of Chinese people’s online shopping routine. Recently, education companies New Oriental have been able to utilize livestreaming to make a major comeback after China’s new rules on private tutoring cut off the bulk of its income.

Details: The new rules are jointly released by China’s National Radio and Television Administration and the Ministry of Culture and Tourism. It consists of 18 guidelines for livestream hosts.

• The guidelines emphasized that livestream hosts must uphold correct political values and social values, create and promote more “positive” stories and maintain a “wholesome” taste. In addition, it advised hosts to self-regulate and avoid content that only focuses on viewing traffics, has morbid aesthetics, caters to fandom culture, or promotes money worship. 
• Livestream hosts in professional fields like law, medical health, education, and finance must obtain relevant qualifications and approvals from the streaming platform. Tencent’s WeChat told the Chinese media outlet The Paper (in Chinese) late Wednesday that it will draft punishment measures for people who disobey these new rules.
• The rules also mention that streaming platforms should take responsibility for their implementation, giving positive encouragement to rule-followers and punishing those who break the rules. Users who severely violate the new rules will be put on a blacklist and will receive a permanent streaming ban.
• The rules also apply to virtual hosts and the human vocalists behind virtual hosts.

Context: Since earlier last year, China has been pushing to further regulate the livestream industry. In late last year, several top livestream hosts stopped their streams due to inappropriate or illegal behavior.

• One of the country’s top e-commerce streamers, Viya, was banned for tax evasion in 2021 and was fined RMB 1.3 billion ($270 million). Before she was banned, her livestreaming generated RMB 8.3 billion in sales on the first day of the Singles’ Day shopping holiday in 2021.
• China’s 315 Gala this year, an annual event highlighting consumer rights abuses, spotlighted fraudulent promotions and scams in the livestream industry.

Chinese video platform Bilibili announced on Wednesday that it is implementing new rules (in Chinese) to combat the rise of hateful speech and inappropriate content on the platform.

Why it matters: This is another self-cleaning act from China’s video platform. Bilibili has made at least seven announcements to remove inappropriate content since January to comply with tightening content control from Chinese regulators. 

Details: Bilibili said it had noticed an uptick of videos that make unethical jokes about the dead and attacks others based on their gender, occupation, and age. The platform said such disrespectful content is “plaguing the community.” Bilibili will start implementing the rules by deleting such content for the first month. After that, content creators will face account suspension if they continue to create such content.

• The new rules banned three main types of content. The first one is mocking death, sickness, and disability. The second is jokes about disasters and tragic social events. Last, is hateful content directed toward a particular gender group and other groups. 
• The platform gave a few examples: videos making fun of tragic events such as the deaths of NBA star Kobe Bryant and former US President John F. Kennedy, and misogynistic and misandrist content.

Context: As of 2021, Bilibili had 271.7 million monthly active users and 10 million newly uploaded videos per month. The platform has become a thriving community for vloggers and fans of animation, comics, and games. 

• Following Chinese regulators’ scrutiny of toxic and negative content online in January, Bilibili went through a large-scale content moderation to crackdown on content involving cyberbullying, softcore porn, online frauds, and others.

IP proxy services have become a sought-after tool in China less than a month after the country’s main social media platforms started to reveal all users’ location information.

Why it matters: Chinese internet users are in a cat and mouse game with the country’s social media platforms which have dealt a blow to users’ privacy by forcing them to reveal their geolocation. 

• Since April 15, major Chinese social media platforms including ByteDance’s Jinri Toutiao and Douyin, Kuaishou, and Xiaohongshu announced that they will start to display all users’ location information by way of revealing the region where their IP addresses are located. Weibo did the same in late April. Most Chinese users don’t have an option to turn off their IP locations. Thus, many online businesses are selling fake IP proxy services to help users to cover up their true location.
• The new measure has already exposed many accounts for promoting content unrelated to their locations. For example, an account with an IP address in the central province of Hunan was shown running a marketing account on local fun activities in the capital city, Beijing. 

Details: Chinese media outlet The Paper on Thursday reported (in Chinese) that many businesses are now selling services that change IP addresses for as little as RMB 6 ($0.9) per day on e-commerce platforms like Taobao. Many of these businesses say that they can alter location information (in Chinese) on platforms like Weibo and Douyin.

• The new rules have had an eye-opening effect on many users. For instance, the Weibo account of Bill Gates, the founder of Microsoft, shows it has an IP address in the central province of Henan, possibly revealing the whereabouts of the team that runs the account (the IP address is only revealed to logged in users). Meanwhile, many popular marketing personalities with overseas images and selling points are shown to be located in China. 
• IP addresses can reveal users’ approximate geographic information. An IP proxy service can route one’s connection to another location so as to hide their real location. 

Context: Social e-commerce platform Xiaohongshu is one of the few platforms that gives users the option to hide their location information. 

• Toutiao, ByteDance’s algorithm-driven feed platform, began displaying the location of users’ profit pages on April 15.
• Weibo announced that it would display all users’ locations (in Chinese) based on IP address on April 28. The Chinese version of TikTok, Douyin, also began showings the user’s’ IP locations on April 29.
• On April 30, Quora-like Zhihu also rolled out a similar feature to display location information (in Chinese) in all new replies, aiming to maintain a “healthy and clear community.”

On Monday, China resumed issuing new gaming licenses (in Chinese) after pausing it for eight months when the country began a broad crackdown on content, gaming, and the education sector last summer. 

Why it matters: The halt on new gaming licenses led to an 8-month-long winter for the gaming industry in China, forcing many game makers to downsize, cutting down on development projects, and laying off staff. 

• Small studios took the heaviest hit during the license freeze. About 14,000 small gaming companies and gaming-related firms reportedly went out of business by the end of 2021, according to the South China Morning Post.

Details: On Monday, China’s National Press and Publication Administration (NPPA)  released a list of licensed games for April, made up of 45 Chinese games. It’s the first list of licensed games released by the administration since last July, with new licenses put on hold since August.

• Major Chinese gaming companies like 37 Interactive, Lilith, and Baidu were all granted new licenses this month. However, the country’s two largest gaming companies, Tencent and NetEase, were absent from the list.
• 89% of the approved games are made for mobile platforms, while 9% are for desktop devices. The list of newly licensed games also includes one indie title for the Nintendo Switch, called “Clocker.” The game was initially released on the desktop gaming platform Steam and received a favorable rating of 84%.
• The list of newly licensed games does not include any overseas games, which have become increasingly attractive for Chinese players as they face tighter regulations at home.

Context: China has strict rules for publications, which apply to video games. Companies must apply to NPPA for gaming licenses to publish new games. In the seven months of 2021, before the freeze, China issued 675 gaming licenses, averaging 96 per month. 

• Chinese authorities had initiated long periods of gaming license freeze in the past. In late 2018, the gaming industry saw 80 new licenses approved after a 9-month hiatus. 

• In addition, stricter rules for Chinese gaming companies at home pushed NetEase, Tencent, and others to focus more on developing games for the overseas market.

US-traded shares of major Chinese tech firms soared after the State Council, China’s cabinet, pledges to adopt policies favorable to economic stability in a meeting held by Vice Premier Liu He on Wednesday.  

The Nasdaq Golden Dragon China Index, which tracks stocks of Chinese companies, jumped 33% on Wednesday to 7,230 points. 

Zhihu, known as China’s Quora, led the jump with a 79% increase on Wednesday trading, followed by Kingsoft Cloud’s 72%, online grocer Dingdong Maicai’s 66%, and a 64% jump by housing broker Ke Holdings. Around 160 Chinese companies recorded a 10% share jump or higher, according to a rough count by local media iFeng. Tech majors like Alibaba, JD, Baidu, and Pinduoduo, climbed by around 40%.

Why it matters: The Wednesday meeting is the first major policy adjustment after China’s year-long crackdown on prominent areas across the board, from the capital market to internet companies to real estate. Tech companies, especially those under the platform economy model, were among the worst-hit during the regulatory clampdown. However, the country kept increasing investment in hard and core technologies like semiconductors and smart manufacturing.

• With favorable policies, the State Council sends a reassuring signal to investors after Chinese tech stocks saw intense sell-offs over the past weeks.

Details: China’s Vice Premier Liu He said the Chinese government will “actively introduce market-friendly policies and prudently introduce policies that have a contractionary effect,” according to a briefing of the Wednesday meeting.

• The Chinese government said that it will continue to support companies to seek listings in the overseas markets. The remarks come less than a week after the US Securities and Exchange Commission named five Chinese companies for potential delisting. The meeting added that China and US regulatory bodies have “maintained good communication and made positive progress” in the regulation of US-listed Chinese firms and said a concrete cooperation plan is underway.
• The meeting also clarified China’s regulatory moves on big internet platforms. It said to complete rectification work on these platforms but asked for “steady,” “predictable,” and “transparent” regulations, a notable different tone from last year’s sudden and intense regulatory moves.  

Context: Chinese leadership is under pressure to keep economic growth steady when the country faces challenges from all sides, from slowing consumption to Covid resurgence to international pressure from the Russia-Ukraine war. 

• Premier Li Keqiang, speaking at China’s “two sessions” meeting in early March, said that the Chinese economy should expand by “around 5.5%” this year. It’s the lowest target for the country in 30 years, but still higher than the World Bank’s expectation of 5.1% and the International Monetary Fund’s prediction of 4.8% for 2022.
• China’s 2021 economic growth took a hit in the latter half of the year after regulators launched a series of crackdowns that eliminated industries like private education and crypto mining and slowed growth and enthusiasm in games, overseas IPOs, and other tech-related areas. Averaging out at 8.1%, the country’s 2021 GDP growth fell sharply from 18% in the first quarter to 4% in the fourth quarter. 

READ MORE: INSIGHTS | Chinese tech giants are still slashing headcounts

Beijing this year aims to expand 5G infrastructure, set up a national system of data centers, keep a tight regulatory grip on big platforms, and push e-commerce in rural China, according to goals set forth this week at the annual lianghui  (“two sessions”) meeting of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC).

China plans to bolster the tech sector by increasing state funding in key areas such as chip manufacturing and improving the capital market so more tech firms can raise money domestically. Having a growing and self-sustained tech sector is central to the government’s plan to achieve these set targets, according to government reports presented in the meeting.

Given the ongoing surge in the pandemic in China, an economic slowdown, and uncertain global geopolitical pressure, many of the goals for 2022 will be particularly challenging to achieve. The GDP growth target of 5.5% is ambitious, despite being the lowest in a decade (It was 6% last year; no target was set in 2020 due to the pandemic). 

Members of the NPC and CPPCC, the nation’s top legislative bodies, meeting from March 5 to March 11, emphasized the need for a stable growing economy as China prepares to host the all-important 20th Party Congress in autumn. This year is also the second year in China’s 14th Five-Year Plan (2021 to 2025), which is set to make the country wealthier and more equal, growing China’s per capita GDP to the level of moderately developed nations and expanding its middle-class. 

Achieving self-sustainability in semiconductors and strategically important areas such as AI, biotechnology, and advanced manufacturing tools and machines are high on the government’s priorities. The government will fund small startups that possess innovative tech in the manufacturing, fostering what they called “little giants,” according to the Ministry of Finance’s report filed to the meeting and released to the press.

New energy vehicles will continue to be embraced. The government aims to build more green energy power structures to ease its reliance on fossil fuels. In key growth areas like Beijing, Shanghai, and Guangdong, the state will fund national laboratories and tech innovation hubs to attract tech talents. 

Reassuring capital markets

China will “promote the development of venture capital,” Premier Li Keqiang said on March 5 at the opening of the six-day NPC assembly. The remarks sent an assuring signal to worried tech venture capitalists after China’s year-long tech crackdown erased trillions of dollars in market cap from Chinese tech majors like Alibaba, Didi, and Meituan. However, the country will still be mindful of the systematic risks brought by “unregulated and disorderly expansion of capital,” Li said in the government work report.

Despite the fears spawned by last year’s regulatory crackdowns, venture capital investments in China jumped almost 50% from $86.7 billion in 2020 to a new record of $130.6 billion for 2021, data from research firm Preqin shows. However, venture capital pivoted to financing hard tech areas like semiconductors and robots rather than highly-regulated areas like edtech. 

In addition to leveraging venture capital, the country plans to improve the operation of public capital markets by reforming China’s new third board, an over-the-counter share trading platform serving small and medium enterprises (SMEs). China made the first step of reform by launching the Beijing Stock Exchange last November, targeting small tech startups and enhancing the connectivity of the multi-level capital markets.

Infrastructure priorities: 5G, data centers 

Regulatory crackdowns on large internet platforms will likely continue this year, as the Supreme People’s Procuratorate, the state’s prosecutor, said in the NPC that it plans to closely monitor anti-monopoly, anti-competitive behaviors, and guide the capital market to orderly development. 

China plans to construct more 5G stations and further utilize data as a critical national resource to bring more value from its increasingly digitized economy. China’s economic planner, the National Development and Reform Commission (NDRC), said in a report released to the assembly that it will launch several “major infrastructure projects,” building 5G networks, artificial intelligence (AI), and an integrated national system of big data centers.

China elevated data to one of the key economic resources in the 14th Five-Year Plan released last year. In 2021, China laid the groundwork for keeping data secure with a slew of regulations. This year, it will further the work to allow data to be better classified and defined to better share and trade data, said the NDRC report. 

Building countryside e-commerce

As China faces continued weak consumption in 2022, the government hopes to compensate by expanding rural e-commerce. The government work report proposed to strengthen the construction of business ecosystems in county-level communities and to improve rural delivery services. The economic planner’s report shows that express delivery services now cover more than 80% of the country’s administrative villages, which will “further unleash consumption potential in rural areas.”

In 2021, China’s total online retail sales increased 14% year on year to RMB 1.3 trillion ($206 billion), or 30% of China’s overall retail consumption of RMB 4.4 trillion, according to NDRC’s report.

In addition, the economic planner wants to boost cross-border e-commerce as part of its efforts. For example,  China plans to expand the scope of the pilot scheme for cross-border e-commerce retail imports and started planning on building seaports, inland ports, and overseas warehouses.

Smaller manufacturing startups

In 2021, manufacturing accounted for 27.4% of China’s GDP. The country aims to upgrade this key sector by nurturing homegrown startups specializing in robotics, automation, industrial software, and other smart manufacturing tools. 

Since the US-China trade war in 2018, China has rushed to reinforce its manufacturing supply chains and make sure it doesn’t rely too much on foreign supplies in core technologies. China has funded more than 4,700 startups since 2021 and plans to invest in 3,000 more this year.

The government called the state incubation the “little giants” project, setting out to give out RMB 10 billion ($1.58 billion) over the years to fund startups in key manufacturing areas. These areas include high-end machine tools, aerospace equipment, marine engineering equipment, advanced railway equipment, electric power equipment, new materials, biomedicine, and high-end medical equipment. 

Yet more support for semiconductors

China’s semiconductor industry has seen an exponential increase in investments and government support since 2019, as the country’s top chipmakers faced US sanctions. The government vowed to rely less on foreign technology in its chip production, but the complexity of this high-tech industry means China’s pursuit of self-sufficiency will be a long-term effort. 

The government vowed to keep throwing money and support into this effort. China’s Ministry of Finance said in its report to the NPC assembly that it would channel funds to the integrated circuits industry through market measures. It would also give tax cuts to the chip industry, alongside other sectors like industrial mother machines, 5G, biotech, and agricultural equipment. 

The NDRC said it will guide semiconductor makers to gradually expand their production, stabilize supply chains in and outside of China, and will help them connect with suppliers. It also vowed to pay close attention to raw materials prices, helping suppliers and manufacturers secure production resources. 

’Moderating’ clean energy policies and supporting NEVs

Chinese policymakers have faced significant challenges as they tried to meet ambitious carbon reduction goals over the last year, ranging from heavy reliance on coal to a nationwide power crisis.

China will continue its efforts to reduce the use of coal and promote renewable energy sources, according to the government work report. And yet, the moves to reach its emissions peak will be done “in a well-ordered way,” Li said, adding that energy supply will be ensured “in accordance with overall planning,” in addition to efforts to build wind and solar power plants. 

Last year, the central government imposed strict measures by enforcing energy consumption mandates and intensity limits. As a result, at least a dozen Chinese provinces introduced power cut measures in September. This, along with soaring energy prices, forced many factories to reduce or even halt their operations late last year. 

Beijing will also push the country’s EV industry forward to drive consumption and cut carbon emissions. The NDRC, the economic planning agency, said in its report that it will continue to boost purchases of NEVs and build more battery charging and swapping facilities. Meanwhile, the  Ministry of Finance pledged to maintain subsidies and tax exemptions for NEV purchases.

China’s IT regulator urged tech companies to stop forcing users visiting web versions of their services to download apps in a Thursday meeting.

Why it matters: The suggestion could cut profits from major internet companies as they might see app users and data decrease. Chinese internet companies often use their web applications to attract new users to mobile apps, from which they can collect users’ information and promote products more easily, especially after browsers start to set a stricter countermeasure to protect users’ privacy.

• Chinese tech companies such as Baidu, Weibo, Zhihu, and Sohu, often require users who visit the mobile web version of the services to download their apps, or else, limiting their access to the mobile web services or trick them into clicking an adjacent button to download the apps.
• Compared to Chinese social media companies, global service providers like Facebook, Twitter, and Reddit have focused on building more app-like features into their websites, making the web experience more pleasant.

Details:  The regulators made the urge following a public complaint. On Feb. 11, a user complained that many tech companies forced people to visit a mobile web version of their services to download apps, according to a complaint posted on state media People’s Daily’s leadership message board. The board allows users to post suggestions for leaders of relevant ministries in China. The Ministry of Industry and Information Technology (MIIT), China’s administration for the IT industry, responded to the complaint, promising they would conduct in-depth research on forced app installation.

• MIIT asked service providers to stop forcing users to download apps without their approval and add a prominent option to cancel downloads. 
• MIIT also asked service providers to provide better mobile web users’ experience, avoiding using techniques such as folding web pages, pop-up windows encouraging app downloads, and frequent alerts. 
• At the time of the publication, Zhihu and Sohu have gotten rid of their app install walls, while Baidu Tieba still requires users to download apps to read full threads.

On March 2, Chinese regulators published a new draft of rules on notifications and pop-ups. The rules hope to stop Chinese apps’ excessive use of the tools and control what content gets shared in the notifications. 

Why it matters: Chinese tech companies widely use notifications and pop-ups to promote their services. New rules curtailing their use could hurt service providers such as Baidu, Tencent, and Meituan, which rely on such methods to promote their products and generate profit from advertisements.

• The new rules also indicate tighter controls on content. Article 5.3 of the draft proposal said that unauthorized platforms aren’t allowed to send news information in notifications.  

Details: The Cyberspace Administration of China (CAC), the country’s internet regulator, has published the draft rules as part of a public consultation period until March 17.

• The draft rules require service providers to not “abuse” notifications and pop-ups to sensationalize trending social issues or entertainment topics. 
• They also dictate that notification and pop-up pushing service providers must publish content that adheres to the government’s “core values.”
• Advertising via pop-up windows would be required to show a visible close button and carry a clear notice to users about the paid nature of the content, according to the draft regulations.
• Service providers that don’t qualify for an internet news license (our translation) by CAC would be barred from pushing news notifications and pop-ups under the proposed rules.

Context: The draft regulations appear to be part of a coherent effort to “clean up” the Chinese internet content offerings after CAC’s new algorithm rules took effect at the start of March.

• Chinese tech companies have been accused of abusing notifications and pop-ups and using them to excessively push commercial promotions or sensational content. Chinese Android phone users receive 100 notifications every day on average, according to an industry group Universal Push Association.
• Such notifications and pop-ups can mislead people, according to Sina’s consumer complaints platform Heimao, especially the young and elderly who are susceptible to downloading unnecessary apps or committing to spending money on such platforms.

China’s gaming companies are cutting off projects and staff as the industry still lacks permission to release new games, Chinese media outlet Hongxing News reported on Tuesday. 

Why it matters: China’s gaming industry has achieved steady growth despite increased regulation, with the actual sale revenue of self-developed games in the domestic market reaching RMB 255.8 billion ($40.4 billion) last year. However, the growth rate dropped sharply from 26.7% to 6.5% since 2020, according to a China Audio-video and Digital Publishing Association report.

• China’s National Press and Publication Administration (NPPA), the state’s regulator for news, prints and publications, stopped issuing new game licenses since July last year, without which new games cannot be released legally.
• Gaming companies have been forced to cut projects and lay off staff. About 14,000 small studios and gaming-related firms went out of business in 2021, South China Morning Post reported late last year. 

Details: News about Shanghai gaming industry leaders laying off workers and cutting projects began to circulate on the Chinese internet in the past few days. Companies like Netease, Baidu, Lilith, IGG, and Perfect World have made cuts, Hongxing reported. 

• Insiders from Lilith, one of China’s largest gaming companies by revenue, said that it has canceled the game Apocalypse Eden due to licensing problems. Members of the project team had been transferred internally.
• Another insider from Netease told Hongxing that the company had begun pausing developing projects as early as August last year and reassigned employees internally. Some staff have chosen to leave.
• An unnamed internal employee at IGG, a Chinese gaming company focused more on the foreign market, confirmed that it has cut staff in its Shanghai and Fuzhou offices, while continue to keep the lights on international gaming projects.
• Perfect World, the official operator of Dota 2 in mainland China, had already streamlined hundreds of employees in the fourth quarter of 2021.

Context: The last batch of games approved by the NPPA were granted licenses last July, seven months ago. The Chinese gaming industry was hit with a similar freeze in 2018, when new game approvals were stopped for nine months.

• Companies like Tencent and Netease were summoned to talk with regulators last year about “profit-making practices” as new regulations restricting playtime for minors were implemented. 
• Last September, new rules restrict minors playing video games to just one hour on Fridays, Saturdays, and Sundays, as well as on holidays.

In the first week of 2022, China’s main internet regulator, the Cyberspace Administration of China (CAC), announced a revised version of its cybersecurity review regulations. These little-known regulations played a key role in crippling Didi’s listing on the New York Stock Exchange last summer and, starting next month, the revised rules will officially place more restrictions on Chinese companies seeking overseas listings.

Called the Measures of Cybersecurity Review, the then-obscure set of rules was cited by the CAC regulators last July as the basis for launching a security investigation into ride-hailing giant Didi, just three days after its IPO. Specifically, the CAC cited the need to protect national data security and public interest. It also ordered app stores in China to immediately remove Didi’s apps. The regulator pointed to a previous version of the Measures, the National Security Law, and the Cybersecurity Law as the legal basis for the review. 

Didi has since announced plans to delist from the US and is considering a Hong Kong listing. At the time of the publication, Didi is still undergoing the cybersecurity review and its apps remain unavailable on domestic app stores. The Didi investigation initiated an intense period of regulatory moves in China, upending business plans and the stock prices of many Chinese tech giants. 

The revised Measures is due to take effect on Feb. 15. When first released in 2017, the regulations focused on improving the security of hardware and services used in networks, ensuring that regulators had the power to do a “security review” when a matter concerned national security. That version of the law was never put into use, but a revision in April 2020 introduced the concept of “cybersecurity review” and refined the scope of the review. 

This 2020 version was the CAC’s legal basis for the initial Didi review. Less than two weeks after launching the Didi review, the CAC released a draft revision of the Measures requiring deeper scrutiny of companies planning to go public overseas. This version was refined and published on Jan. 4, 2022, becoming the latest iteration of the Measures.   

TechNode examined interpretations of the Measures from Chinese regulators and top Chinese law firms to understand the focus of the Measures and how it might affect Chinese companies seeking overseas listings. All quotes have been translated from Chinese and edited for clarity. 

Hong Kong listings should be easier to pursue 

Several leading Chinese law firms said in public analyses that companies should face an easier cybersecurity review process should they choose to go public in Hong Kong. The Measures will require online platforms which plan to go public overseas and hold information on more than 1 million users to apply for a cybersecurity review. Hong Kong, China’s special administrative region and a hot spot for fundraising, doesn’t count as overseas, so this new rule shouldn’t apply, several attorneys wrote in their interpretations. But companies should look closely at their own businesses and assess whether their activity will affect national security: If so, even a Hong Kong listing could trigger a cybersecurity review.

The dust around the Measures of Cybersecurity Review has settled, its impact on overseas listing
Zhong Lun Law Firm, Jan. 10

Following the expression used in the draft version, the Measures didn’t give a clear definition for what counts as an “overseas listing.” However, listing in Hong Kong is unlikely to be regarded as an overseas listing, considering the standard definition of overseas and the definition given in the Exit-Entry Administration Law. In addition, Regulations on Network Data Security Management (draft for comments and released by the CAC on Nov. 14, 2021) separated the issues of “overseas listing” and “Hong Kong listing” into two different sections under Article 13. Therefore, Article 7 of the Measures shouldn’t include listing in Hong Kong. And companies going public in Hong Kong won’t need to apply for cybersecurity reviews. 

But will all Hong Kong listings be exempt from the review? Not necessarily. But the review process will be different from foreign listings…

According to the Data Security Law, as long as data processing activities affect or may affect national security, a security review will be triggered, which will, of course, apply to Hong Kong listings as well…According to Regulations on Network Data Security Management, the cybersecurity review for Hong Kong listings will be more flexible than the mandatory requirement for foreign listings. For Hong Kong listings, a cybersecurity review will only be triggered when there is a real risk that affects or may affect national security. 

China’s cybersecurity review system has entered a new stage: Interpretation of the new changes in the Measures of Cybersecurity Review
Fangda Partners, Jan. 5

Whether a company goes public in Hong Kong, the US, or other countries, as long as the action has or may impact national security, there is a possibility that the company will be subject to cybersecurity review. Therefore, to judge whether a company faces security reviews when seeking a listing abroad, one should look beyond the requirements in the Measures (online platform operators holding more than 1 million users’ information and planning to go public overseas must apply to the Cybersecurity Review Office for a cybersecurity review), and consider whether the listing would result in “core data, key data or large amounts of personal information being stolen, leaked, damaged, illegally used or illegally spread out of the country.”…

We believe that, with the official release of the Measures, the regulatory attitude on Hong Kong listings is evident. There is no need for companies to actively apply for a cybersecurity review when listing in Hong Kong…However, this exemption does not mean that the company will not be subject to a cybersecurity review. The Measures still give power to members of the cybersecurity review office to initiate a review if the company’s listing abroad affects or may affect national security. 

The focus of China’s cybersecurity reviews 

The CAC said in an interpretation of the Measures that the review focuses on protecting the safety of key data while preventing foreign governments from exerting control and influence over Chinese companies and their data should they choose to go public in a foreign country. This interpretation mentioned that several US laws had given the US government more power to exert control over data in its jurisdiction. It cited laws such as the Holding Foreign Companies Accountable Act, the executive order on Securing the Information and Communications Technology and Services Supply Chain, and the CLOUD Act. Therefore, the CAC hopes the Measures can serve as a defense to limit risks.

Expert Insights | Keeping up with the times and building a defense line for national security reviews
The CAC, Jan. 5

The cybersecurity review system mainly focuses on two types of risks. Firstly, “the risk of core data, key data, or large amounts of personal information being stolen, leaked, damaged, illegally used, or illegally spread out of the country (Article 10.5).” Secondly, during the process of companies going public, there is a risk of foreign governments influencing, controlling, or maliciously exploiting critical information infrastructure, core data, large amounts of personal information, and other cyber information security risks. (Article 10.6)”

The first risk mainly focuses on critical information infrastructure providers using its job of buying network products and providing services to illegally collect, store, utilize, and provide to an overseas entity “core data, key data or large amounts of personal information.” In other words, network products and service providers shouldn’t undertake secret action with collected data, nor should they damage users’ power to access and use their own information. 

The latter focus refers to companies being placed under the jurisdiction of foreign laws after they list abroad. It could allow foreign governments to use legal and judicial power to “exert influence, advocate control, and maliciously use core data, key data, and large amounts of personal information” controlled by network operators, endangering our country’s sovereignty, security, and interests. 

Length of cybersecurity review

“Security and development first”: The Measures of Cybersecurity Review officially released 
King and Wood Mallesons, Jan. 4

The Measures didn’t drastically change the review process and the timeline compared to its draft proposal, apart from updating the special review process from three months to 90 working days. The update aims to unify time calculation in the regulation, but more importantly, extend the timeframe of the special review process.

According to our calculation, the regular cybersecurity review takes up to 70 working days (10 + 30 + 15 + 15). For the special review process, the longest required time can be more than eight months (70 working days + 90 working days + unknown number of extended days).

Despite their various fields and interests, members of the TechNode community agree: The theme for China tech 2021 was regulations. 

Sometimes the regulations came in waves. Sometimes the rules were new, sometimes just newly enforced. There were so many rules that, like a chronic state of pandemic alertness, regulation fatigue set in by year’s end.

There were industry-rattling rules, like the bans on crypto mining and trading in May, soon followed by the data security review that forced Didi’s US delisting. And while we were still digesting that, there was the sweeping ban on the most profitable edtech services. Mostly, though, there were fines. Tech giants like Alibaba, Meituan, and Pinduoduo faced fines large (for anti-competitive practices) and small (for illegal information releases).  

Next came the drastic limits imposed on minors’ playing hours, which could gnaw into game-makers’ profits and dent the world’s largest population of players. Meanwhile, even tech companies never previously enmeshed with virtual or augmented worlds claimed to be ready to soar into the metaverse in 2022. Already making great—frankly, surprising—advances in 2021 were several homegrown silicon chip designers and a handful of the slew of electric carmakers.

In the wake of news of tragic employee deaths and abusive working conditions, the grueling hours demanded by Big Tech got renewed official and unofficial attention in 2021 as well. It turns out that requiring employees to work six days a week, from 9 a.m. to 9 p.m–the so-called 996 workweek–violates labor laws, according to a statement the Supreme People’s Court issued in August. 

Some of the biggest companies quickly declared that they were abolishing weekend work. 

So are tech workers shouldering a lighter workload now? Is Big Tech assuming a kinder, more humane face?  TechNode’s friends and contributors are once again united and …. skeptical. On the upside, at least the ten richest tech moguls, notably PInduoduo founder Colin Huang, got whacked in their pocketbooks this year. 

Wishing you a 2022 minus 996. 

This year’s most surprising development was Didi’s forced delisting, justified by vague references to national security. It’s still unclear on what basis the Cyberspace Administration of China (CAC) believes foreign listings may result in: (1) Chinese firms transferring onshore data overseas or (2) Chinese firms being compelled to hand over data to foreign entities. My best guess is CAC believes there’s a possibility sensitive data may be requested as part of an investigation under the US Foreign Corrupt Practices Act. Whether well-founded or ill-founded, this fear has led to an overhaul of foreign listings.  

—Michael Norris, research and strategy lead, AgencyChina

The regulatory crackdown is a big one, although a long time coming. I think at this point we have become a bit desensitized to the news. I remember just how shocking the Ant Group fiasco was last year. Everyone was talking about it. Now, with everything going on in gaming, education, content, livestreaming, fintech, crypto and more, it seems like a drop in the bucket. During the latest crypto crackdown, I was surprised to see just how much mining was done in government facilities, or under government supervision, despite the May announcement to shut down the industry. 

—Eliza Gkritsi, Asia mining reporter, CoinDesk

In the semiconductor space, it is how strong industry has aligned with the government. In almost every WeChat group I am in, engineers seem to be one hundred percent behind China’s self-sufficiency goals. Whereas before they may have gone along with such drives begrudgingly, there now seems to be a true desire to work together to achieve these goals. One example where this has been a success to some extent is the silicon IP (intellectual property) space where China—through self-development, tech transfer and other means—has become much more self-reliant in CPU, interface, and GPU IP.

—Stewart Randall, director of operations, Intralink

What do you fear or hope for in 2022?

I expect China’s commercial space industry to achieve more encouraging results in 2022. As novelist Liu Cixin wrote in “The Three-Body Problem”: “The future of mankind is either to move towards interstellar civilization, or to indulge in the virtual world of VR all the year round.” Although metaverse hype swept the global tech industry in 2021, it was also fascinating that we witnessed the successful launch of NASA’s James Webb Space Telescope this past Christmas Day. Personally, I hope Chinese space companies accelerate the steps of mankind to spread themselves beyond earth.

—Lu Guanghao, director, Befor Capital

I hope industry players can work together to create a unified standard for intelligent driving functionalities when it comes to the names, definitions, and driving scenarios, among other things. In the past year, we have seen self-driving companies and electric vehicle makers hyped up automated driving technologies as a unique selling point of their products and services due to the surging demand from customers. 

However, it takes users a great amount of additional time and effort to familiarize themselves with different vehicle systems. Also, as the technology is advancing, there are no industry-wide rules and safety requirements governing the development of automated driving capabilities. 

—Liu Guoqing, founder and CEO of automotive software developer Minieye

My hope for 2022 is that our collective understanding of China’s regulatory activities steps up a gear. In 2021, too many were suckered by the temptation to ascribe a single, all-encompassing narrative to China’s regulatory thrusts. Early uncritical anchoring to a particular analytical frame left market participants blindsided by regulation that didn’t fit neatly within their mental model. If we are to have an analytical frame equipped to consider and make prudent investment decisions within the shifting sands of China’s regulatory landscape—particularly its views on competition and market irregularities—we must do better than “Well, it’s all about taking down Alibaba” or “Well, it’s all about taming the private sector” or “Well, it’s all about semiconductors” or “Well, it’s all about reducing inequality.”

—Michael Norris, research and strategy lead, AgencyChina

US efforts to decouple China from the global economy are meant to weaken and isolate China’s technology sectors to some extent, but technology really does not follow any political boundaries. For Chinese enterprises, a key initiative would be to better utilize the research and development resources from the rest of the world and be more engaged in the global innovation community. 

Meanwhile, China will grow more innovative and more resilient in its long-term development of advanced technologies and the future looks very rosy for those startups in frontier sectors in the next several years. With the launch of the Beijing Stock Exchange in November, innovative Chinese startups will have more access to raise capital at home, while more Chinese-born scientists are expected to bring their expertise home from abroad. 

—Lu Shengyun, former partner with Simon-Kucher & Partners

I fear VCs that have been surprisingly patient to date will want to see returns on their semiconductor investments here in China towards the end of 2022. A chip takes 18 months to two years to design and get to market, so if they are not seeing returns–if these chips do not sell, miss deadlines, or struggle with performance or with bugs–then we could see some semiconductor startups fail. There is a lot of competition out there: over 20,000 chip-related companies and now over 2,800 chip design companies in China. Many companies are on thin margins, if any at all.

—Stewart Randall, director of operations, Intralink

Are Chinese tech giants becoming more humane workplaces? Or more socially responsible neighbors?

As we approach the one-year anniversary of the tragic deaths of two Pinduoduo employees in the same week, I don’t believe China’s tech giants have turned the page on excessive work hours. The collaborative “Worker Lives Matter” spreadsheet, originally published in October, suggests that overwork is commonplace and confirms Pinduoduo employees have the most grueling work hours among the tech giants.

—Michael Norris, research and strategy lead, AgencyChina

They certainly want to make it look that way, but to what extent it is an accurate depiction of reality, I don’t know. I am worried that better work-life balance might actually translate into layoffs. 

—Eliza Gkritsi, Asia mining reporter, CoinDesk

Although the “996” work schedule has been banned, it does not seem that the workload on employees has been reduced. Therefore, this particular policy has meant a reduced salary (as no longer paid double on Sundays), and yet a similar total number of working hours. Hopefully, this is simply the “adjustment period” and the companies will adapt to a non-overtime work culture. But for now, there has not been a great shift. 

—Capucine Cogne, China tech-watcher in Chengdu

As we’ve seen, the Chinese government brought two big policy shifts in the country’s tech space over the past year: strengthened policy support to build its own core technology, as well as the tightened regulation against internet giants. I believe “tech for good” will be the main theme in the industry for a while in the future.

—Lu Guanghao, director, Befor Capital

China’s top market regulator introduced Friday a draft rating system for Chinese internet companies in an attempt to define their services and corresponding responsibilities. 

Why it matters: China is continuing to beef up efforts to regulate the internet by establishing an oversight framework for its technology sector; the proposed rating system follows numerous penalties this year for offenses ranging from monopolistic practices to data breaches.

READ MORE: China’s tech giants aren’t ‘immune’ to antitrust anymore

Details: The State Administration for Market Regulation (SAMR) on Oct. 29 issued for public comment draft guidelines for a rating system for Chinese internet platforms that includes platforms’ future responsibilities. 

• The Chinese market watchdog will classify internet platforms into six categories according to industry, namely online sales, life service, social entertainment, information, financial services, and computational applications.
• The platforms are further classified into super, large, and medium-and-small based on their user scale, business type, and capacity.
• The regulator defines super platforms as those having more than 500 million annual active users, a wide range of business types, and a market value of more than RMB 1 trillion ($156 billion). The description applies to tech giants such as Alibaba, Tencent, ByteDance, and Meituan.
• Large platforms are defined as having more than RMB 50 million annual active users and a market valuation of more than RMB 100 billion. The draft doesn’t give specific benchmarks for medium and small platforms, only referring vaguely to them as having “certain” users and market caps, among other criteria.
• Super platforms are expected to uphold more responsibilities by playing a leading role in promoting fairness in competition, opening up their ecosystems, securing data, developing risk management, and fostering innovation.
• The concept of a “super platform” will be “conducive to deepening the understanding of antitrust issues and addressing the balanced development of platforms,” according to SAMR.
• The public comment period runs until Nov. 8. SAMR gave no indication when the rules would go into effect.

Context: The total value of Chinese internet platforms with a market cap greater than $1 billion increased from $770.2 billion in 2015 to $3.5 trillion in 2020, with an average annual compound growth rate of 35.4%, according to data from the China Academy of Information and Communications Technology.

• China’s antitrust crackdowns this year have punished such super platforms as Tencent, Alibaba, and Meituan.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode, the guys are joined by South China Morning Post’s Josh Ye to discuss China’s gaming industry. They go over recent regulations, misconceptions, and whether Chinese gaming firms have a leg up in the future of the “metaverse.” James and Ell also briefly discuss Luckin Coffee, Evergrande, and antitrust regulations.

To read more of Josh’s work on gaming in China and much more, check out the Pro Edition of SCMP’s 2021 China Internet Report.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Josh Ye – @TheRealJoshYe

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode, the guys are joined by tech founder and financial blogger Ming Zhao. They discuss the broader context of Evergrande’s growth and collapse, and what this means for the broader Chinese economy. Topics include China’s balance-sheet expansion, off-balance-sheet lending, and past instances of heavy leverage and collapse for Chinese firms.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Ming Zhao – @fabiusmercurius

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode, the guys are joined for the second time by John Artman, tech editor at the South China Morning Post. They go over some of the SCMP’s 4th annual China Internet Report released recently, and talked about the four areas of China tech regulations: antitrust, fintech, data security, and cryptocurrency. They also go over China’s recent crackdown on overseas IPOs and what that means for overseas investors.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• John Artman – @knowsnothing

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China’s top executive body published a new regulation to protect critical information infrastructure on Tuesday, which is likely to bring stricter cybersecurity oversight to companies in a wide range of sectors, including tech. 

Why it matters: In July, regulators initiated one of the nation’s first cybersecurity reviews of ride-hailing giant Didi, citing regulations indicating Didi was treated as a critical information infrastructure operator. The new regulation provides detailed definitions of what would qualify as critical information infrastructure (CII), and the responsibility and obligations of businesses treated as critical information infrastructure operators (CIIOs). 

• Chinese tech companies need to know whether they are CIIOs, said Calvin Peng, a senior partner at Jincheng Tongda & Neal law firm. Companies classified as CIIOs should expect much stricter regulatory oversight, especially regarding national security matters, Peng added. 
• Companies have little say when it comes to deciding whether they would qualify as CIIOs, Peng said. Peng’s law firm has seen some regional Chinese government agencies start reviewing companies to determine if there are CIIOs in their region as early as June 2019. 

Details: The regulation defines critical information infrastructure as essential network facilities and information systems used in industries such as public communication, information services, energy, transportation, water conservancy, finance, public services, e-government, national defense science and technology, as well as other industries that would seriously endanger national security and public interests if their data was leaked or the systems get damaged. 

• The central government “attaches great importance to the protection of critical information infrastructure,” Chinese government agencies said in a press conference (in Chinese) on Tuesday. “Critical information infrastructure is the central nervous system of economic and social operations, and it is the top priority of network security,” it said (our translation).
• CIIOs must conduct security examinations and risk assessments every year, said the regulation published (in Chinese) on Tuesday. Peng said companies that may not be classed as CIIOs at first could be classified later on as their businesses expand and change. 
• Companies should prioritize purchasing “secure and reliable network products and services,” said the regulation. Operators need to pass a cybersecurity review before they buy any network products and services that could affect national security, it said.
• The regulation takes effect on Sept. 1.

Context: The regulation comes as Beijing pushes to protect critical data and develop a new economy driven by government-led data exchanges and data marketplaces. The nation has set up multiple “data exchanges” to trade data ranging from a collection of adult faces intended for AI training to voice data collected from mobile phones, TechNode recently reported.

• The country in June passed a comprehensive Data Security Law, stipulating how data can be used, collected, protected, and developed in China. The law, as well as the regulation, will take effect on Sept. 1.

ByteDance is scaling back its online education businesses and laying off half of its in-house Pre-K tutors, according to a report by Late Post (in Chinese) on Thursday. 

Why it matters: ByteDance is grappling with the fallout from recent regulations that impose strict limits on edtech companies’ business operations and financial activities, and completely ban online tutoring for pre-school children. The company is scaling back its Pre-K focused-businesses and focusing more on other sectors such as vocational education.

• The new rules are seen as an attempt to ease pressures on school children, who have suffered from China’s highly-competitive education system, and boost birth rates by reducing living costs for families in the country’s major cities. 

Details: The layoffs affect employees of Dali Education, ByteDance’s standalone edtech brand that runs the short video giant’s education products, including Pre-K education platform Guagua Long and one-on-one English tutoring app GoGoKid, Late Post reported. 

• Guagua Long will suspend sales of all its online trial courses by mid-August and lay off  half of in-house tutors by the end of August, according to the report..  
• GoGoKid, the company’s English tutoring app targeting kids up to 12 years old, had been removed from app stores in China on, TechNode found on Thursday. ByteDance will shut down the platform completely, according to Late Post.
• TechNode was unable to independently verify the report. A ByteDance spokeswoman declined to comment on the matter when contacted by TechNode on Thursday.
• Discussions around ByteDance’s layoffs have also circulated this week on professional networking platform Maimai. Maimai user Kunlun Dizi, who identified himself as an employee of Dali Education, said he had been laid off.

Context: In an internal meeting held in June, Chen Lin, CEO of Dali Education, said that the company management is “very confident and patient” about its education business and will continue to invest without any layoffs, according to Chinese media outlet Pingwest.

• Chinese edtech giants including Zuoyebang and Yuanfudao are also rumored to be laying off staff, as Chinese officials tighten regulation governing the private tutoring market.
• In October 2020, ByteDance launched edtech brand Dali Education to host all its education businesses. The unit had 10,000 employees after launch.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode, the guys are joined by Kendra Schaefer, partner at Trivium China and head of the firm’s tech practice. They dig into the ever-evolving saga at Didi, whose decision to go through with a US IPO against Beijing’s wishes has brought about waves of regulatory wrath against the ride-hailing and mobility giant. Kendra’s insights are helpful for investors, analysts, or anyone hoping to understand the new rules of the road for China’s tech firms.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Kendra Schaefer – @kendraschaefer

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

On Saturday, China’s top market regulator ordered Tencent to end exclusive music licensing deals within 30 days from Saturday, writing that the action was “the first case” of “necessary measures to restore market competition” in a Saturday statement (in Chinese).

Why it matters: The punishment may create openings for other music streamers in China. And the government says it is only the first.

Details: The State Administration for Market Regulation (SAMR) fined Tencent RMB 500,000 ($77,100) for violating market concentration rules with a 2016 acquisition of China Music Corporation. The regulator said that Tencent “illegally concentrated a market,” citing China’s Anti-Monopoly Law. 

SAMR said the deal gave Tencent control of more than 80% exclusive music libraries in “related market share,” allowing the company to “eliminate and restrict competition.” 

Tencent wrote in an online statement the same day that it will “comply with the regulator’s decision” and “contribute to healthy competition in the market.”

READ MORE: The Chinese gaming startup outperforming Tencent overseas

Alibaba strengthens its local services to combat Meituan. Troubled retailer Suning gets a $1.36 billion bailout from Alibaba and a provincial government. Chinese regulators to increase penalties for misleading price practices. Nayuki Tea goes public in Hong Kong. Logistics firm Yunquna raises funds to expand overseas network. 

Alibaba gets competitive with Meituan

E-commerce giant Alibaba has reconstructed operations to establish a new life services division. The new division includes mapping platform AutoNavi, online travel agency Fliggy, food delivery app Ele.me, and local services connector Koubei. The move will help Alibaba to compete with Meituan, a local service giant in China. (SCMP)

Suning bailed out

Troubled retailer Suning will receive an RMB 8.8 billion ($1.36 billion) lifeline from an investment group that includes Alibaba, rivals Midea and Haier, and the Jiangsu provincial government. The coalition will hold 16.96% of equity and Suning’s founder Zhang Jindong will lose majority control of the company. (Bloomberg)

No more price manipulation

China’s top market regulator further restricted e-commerce platforms from manipulating prices on their platforms price manipulation . In a July 2 directive, the State Administration for Market Regulation specified that it will increase penalties for price dumping, price hikes, and disregarding government price controls. (Government statement, in Chinese)

Nayuki Tea IPOs

Nayuki Tea, a chain that offers modern tea-based drinks, raised HK$4.84 billion ($623 million) in a Hong Kong IPO on June 30. The tea store, which now also sells coffee-based drinks, competes with rivals like fruity beverage chain HeyTea and coffee chain Luckin. The company’s shares fell more than 10% on the morning of its first trading day. (Yicai, in Chinese)

Yunquna to expand overseas network

Chinese logistics firm Yunquna announced on June 29 that it had raised $150 million in its Series D. Citic Capital led the investment and China Renaissance served as the financial advisor. The company said it will use the funds to expand its overseas destination ports and improve shipping and delivery speed. (Caixin Global)

Luckin discloses fraud details

Chinese chain store Luckin Coffee released an amended 2019 financial statement on June 30, the first filing since it admitted fraud in 2020. The company booked a loss of $454 million in 2019 and inflated revenue by nearly RMB 2.12 billion. (TechNode)

China’s top legislature on Thursday passed a comprehensive data security law that stipulates how data is used, collected, protected, and developed in China. The law will affect a broad range of industries, including tech, telecommunication, transportation, finance, health, and education.

Why it matters: China is moving from one of the world’s least regulated data environments to one of its most. In the past year, China has drafted several laws to regulate tech firms’ collection and use of personal data and limit anti-competitive practices.

• The law also creates a legal basis for the state to request data held by China’s powerful tech companies.

Details: The Data Security Law of China focuses on data that is high-level and crucial to national security, calling it “core state data,” according to a full text of the law published by state news agency Xinhua (in Chinese).

• Formulating the Data Security Law is “a necessity” to safeguard national security, Xinhua wrote in a commentary (in Chinese) on Friday. “Data is a basic strategic resource of a nation. Without data security, there is no national security,” it wrote.
• The law directs central and local governments to oversee “core state data,” a category that includes data held by private firms. If companies are found to have mishandled such data, they can face fines between RMB 2 million ($313,200) and RMB 10 million or be ordered to shut down. 
• The law also directs the central government to define a category of “important data.” Companies found sending “important data” to entities overseas can be fined between RMB 100,000 and RMB 10 million, or have their business licenses revoked.
• Companies are required to “cooperate” when authorities ask to inspect their data for “national security or criminal investigation” purposes. Those data inspection requests are subject to “strict examination and approval,” the law said.
• The law prohibits Chinese companies and individuals from providing data stored onshore to overseas judicial bodies or law enforcement agencies without Chinese government approvals.
• The law takes effect on Sept 1.

Context: The new data security law is a step forward in China’s push to keep important data within its borders. The 2017 Cybersecurity Law requires firms to store data collected in China locally.

• Last October, the nation proposed a draft of the Personal Information Protection Law, which resembles the European Union’s General Data Protection Regulation (GDPR). The GDPR is a respected example for such regulation worldwide. In January 2020, China proposed an overhaul of its Anti-Monopoly law to rein in an increasingly powerful tech sector.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

It’s another earnings episode, so the guys welcome Michael Norris back to the show. They discuss the quarterly earnings of Baidu, Tencent, and JD, while also answering questions from listeners. Key topics include what a new era in tech regulation means for stocks.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Michael Norris – @briefnorris

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

ByteDance, the owner of the viral video platform TikTok and Douyin, briefly attacked Chinese tech giant Tencent in a long, strident online post on Friday. The tussle between two Chinese tech heavyweights comes amid increased governmental scrutiny on anti-competitive behavior in the tech sector.

ByteDance criticized Tencent’s practice of blocking links to its products on messaging platforms WeChat and QQ in an online post, attaching a 59-page PDF file chronicling the blocking activities in the past three years. The company has since deleted the post and the file.

“More than 49 million people were stopped from sharing Douyin content to WeChat and QQ every day on average,” said ByteDance’s post. The company didn’t specify how they calculated the number.

ByteDance complained that Tencent has been blocking links to its short-formed video apps Douyin, Huoshan, and Xigua, for three years, “affecting more than 1 billion users.”

ByteDance’s high-profile complaint came as Chinese regulators crack down on tech companies’ anti-competitive behavior. ByteDance could benefit if regulators take action against Tencent’s link blocking practice. The company competes with Tencent on multiple fronts, including news aggregation and online games.

In March, Reuters reported that China’s top antitrust regulator was looking into Tencent’s WeChat for monopolistic practices, and how the popular messaging app had possibly squeezed smaller competitors.

ByteDance declined to comment on the situation when reached by TechNode. Tencent also declined to comment. Chinese media saved a copy of ByteDance’s post.

Widespread practice

Tencent is not the only company that tries to stop users from clicking into rival ecosystems. Tencent has banned links of ByteDance’s Douyin and productivity tool Feishu on WeChat. It also prohibits users from opening links to e-commerce giant Alibaba’s Taobao and Tmall online marketplaces.

Alibaba also bans (in Chinese) merchants from listing their WeChat contact information on the platform.

In August, ByteDance’s Douyin said it would ban links to third-party e-commerce sites, including Taobao and Tencent-backed JD.com, on its live-streaming channels in October. However, it also relies (in Chinese) on selling ads with links to those e-commerce sites for its short video feature.

ByteDance wrestles with Tencent

ByteDance wrote that the post was a response to a comment made by Tencent executive Sun Zhonghuai last Thursday at an industrial forum. Sun compared short-form videos to food for pigs.

Sun, a Tencent vice president and chief executive officer of the company’s online video department, said short-video apps were feeding users vulgar content. “Because the personalized recommendation [algorithms] are so powerful, if you like pigswill, all you see is pigswill, nothing else,” Sun said.

Sun is responsible for Tencent’s video-streaming platform Tencent Video and short-video app Weishi, according to Chinese media reports.

ByteDance defended short videos in the post, saying Sun’s remarks were “arrogant and unfair.” “As a new form of communication, short videos help countless ordinary people record and share their lives, allowing more people to see a larger world.”

ByteDance also hinted in the post that Tencent’s criticism of short videos was insincere, pointing out that Tencent had tried various times to make short video apps while calling them “pigswill.”

In the attached PDF file (in Chinese), ByteDance listed evidence that Tencent had blocked links to ByteDance’s short-video apps Douyin, Xigua, and Huoshan on WeChat, while allowed Tencent-backed Kuaishou and Weishi to share links on the social media platform.

The file mainly consists of annals of news coverage of Tencent and ByteDance’s conflicts from 2018 to 2021 and ByteDance’s summary of those events.

“We see this pamphlet as a standing reference to the [link] blocking and monopoly. It always reminds us that time may erase memories, but time cannot erase facts,” wrote ByteDance in the now-deleted post (our translation).

Suing companies for link blocking

ByteDance sued Tencent in February for blocking Douyin’s content on WeChat and QQ, citing China’s Anti-Monopoly Law.

Bytedance accused Tencent of violating Anti-Monopoly Law and “misusing a market-dominant position,” “excluding and restricting competition.”

The lawsuit is still awaiting a first hearing date at the Beijing Intellectual Property Court. Tencent has requested (in Chinese) the case be transferred to a court in Shenzhen, where the company is headquartered.

In 2019, a Chinese lawyer sued Tencent for blocking Alibaba’s Taobao links. He dropped the case in early 2020 for “a lack of evidence.” But since then, anti-monopoly enforcement has taken off.

Zhang Zhengxin, the lawyer who sued Tencent, told TechNode in December that his odds to win the case would “increase by a lot” if the case had gone to court then.

In December, China fined a batch of tech companies over antitrust violations for the first time. A month before that, China’s top antitrust regulator proposed new guidelines targeting anti-competitive behavior to include internet companies.

Shanghai’s market watchdog has imposed an RMB 500,000 ($77,000) fine on Alibaba-backed operator of food delivery app Ele.me for misleading consumers on prices and food safety, according to an announcement Monday.

Why it matters: This fine is the latest move in a broader crackdown on the country’s biggest internet companies, across sectors and for different violations.

• The amount is trivial for the company, but it’s likely to take it as a warning.
• The fine on the Alibaba-backed company comes as its rival Meituan is still under antitrust investigation.

Check out TechNode’s Techlash Tracker for an overview of the crackdown.

Details: Shanghai’s market regulator announced Monday April 30 fines totaling RMB 500,000, for giving misleading pricing about its services and hosting non-qualified merchants.

• From July to August last year, Ele.me promoted within its app special deal zones offering up to 90% discounts to lure customers. An investigation found that not all the deals listed in the promotional zones offered the low discounts the app promoted.
• The regulator imposed an RMB 300,000 fine under China’s Price Law.
• At the same time, the company was penalized for listing 62 unlicensed restaurants in Tianjin.
• For failing to fulfill its responsibility to monitoring merchant qualifications, Ele.me received another RMB 200,000 million fine for violating China’s Food Safety Law.
• Regulators said the Shanghai-based firm did not request a hearing after receiving the notice on April 26.
• Ele.me could not be reached immediately for comment.

Context: The fine comes amid a wave of penalties for large and small platform companies.

• China’s top antitrust regulator recently issued a record RMB 18.2 billion ($2.8 billion) fine on e-commerce giant Alibaba for antitrust practices.
• Sherpa, a Shanghai-based English-language food delivery app, was fined RMB 1.2 million in April for abusing a monopoly position in English-language food delivery.

Chinese online retail conglomerate Alibaba posted mixed results for the quarter ended March 31, reporting better-than-expected revenue and net losses for the first time since going public as a result of its record-setting $2.8 billion antitrust penalty.

Why it matters: Regulation was a major uncertainty for Alibaba following a probe of the company launched late last year. With the penalty issued in April, the e-commerce giant is now seeking to move forward and focus on business such as long-term rivalries from competitors like JD.com and Pinduoduo, which recently overtook Alibaba in user numbers.

Details: Alibaba is planning to invest all of incremental profits in the coming year into core strategic areas, the company’s management said in a call held Thursday with analysts.

• The company reported an operational loss of RMB 7.7 billion after accounting for a $2.8 billion fine levied by Chinese market watchdog in April. The net losses attributable to ordinary shareholders was RMB 5.48 billion.
• Alibaba posted RMB 187.4 billion ($28.6 billion) revenue for the quarter ended March, a 64% year-over-year increase compared with RMB 114.3 billion in the same quarter a year ago. Revenue beat the high end of analyst estimates compiled by Yahoo Finance.  
• Revenue for fiscal year ended March jumped 41% year on year to RMB 717.29 billion, driven by growth in the core commerce businesses as well as Alibaba Cloud, Wu said in a statement.
• Sun Art, the supermarket chain Alibaba acquired for $3.6 billion in October, was a major contributor to revenue growth, contributing RMB 42.9 billion or around 6% of the total annual revenue.
• Priorities include technology innovation, merchant solutions, user acquisition and experience enhancement, supply chain, and infrastructure, company executives said without specifying the expected investment sum.
• Chief financial officer Maggie Wu encouraged investors to look at the long-term profit when responding to concern about profits in the coming year. The company promised that its investments will be “highly targeted and disciplined.”
• Tiger Brokers analyst Mark Meng said that for Alibaba to deal with the impact from the regulators all in one quarter was positive. “There’s no need to be pessimistic given Alibaba’s business growth is still robust and the penalty, though hefty, is one-time and small in proportion to Alibaba’s overall quarterly revenue” (our translation).
• Growth in Alibaba Cloud, once a reliable engine for the company, is losing momentum. Revenue of Alibaba’s cloud business increased only 37% year-on-year, slowest pace since 2014. Wu attributed the drop to the loss of a “top-class customer in the internet industry” without naming the firm.
• Meng said that the former client was TikTok, which was forced to end its partnership with Alibaba when it began facing scrutiny from the US.
• Alibaba forecasted that revenue for the year ending March 2022 will rise at least 30% year on year to exceed RMB 930 billion.
• Alibaba shares fell 6% in New York trading on Thursday, while its Hong Kong shares dipped 5% Friday morning.

Context: China’s top antitrust regulator issued a RMB 18.2 billion ($2.8 billion) fine to e-commerce giant Alibaba on April 10 for anti-competitive practices including forced exclusivity. 

READ MORE: What is ‘forced exclusivity’? And why did it get Alibaba fined $2.8 billion?

Regulation and fines

• Regulators on Monday slapped Chinese edtech rising stars Zuoyebang and Yuanfudao with RMB 2.5 million ($389,000) penalties each for unfair competition. The startups were found to use misleading marketing tactics, offer nonexistent discounts, and making false claims to lure consumers. Other edtech sector companies were previously dealt smaller penalties. Zuoyebang is considering a US IPO. (TechNode)
• Apps by Alibaba, Baidu, and Tencent were among 84 mobile security and online lending platforms singled out by China’s top internet regulatory body for invasion of privacy and unwarranted collection of user data. Companies mentioned have 15 days to change their practices before further action will be taken. Regulators named in March an earlier batch of 33 apps found to infringe on consumer privacy. (SCMP)

Meituan troubles

• Food delivery giant Meituan’s shares fell by 9.8% in Hong Kong on Monday before closing 7.1% down, wiping $16 billion from its market cap. The sudden drop occurred after Meituan co-founder Wang Xing posted a Tang dynasty poem on the Fanfou social media platform criticizing book burning. The since-deleted post comes at a politically sensitive time, after Chinese regulators opened an investigation into Meituan on April 26 for antitrust violations and torpedoed fintech firm Ant Group’s dual IPO in November following public criticism of the “over-regulated” fintech industry by founder Jack Ma. (Bloomberg)
• Shanghai’s Consumer Council met with Meituan on Monday, criticizing the lifestyle platform for misleading content, refund issues, and its delivery process for perishable foods. According to the Council’s statement, Meituan said that the company will conduct a self-evaluation and promptly submit a rectification report. (Shanghai Consumer Council, in Chinese)

IPOs and funding

• Chengxin Youxuan, the grocery division of ride-hailing leader Didi, intends to spin off and file for an IPO as soon as next year, according to company executives. The platform is one of many recent initiatives by China’s tech giants to claim a share of the rapidly expanding community group-buying market. (TechNode)
• JD Logistics’ latest Hong Kong prospectus showed that its losses in 2020 widened to $620 million from $340 million in 2019. The JD.com affiliate received approval on April 29 from the Hong Kong stock exchange for a public offering, through which it aims to raise $4 billion. (KrAsia)
• Online grocery delivery platform Dingdong Maicai has secured $330 million in a “D-plus round” led by SoftBank Vision Fund, according to its advisor Cygnus Equity. Dingdong Maicai has raised more than $1 billion this year including a $700 million D round it received in April. (TechNode)
• Cloud storage and data analytics platform Qiniu has filed for an IPO on the Nasdaq exchange. Alibaba, by way of Taobao China, is the largest stakeholder with a 17.7% stake. The company is trending towards profitability, showing a 30% increase in revenue since last year. It’s the leader by market share among companies following the platform-as-a-service model, and a key player in China’s flourishing cloud services economy. (Nikkei Asia)

Suning Group

• Chinese retailer Suning Group announced on May 6 that the company had signed an agreement for the creation of a New Retail Development Fund with the state-owned Assets Supervision and Administration Commissions of Jiangsu Province and Nanjing City. According to the statement, the RMB 20 billion public-private fund will be used to invest in Suning’s businesses and assets in new retail. (Suning Blog)

Amazon pulls Chinese products

• At least 11 top Chinese sellers, including gadget brands Aukey and Mpow, have disappeared from the Amazon platform for questionable marketing tactics such as manipulating user reviews, according to e-commerce research film Marketplace Pulse. The suspended accounts contributed over $1 billion to Amazon’s GMV. Chinese merchants account for 75% of new sellers on Amazon in January, seeing it as an opportunity to expand overseas amid domestic competition. (TechCrunch)

Chinese regulators have imposed the maximum penalty on Zuoyebang and Yuanfudao, two of the country’s most valuable edtech startups, for unfair competition amid a broader crackdown on its biggest internet companies.

Why it matters: Beijing is expanding its scrutiny of tech firms to the online education sector following extensive fines on various segments from e-commerce to community group-buy platforms.

• The penalty comes on the heels of the fines levied on four major edtech platforms—TAL Education-backed Xueerxi, GSX Techedu, Koolearn Technology, and Gaosi Education—for deceptive pricing practices.

Details: The State Administration for Market Regulation (SAMR) said in a statement (in Chinese) on Monday that it had imposed RMB 2.5 million ($389,000) fines each on Zuoyebang and Yuanfudao. The regulator also issued regulatory warnings to the startups, two of China’s most valuable (in Chinese) online tutoring platforms.

• The investigation showed Zuoyebang fabricated information about its teachers’ work experience, falsified user reviews, and gave misleading details about its services in order to boost orders.
• The Alibaba-backed company fraudulently claimed on its website to be a partner of the United Nations, according to the notice.
• SAMR pointed out that both of the two companies falsely advertised discounted prices to boost orders.
• A Zuoyebang promotional campaign on its own app and official stores on Tmall and JD markets offered a discount of around 21% off of online courses priced up to RMB 3,280 (around $510). Yuanfudao also lured customers with special deals, such as offering RMB 399 package courses for RMB 9. Investigations showed that no transactions at these prices had ever been recorded.
• Zuoyebang confirmed news of the penalty with TechNode, and pledged full compliance with the order and rectification of improper marketing behavior and misleading pricing.
• A Yuanfudao spokeswoman said that the company had already started inspecting various channels and had removed all the improper marketing banners.

Context: Investors have rushed into the online education sector, which has seen a boost during the coronavirus pandemic.

• Yuanfudao, focused on the K-12 age group, raised over $3.5 billion in 2020 from investors including Tencent, DST Global, and Jack Ma-backed Yunfeng Capital.
• Rival Zuoyebang received a combined $2.35 billion funding last year from investors including Alibaba, Tiger Global Management, SoftBank Vision Fund, and Sequoia Capital China.

Fintech giant Ant Group’s troubles began in November 2020, when Chinese regulators suspended its $34 billion IPO two days before a dual listing in Shanghai and Hong Kong. Beijing made it clear that the Alibaba-owned company would not be able to list in its current form.

China’s central bank then announced in December 2020 that it had summoned Ant for a meeting with financial regulators led by the People’s Bank of China (PBOC), and by February, the fintech platform had reportedly reached a deal to restructure.

READ MORE: Deciphering the Ant Group rectification plan

But what are observers saying in Chinese?

Searching for comment on the Ant rectification plan, TechNode found very few independent analyses. But within the range of commentary available, we saw dramatic predictions that included Ant itself being broken up, and Ant-like rectification plans being imposed on a broad range of big tech fintech platforms. 

The key question:

Has the other shoe dropped?

Ant’s restructuring will be costly, and complicated. But maybe the announcement of a plan means that at least it can move on, some commentators write.

Latest Caixin Weekly | Ant’s restructuring begins
Caixin, April 18

Half a year after braking hard on its IPO, the shoe has basically dropped for Ant Group’s restructuring.  

Chinese finance magazine Caijing Tianxia agrees in “Summoned for a second time, Ant is not the same Ant,” citing a 9% jump in parent company Alibaba’s stock price on April 12 as a reflection of the market’s belief that the uncertainty is now resolved. Caijing Tianxia writes that the market has now reversed the previous drop in Alibaba’s share price when Ant Group’s IPO was halted in November 2020. 

But another expert warns that while restructuring Ant as a financial institution will put it more under Beijing’s control, the action by itself is too vague to determine the future of the company.

Summoned for a second time, Ant is not the same Ant
Caijing Tianxia Weekly, April 13

“Currently, it is still too early to say the shoe has dropped,” [Chinese Academy of Social Sciences] senior financial researcher Zhang Ming told Caijing Tianxia. This means that in the future Ant will be considered a financial institution, the core purpose being one of control, but the specifics of how supervision will land still require the development of further rules. 

What’s next for Ant?

Zhang also makes a more dramatic prediction: he argued that Ant will most likely need to be broken up in order to comply with national regulations.

“Ant currently has only determined an overall direction. Whether it will specifically be broken up in the future or not is still very difficult to tell. But without being broken up, supervision would be very difficult to implement.” Zhang Ming said that splitting the asset management business from the investment banking subsidiary is already a sort of correction. If Ant does not continue breaking apart, it will then be very difficult to really fit into the supervision framework of the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission. Would it be the Banking and Insurance Regulatory Commission or the Securities Regulatory Commission that would be responsible? When banks make missteps, the Banking and Insurance Regulatory Commission issues a notice. But if Ant were to be placed under supervision, who would issue the notice? It probably won’t continue being a ‘special affairs’ case.”

—Caijing Tianxia Weekly, April 13

Ant restructures, businesses that annually create over RMB 160 billion in revenue will all be affected
Gong Fangyi
Late Post, April 13

Gong Fangyi, in WeChat public account Late Post, predicts that regulations will cause Ant Group’s money market fund Yu’ebao to shrink in size, limiting the company’s earning potential. Gong argues that restrictions on Yu’ebao will have consequences for the rest of the company, because it is the basis of the company’s cash flow, a platform allowing Ant to offer financial services to users and to turn a profit off of unused cash stored in Alipay.

The scale of Yu’e bao has also been limited by regulations. Yu’e bao is the basis of Ant’s financial flow. Hundreds of millions of Alipay users put their unused money in Yu’e bao where they begin investing, and then, they purchase funds, investment products, and use Huabei.

Who’s next?

It’s clear to all commentators that Ant isn’t just Ant: it’s a precedent. Pan mentions both fintech and the broader platform economy in his interview. How far does the precedent stretch?

Paidai argues that fintech is part of the financial sector. Like many articles, it quotes a key line phrase from Pan: platform companies “should not make technology a ‘camouflage’ for illegal activities.”

Ant Group summoned again, things are too difficult for Alibaba
Zhang Xiaomang
Paidai, April 13

In recent years, fintech and the platform economy have rapidly developed. This has played an important role in improving the effectiveness of financial services, in promoting the spread of beneficial aspects of the financial system, and in lowering transaction costs. At the same time, because [fintech] has the specific characteristics of crossover operations, mixed-industry operations, and cross-regional operations, the rate at which risk spreads is higher, the surface area is greater, and the negative spillover effects should then be stronger. This has created new challenges for financial supervision.

[Regulators] meet with Ant Group again, what serious signals have been released?
Xia Bin
The Country is a ‘Through Train’, April 12

A WeChat account operated by the state-owned China News Service, also writes that Ant Group’s restructuring sets a precedent for the financial sector.

With an eye for the long term, while taking into account the current situation, making up for shortcomings, strengthening weaknesses, it should be said that the idea that all financial activities will be under financial supervision is very clear.

Pan’s answers this time also emphasize that the Financial Management Department will continue the principles of “fair supervision” and “strict supervision.” In other words, for any business that even touches upon financial services, the Financial Management Department will certainly implement strict supervision.

But it goes farther, writing that platform businesses as a whole should follow Ant. After describing monopolistic tendencies in the fintech industry, the article says that the same issues exist in the broader platform economy.

This list of problems [in fintech] has commonalities with other platform businesses. Promoting the issue of self-evaluation in platform companies, promptly and proactively making changes is also the deep purpose in [Pan Gongsheng] answering reporters’ questions.

Experts interviewed by Caijing Tianxia predict that the fallout from Ant would affect much of Big Tech, noting that most of the major tech empires have mimicked at least some of the behaviors that got Ant in trouble. Director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences Yin Zhentao told Caijing Tianxia that because Ant Group opened a can of worms as the leader, other e-commerce and social networking platforms that have gotten involved in fintech will also need to change.

As a pioneer in internet fintech, Ant can be said to have gotten off to a bad start. Up to the present, digital payment and credit have almost become the standard products for internet companies getting involved in the financial sector, which include Tencent, JD.com. Yin Zhentao believes that after this time of Ant Group being summoned, other internet companies will also implement the corresponding changes.

—Caijing Tianxia Weekly, April 13

Economist Song Qinghui also told Caijing Tianxia that Ant is not the only company with unfair market practices as identified by Chinese regulators, naming other tech majors with fintech plays. 

Ant Group undoubtedly is a pioneer in internet fintech. After it, giants such as JD.com, Tencent, Xiao Mi, Meituan, Baidu, 360 are all lining up. They all want to take advantage of their user streams and get into financial services. Famous economist Song Qinghui believes that there exists, at varying levels, issues of disorderly development, unfair competition, privacy issues, and harm to consumer rights in these leading internet companies, which accumulate into quite sizable risks and hidden dangers.  

Song said that e-commerce giant JD.com watched as Ant Group tested the waters first and then followed in its footsteps. Caijing Tianxia added that JD.com-affiliated JD Digits, which has now been folded into JD Technology, changed its mind on going public after Ant’s IPO was halted.  

“Jack Ma crossed the river by feeling for stones. [JD founder] Liu Qiangdong crossed the river by feeling for Jack Ma.” JD Digits, which originally wanted to follow Ant’s model, has now also terminated its plan to go public on the Science and Technology Innovation Board.“

—Caijing Tianxia Weekly, April 13

More shoes

Despite the positive reaction of the market to the release of the rectification plan on April 12, official voices say that Ant Group is still not in the clear. 

Shoes continue to fall, if not for Ant then across its peer group. Most recently, China’s central bank and four other regulatory agencies told leading internet companies, including Tencent Holdings, Didi Chuxing, and JD.com, on April 29 that their platforms should stop provision of other financial services beyond payments. 

For Chinese media, one thing is certain. Regulators have used Ant Group to set a precedent for other tech giants wanting to adopt the company’s lucrative business model of linking various services normally provided by banking institutions with its core payment platform. 

The leading platforms have responded in turn. Almost 36 of China’s internet companies, including ByteDance, Baidu, Pinduoduo, and JD.com had pledged to comply with the country’s antritrust laws by April 14, two days after Ant Group met with regulators and four days after parent company Alibaba was fined a record-breaking RMB 18.2 billion ($2.8 billion).

Despite heightened US-China trade tensions and the COVID-19 pandemic’s disruptive effects on the global economy, mergers and acquisitions continue. The US government’s Committee on Foreign Investment in the United States (CFIUS), however, has steadily increased its scrutiny of Chinese investment in US businesses. Recent changes to US laws, including the Foreign Investment Risk Review Modernization Act (FIRRMA), expanded CFIUS’s ability to block investments that it deems a threat to US national security.

Recently, the US government has identified the government of the People’s Republic of China as a significant counterintelligence and economic espionage threat. As a result, CFIUS has increasingly focused on Chinese investment in US businesses, particularly involving sensitive data, critical technology, or critical infrastructure. Due to this emphasis on data and technology, tech companies in particular are exposed to CFIUS risk.

Following the 2018 regulatory changes, CFIUS now may review any minority investment in US businesses that: 

• Produce, design, test, manufacture, fabricate, or develop one or more Critical Technologies;
• Perform certain functions related to Critical Infrastructure; or 
• Maintain or collect, directly or indirectly, Sensitive Personal Data of US citizens.
• The capitalized terms are all defined in the regulations and together are referred to as a TID US Business with TID standing for Technology, Infrastructure, and Data. 

CFIUS may review minority investments in TID businesses if the investment provides the foreign party:

• Access to Material Nonpublic Technical Information;
• Membership or observer rights on, or the right to nominate an individual to a position on, the board of directors (or equivalent); or
• Any involvement, other than through voting of shares, in substantive decision making related to the US company. 

Additionally, CFIUS must be notified of certain transactions. Those involving US businesses that produce, design, test, manufacture, fabricate, or develop Critical Technologies require a CFIUS filing if US regulatory authorization is required to export the Critical Technology to the foreign investor. In other words, a foreign investor must determine if the company’s technology would normally be subject to a US export license. If so, it must notify CFIUS. 

A companion law to FIRMMA requires the US government to review export control requirements for emerging and foundational technologies, which is expected to result in increased license requirements for US exports to China. 

It’s not a ban 

Although risk has increased, Chinese companies can still invest in the United States. In many cases, foreign investment poses no national security risks that would warrant CFIUS intervention. Although the “T” in TID, refers to technology, only a few companies will qualify as TID US businesses that trigger the closest CFIUS scrutiny.  

However, some evidence suggests that FIRRMA may have put a damper on Chinese investment in the US. The 2019 CFIUS report indicates a marked decrease in China-based notice filings, although this also corresponds with an overall decline in Chinese investment in the US amid global economic uncertainty. While the confidential nature of the CFIUS process makes data-gathering difficult, public disclosures of CFIUS matters since 2019 indicate there have been at least 16 filings by Chinese companies. Of those, CFIUS approved six, President Trump blocked one, and the rest either remain pending or there has been no public disclosure of their disposition. Because of the sensitive nature of the information provided to CFIUS, CFIUS does not publicly disclose its decisions; thus, we gathered the above information from corporate disclosures. 

Notably, during the same time, CFIUS clearances that involve “mitigation agreements,” conditions on the deal monitored by the US Department of Justice, have increased. The Assistant Attorney General for National Security, who oversees the process, has indicated that this increase in mitigation measures rather than blocking transactions is likely to continue. He cautioned, however, that investment from companies owned by foreign governments or in countries that are not allied with the US may present trust issues that make mitigation measures unlikely to alleviate national security concerns. 

Given the recent tensions between the US government and the Chinese government, China-based investors may face an uphill battle to convince CFIUS of their ability to mitigate national security concerns, particularly involving acquisitions of TID US businesses. However, this is not impossible. For example, even if the US business involves Critical Technology, the Department of Commerce already may have licensed that technology to China for a particular purpose such that the investment does not create additional risk, or an agreement to restrict use of the technology may be sufficient. Also, it may be possible to restrict access to data or to facilities in a way that sufficiently mitigates risk.

Should you continue to invest?  

With expanded jurisdiction and new mandatory filing requirements, CFIUS risk is greater than ever for Chinese investments in US tech companies. Even when companies may not be required to file with CFIUS, many choose to do so voluntarily to obtain clearance and avoid a future requirement to divest. Obtaining clearance at the time of the transaction matters more than ever because FIRRMA also has provided more resources for CFIUS to review non-notified transactions (transactions that were completed without a CFIUS filing), potentially disrupting the investment.

Investors should consider their goals. For parties not seeking to control the US company, and who are willing to take a passive role or invest as a limited partner with restricted access to sensitive technical information or data, CFIUS risk is much less. It’s possible that CFIUS may not even review the transaction.

Additionally, while FIRRMA enjoyed bi-partisan support, the Biden administration may herald a change in CFIUS policy over time. We are still waiting for appointments to the Treasury Department offices that manage the CFIUS process. Once they are filled, we will have a better sense whether there has been a change in the risk calculation for certain foreign investment transactions.

Chinese companies should evaluate CFIUS risk early to identify the likelihood of any US national security vulnerabilities as well as to determine whether a mandatory filing is required, or whether a voluntary filing would be prudent. Additionally, companies should consider proactive steps to address likely CFIUS concerns, such as investing as a limited partner with no control of the US business, or restricting foreign access to technology or data. With proper planning and collaboration, Chinese tech companies can successfully navigate this complex regulatory framework to make the acquisitions and investments to improve and grow their businesses. After all, CFIUS still approves the vast majority of the transactions it reviews.

May holiday consumption

The Ministry of Commerce will kick off a month-long campaign to increase consumer spending on May 1 in the hopes of boosting economic recovery amid the pandemic. Some 260 e-commerce retailers will participate in the national event including tech giants Alibaba, JD.com, Meituan, Trip.com, and ByteDance. (SCMP)

Meituan, livestream commerce probes

• The State Administration for Market Regulation (SAMR), China’s top antitrust regulator, said in a one-line statement on Monday that is investigating food delivery leader Meituan for “forced exclusivity,” a practice in which platforms force merchants to use only one company’s platform or services. Meituan said that it would cooperate with the investigation. The Tencent-backed platform, along with 33 peers in the internet sector, had previously pledged from April 14 to 16 to comply with SAMR rules. (TechNode) 
• Seven central government agencies including the Cyberspace Administration of China, the Ministry of Public Security, and the Ministry of Commerce also announced new rules on April 23 governing livestreamed e-commerce that will go into effect on May 25. The regulations on livestream views and transactions, misleading marketing, and user data privacy follow a previous set of rules announced by SAMR on March 12 at the annual 315 consumer rights protection gala. (TechNode)

Funding and IPOs

• JD Logistics, the logistics arm of Chinese online retailer JD.com, will seek approval from the Hong Kong stock exchange for a public listing. The company filed its prospectus for an initial share offering on Feb. 16. JD Logistics would be JD.com’s third publicly traded unit after its healthcare arm went public in December. (IFR)
• Alibaba-backed edtech newcomer Zuoyebang may pursue a US listing as early as the third quarter of this year. The study services platform could raise over $500 million. The startup has hired a CFO from Nasdaq-listed Joyy Inc purportedly for his knowledge of the American market. (Bloomberg)
• According to Sohu Finance, Chinese supermarket chain Wumart Group submitted a prospectus to the Hong Kong stock exchange on March 29, in which it had agreed to either take an up to 2% stake in Chengxin Youxuan or buy a maximum of $100 million in shares in the Didi-owned community group-buy platform. Community group buying is a platform-based grocery service employing a network of organizers who coordinate selling products to their neighbors. By combining individual orders into bulk shipments, group-buy companies can offer lower prices to customers. (Sohu Finance, in Chinese)
• Delivery service Baishi Express hosted an internet conference in Hangzhou on April 24, where CEO Zhou Shaoning announced that the company is currently in financing discussions. He said that the quickest timeline for an IPO would be in 2022. (36kr, in Chinese)

Food delivery and grocery

• Grocery e-commerce startup MissFresh began offering its produce on the JD.com app and its offshoot JD Daojia earlier this month. In exchange for access to its marketplaces, JD will collect commissions and fees per transaction. The two platforms have the same target audience, consumers who want produce delivered to their doors. MissFresh filed a prospectus to US regulators earlier this month. (KrAsia)
• Food delivery behemoth Meituan’s new autonomous delivery vehicle commenced full operations beginning last week. The company highlighted improvements in vehicle range, storage capacity, and artificial intelligence capabilities. First trials of the vehicle began in February to minimize the need for close contact amid the pandemic. This space is one to watch as Meituan and Tsinghua University are teaming up to work on autonomous vehicle and other AI technologies, while Beijing’s city government has set aside urban districts for vehicle prototype testing. (Caixin Global)

Cross-platform troubles

• Alibaba’s Taobao Deals, a Pinduoduo rival, has made little progress in applying for a mini program on Tencent’s mega chatting app WeChat, according to an Alibaba executive. The executive said that Tencent has stopped testing for Taobao Deals and has not provided a timetable for the launch of the mini program. (SCMP)

A year ago, Ant Group was riding high. Since it was founded in 2014, it had become, by its own description, China’s dominant fintech company. It was set to raise $34 billion in blockbuster dual listings in Shanghai and Hong Kong in November 2020.

But it was not to be. Two days before its listing, Chinese regulators shut it down, citing changes to the regulatory environment that Ant hadn’t disclosed in its IPO prospectus. They made it clear, Ant would not be allowed to list in its current form.

The company, supervised by regulators, has since been negotiating its “rectification” behind closed doors.

The tech world has been in suspense for months. How much will Ant change? Will it be allowed to retain its data-driven core business, or forced to change into something much more like an online bank?

The answers depend both on opaque conversations between the business and government, and on an emerging body of fintech regulations.

On April 12, the company met again with regulators. In a readout, it said it had “completed the formulation of our rectification plan.” In another meeting readout on behalf of the regulators, one of the central bank’s deputy governors, Pan Gongsheng, a key figure in the government’s effort to oversee Ant’s revamp, confirmed that a plan was formed and added a little more detail.

So, is Ant Group’s future clear?

READ MORE: UPDATED: Ant Group IPO delay and Jack Ma’s ill-timed speech

Bottom line: Clearer. We know about the plan only from two very brief statements, from Ant Group and Pan. There’s a lot we still don’t know.

With a rectification plan in place, changes should accelerate across the company. It appears that the company will continue providing the same services, but will change how it is organized, accounted for, and regulated. The brief statements don’t tell us much about the key question of managing data flows between digital payments and microlending.

We don’t know much about Ant’s understanding with its regulators. Both statements agreed that there are five points in the rectification plan. But they don’t agree on what the points are. We can make some informed guesses based on areas of overlap, but some big questions are still hanging over the company.

Whatever will happen to Ant, it will set a precedent for the governance of platform companies.

What we learned

The new information: Last week, we got a trickle of new information about these questions.

• Ant wrote a terse press release announcing that it had a rectification plan, in English, on its WeChat account. 183 words summarize the specifics of the plan.
• Pan, a deputy governor at the People’s Bank of China (PBOC), made a one-paragraph comment about the plan during an interview on the plan and fintech regulation more broadly with official media (in Chinese).
• State media quoted the regulators’ readout of the meeting, given by Pan: the PBOC, the China Banking and Insurance Regulatory Commission (CBIRC), China Securities Regulatory Commission (CSR), and the State Administration of Foreign Exchange (SAFE).

The confusion: Ant and Pan both describe a five-point plan, but they do not agree on what exactly those points are, or how to order them.

• It’s hard to separate the five points in Ant’s English statement, but the Chinese version clearly outlines them. We’ve broken them up below according to the Chinese.
• Pan’s five are different. For example, he puts antitrust first in his statement, but Ant places it in sub-point three of point five.
• Adding to this confusion is the fact that many of the regulations they are referring to are still in development, or so brand new that courts haven’t had time to interpret them.
• Both statements also refer to a third set of five demands (in Chinese) by the central bank deputy governor in December 2020, which don’t line up perfectly with either statement.

So, we have three sets of five points that have some overlap but are not the same; a penta-triptych in an impressionist style.

What they said (in the order of appearance in the statements as published):

Financial holding company

This is Ant Group’s first point, but only ranks third in Pan’s list. Ant will set up a financial holding company “in its entirety,” it said. This will affect how the company is regulated. Recently China has been making new regulations for financial holding companies, but we don’t know that much about how they’ll be applied yet.

Does it lend? Ant Group has always said it’s not a bank and it shouldn’t be regulated like one.

• Ant doesn’t make money the same way banks do. Banks lend out money and earn profits from interest.
• Ant Group behaves more like a loan originator, such as Countrywide: it finds people who want financial services—such as loans, investment products, or insurance—and connects them to finance companies. It makes money by charging providers what it calls “technology fees” for helping them find customers.
• Ant owned only 2% of the RMB 2.15 trillion in loans it has created; the rest were underwritten by its partner banks.
• But Ant Group also owns 30% of MyBank, which underwrites loans enabled through Ant’s credittech platforms. MyBank is Ant’s second-largest customer, according to the IPO prospectus, accounting for 6.2% of Ant’s revenue in Q1 2020.

The same goes for investments and insurance: Out of the RMB 4.1 trillion of assets that go through its investmenttech platforms, only 33% of that is directly managed by Tianhong Asset Management, a company that Ant Group has a 51% stake in.

• Ant’s insuretech platforms enabled RMB 52 billion worth of insurance premiums contributions. But its licensed subsidiary only accounted for 9% of those.

But regulators say “same industry, same regulation.” In his interview, Pan said that platform companies “should not make technology a ‘camouflage’ for illegal activities.”

Now what? The company’s operations likely won’t change dramatically, but the way it runs its books will: Rules for financial holding companies will require it to behave a lot more like a bank—which will likely drag on its profitability.

• Financial holding companies “only manage equity investment and do not directly engage in commercial business,” according to trial measures for this type of corporate structure issued by the State Council in September 2020.
• The regulatory framework sets requirements for registered capital and corporate governance rules. It also places these companies under the purview of the People’s Bank of China (PBOC).
• “Ant will have to inject a significant amount of capital to meet the capital adequacy requirement, and also need cash to meet the manage liquidity risk appropriately,” Li Nan, associate professor of finance at Shanghai Jiaotong University’s Antai College of Economics and Management, told TechNode.
• More detailed rules on balance sheet management, leverage ratios, and capital adequacy requirements might be drafted later, Chinese media have reported.
• Ant Group will still be able to “enjoy the benefits of economies of scale,” but with “Chinese walls” separating the different operations, Li said.

Monopolistic behavior

Correcting monopolistic behavior is Pan’s first point. In Ant’s statement, the issue is much less prominent, with only a mention of competition in a sub-points below the fifth point. Pan ties the monopoly issue to the “inappropriate links” we’ll see below.

Market dominance? According to iResearch, Ant Group accounts for more than 55% of the third-party digital payments market. By this measure, Alipay reaches the threshold to be classified as a dominant player in the sector, according to new regulatory definitions issued in January.

• It’s not illegal to be a dominant player. But the regulation calls for a review into the dominant players’ business practices to make sure you play fair.
• Its ubiquitous digital payments app Alipay had 1 billion annual active users as of the 12 months ending August 17, 2020.
• These users transacted a neat RMB 118 trillion in payment volume in the 12 months ending June 30, 2020.

Playing fair: The fintech giant also has to “correct unfair competition in its digital payments business and give consumers more choice in payment methods,” Pan said.

• Ant said that “returning to its origin, our payment business will serve consumers and SMEs by focusing on micro-payments and bringing them convenience.” Micropayments are low-value retail transactions.

Simplifying structure… a bit

Ant Group is hard to supervise, regulators have said. In part because its business cuts across different regulator’s territory, and in part because its operations are spread out across many subsidiaries. Reorganization will clearly define Ant’s different businesses to align with regulatory lines.

Another issue related to corporate reorganization is to bring Ant’s credittech operations under properly licensed subsidiaries. This is not directly addressed as a separate point in either of the statements, but both allude to it. Ant and Pan both mention a promise to set up a licensed personal credit reporting company. Ant also promises to place two major lending platforms in a consumer finance company.

What’s the issue? Ant Group is a very difficult corporate entity to wrap one’s head around, particularly its credittech operations. It does a lot of different things, both tech and finance, and has many corporate entities. It is very difficult to discern which company does what.

• The company’s microlending business is currently divided into a few different subsidiaries, according to its IPO prospectus. Two are “dedicated to technical services”: Ant Zhixin in Hangzhou and Chongqing Wantang. Ant Shangcheng and Ant Small and Micro Loan, both registered in Chongqing, are used to “fund a small portion” of the microloans enabled through Ant’s platforms.
• The two microloan companies that actually fund loans are able to operate nationwide because Chongqing municipality allows fintechs that have set up shop there to offer their services in the rest of China.
• Sesame Credit, a fully owned subsidiary, has been a licensed corporate credit reporting company since 2016.

LISTEN MORE: China Tech Investor: Ant Group is really big, and really confusing

Now what? The plan will set up “clearer boundaries between different regulated entities under the financial holding company,” Jun Wan, a lawyer who specializes in fintech at Han Kun Law Offices in Shanghai, told TechNode.

• Reorganization “does not mean that Ant has to be broken up,” Li said. The plan “implies that Ant will set up different licensed subsidiaries under the same financial holding company,” the Jiaotong University professor said.
• Ant Group started the process to set up a Chongqing subsidiary dedicated to consumer finance in August 2020, and got the green light from the China Banking and Insurance Regulatory Commission in September 2020, its prospectus said, but didn’t give any details as to what happened since.

Data

Pan demanded that Ant “break the data monopoly.” Ant, in its own second point, offered a promise to return Alipay “to its origin… by focusing on micropayments,” which could mean less focus on data. Both referred to regulations on personal credit reporting companies, specifically in regards to data management.

In the pre-rectified Ant Group, data was like the family fridge: Alipay put food in, and other units like Huabei and Jiebei could take it out as needed. It was not clear to outsiders who was using what data for what purposes.

In its prospectus, the company said it limited access to personal data “based on necessity,” and that it maintained “strict control over access to personal data and strict assessment and approval procedures to prohibit invalid or illegitimate uses,” and “records of data access.” “We limit any access based on necessity and maintain records of data access.”

The rectified Ant will manage data more like a cafeteria: If Huabei is going to use Alipay data, it will have to track what it takes and get a receipt. There will be rules—overseen by regulators—about what data it can transfer, for what use, and how, but we don’t know much about what these rules will be.

Data management is a regulatory priority in general, and particularly for the regulators on Ant’s case. “The regulators keep focusing on personal information protection given Ant collects a huge amount of personal information. It may require Ant to follow the strict personal information protection laws and regulations when collecting the personal information,” Wan said.

Data mixing: Ant uses data from Alipay and Alibaba to assess the credit risk of potential borrowers for its microlending businesses. Regulators seem to be concerned both that the company’s monopoly on payments data gives it an unfair advantage over rivals, and that the way it uses the data threatens user privacy.

• Access to user data is crucial to one of the unique aspects of Ant’s credittech business: Unlike banks, Ant can perform risk assessments for consumers and SMEs with little to no credit history.
• The company described its credit risk assessment process in its IPO prospectus: “Based on customer insights and risk rating in terms of spending, assets, liabilities, occupation, and other parameters such as financial stability, we categorize all Alipay users into different risk categories. […] By leveraging our dynamic risk management systems and extensive and real-time customer insights across different consumption scenarios, including those on Alibaba’s platforms, we have constructed comprehensive customer profiles, which feed into our dynamic credit risk assessment system.”
• In a speech at the Bund Summit on Oct. 25, 2020, Jack Ma argued: “We must use today’s technological capabilities to replace pawnshop thinking with a credit system based on big data.”
• Ant also uses its “unparalleled customer insights” to serve investment and insurance products to consumers, its prospectus said.

New rules on data soups: In his interview, Pan said that Ant will have to abide by the “’credit reporting industry management regulation’,” a 2013 regulation on the credit risk assessment industry. The 2013 rules were updated in January.

• In January, while Ant’s rectification plan was being negotiated and drafted, the State Council updated the 2013 regulation on the credit reporting industry. The new administrative measures have yet to be finalized and implemented.
• The measures will guide how the 2013 law is implemented and, according to some legal commentators, clearly extend it over tech companies.
• The rules are still in the pipeline, and much is left up to interpretation (in Chinese).

Data walls? Under most extreme reading of the administrative measures, it could be that Ant will no longer be able to use data from Alipay to perform credit risk assessments for its microlending products.

• Soochow Securities, a Shanghai-listed financial services firm, said in a report that the measures won’t allow internet platforms like Alipay to both attract hordes of borrowers and perform credit risk assessments. As the measures are implemented, the two functions will have to be separated.

Porous walls: It’s more likely that the data flow will continue, with more oversight: This could have serious implications for Ant’s credittech business model: It likely means that it will have to pass through regulatory hurdles to use customer transaction data from Alipay to conduct credit risk assessment, experts told TechNode.

• The rules don’t prohibit credit-reporting agencies from working with other companies, like Alipay, to collect data. But they have to report to the PBOC when they do so, and only work with licensed information providers.
• “Ant may still be able to use relevant data from Alipay,” but it will have to follow rules on how to do that, Wan said.
• Ant might have to limit the amount of data it collects to perform credit risk assessments. The proposed measures require companies to minimize their data collection to what’s necessary.

Some say Ant may have to share data. The 2013 regulation also proposed a nationwide data platform where credit reporting agencies contribute data. But the platform never got traction.

• Data monopolies are the crux of the anti-competitive behavior that big tech companies exhibit, several experts wrote in November 2020.
• Li understood Pan’s data monopoly remark to mean that “Alipay may misuse the market power and data collected from the Alipay platform to discriminate against certain types of consumers or small merchants.”
• The new measures reiterated the need for a platform, but didn’t make it mandatory. Ant could also be asked to share credit assessment data with other platforms.
• The Financial Times, citing anonymous sources, reported Friday that the PBOC is pushing for Ant to give control of its data to an external, state-owned company.
• Legally, it’s not mandatory: Ant will “not be required to share all the credit risk data through a national database,” Wan said.
• The database, under the supervision of the PBOC, didn’t get traction, in part because tech companies refused to share data on it.
• If Ant has to share its data with other companies, its valuation will be significantly lower, wrote Wang Shuai from the Oxford-Hainan Blockchain Research Institute.

Ant Group nests

Under the monopoly issue, Pan also brought up “irregularities such as nesting credit business in the payment link.” Ant didn’t make any direct mention to “nesting” in its statement.

Embedding links: Alipay often advertises Ant’s microlending products on its payment success notices. It also gives users the option to pay using its native products, be it a microloan or a money market fund, as well as the user’s linked debit cards. But Alipay doesn’t give users the option of paying using other tech giant’s options.

• Regulators have been complaining about such practices, which they call “nesting,” since 2019. PBOC deputy governor Fan Yifei said that this “cross-nesting” of microlending and digital payments forms a “closed loop” that spreads risk through the market and is hard to supervise.

No nesting: Pan specified that “nesting credit business in payment links” is an “irregularity” that will be rectified. This will likely stop, reducing Ant’s ability to market loans to Alipay users.

• Ant’s statement gave little in the way of clarification: The company said its two microlending platforms will be under the consumer finance company, and that Alipay will “return to its origin… focusing on micropayments.” This phrase has been used by regulators since at least September 2020.
• Inappropriate links “refers to the operation that Alipay embedded the Huabei as one payment option, instead of setting up a separate credit-card type service,” Li said.
• Soochow Securities expects that this will limit the growth of Ant’s microlending business, because it won’t be able to attract new borrowers from Alipay.
• When asked about whether this means that the Alipay app will have to be broken up, Wan said it’s still unclear. To the best of our knowledge, regulators have never mentioned breaking up the company in public.

Liquidity risk

Finally, Pan called on Ant to manage liquidity risk, particularly in its money market fund (MMF) Yu’ebao. Ant said only that it would“strengthen risk prevention,” and did not mention Yu’ebao.

Does Yu’ebao have a cash problem? Liquidity for money market funds has been a regulatory issue for a while.

• Regulations on money market funds implemented in 2018 set new liquidity ratios. Back then, Yu’ebao was China’s biggest money market fund.
• At the time, Chinese media reported that Tianhong Asset Management, the Ant affiliate that manages Yu’ebao, did not meet the requirements.
• Today, Yu’ebao’s total balance is falling, as are its yields. The total balance of Yu’ebao fell below RMB 1 trillion in Q1 2021, Tianhong’s report said. The money market fund lost its spot as China’s biggest.
• Tianhong said that average residual maturity of its portfolio assets is 57 days, and that it maintains a high ratio of cash to liabilities.

The liquidity plan: The company will “manage and control liquidity risk of its important fund products and reduce the balance of [its money market fund] Yu’ebao,” Pan said. Ant will need to raise liquid assets like cash, Li said, to be able to quickly meet short-term debt obligations.

• The decision to release pressure from Yu’ebao came as a surprise, Soochow Securities said in its report on the April 12 plan.
• Across its operations, Ant also has to “control high leverage and risk contagion” and “improve corporate governance,” Pan said.

What now?

The April 12 statements gave some clarity on what Ant will look like once it has been rectified: It will become a financial holding company with clearly delineated business operations. Alipay and Ant’s microlending platforms will be separated, but we don’t know if that will mean sleeping in separate bedrooms or a full-blown divorce.

Ant’s revamp is far from over. There will likely be more meetings and readouts, as changes to the fintech behemoth are negotiated and rolled out. Even the underlying laws and regulations are still in development. Basic issues are still undetermined, such as how will Ant’s credit risk assessment data practices change.

Whatever happens, it will set a precedent for other platform companies, especially in fintech.

As one banking and insurance regulatory official put it. The issues discussed in Ant’s meetings with regulators are “universal” to internet platforms. Other internet giants should watch closely.

China’s top market watchdog said Monday that it has started an investigation into food-delivery giant Meituan, continuing the country’s crackdown on the platform economy.  

Why it matters: Beijing has stepped up antitrust regulations in recent months, prompting tech majors including Tencent, Didi Chuxing, and Alibaba’s grocery unit to pledge compliance with anti-monopoly practices and fair competition rules. 

• The investigation into Meituan follows a record-breaking fine of RMB 18.2 billion ($2.8 billion) levied on Alibaba on April 10 for antitrust violations. Alibaba said in response that it would end the practice of forced exclusivity and spend billions to lower merchant costs. 
• Beijing had issued on March 12 smaller fines of RMB 500,000 ($76,095) on 12 Chinese companies over 10 investment deals in violation of the country’s Anti-Monopoly Law. These include Alibaba, Tencent, Didi Chuxing, Baidu, JD.com, ByteDance, Meituan, and Suning. 

Details: The State Administration for Market Regulation (SAMR), China’s top market watchdog, said in a one-line statement on Monday that it is investigating the Tencent-backed platform for antitrust violations—namely, forced exclusivity. 

• Meituan said in a statement on Weibo that the company would cooperate with the investigation and that business is currently operating normally.
• The Weibo statement reiterated Meituan’s pledge to comply with SAMR rules—along with 33 peers from April 14 to 16—in which it emphasized “protecting consumer rights” and “improving compliance management.”
• Forced exclusivity, or “choose one out of two,” is a practice in which platforms force merchants to use only one company’s platform or services. 

Context: Food delivery platform Meituan has emerged as one of the frontrunners in China’s red hot community group-buy market after launching Meituan Youxuan on July 7. 

• SAMR’s increased regulation of the tech sector includes closer scrutiny of community group buy businesses. The regulator levied fines of RMB 1.5 billion on five companies, including Meituan Youxuan, on March 3. Beijing also summoned Meituan alongside other tech giants including Alibaba, JD.com, Tencent, Pinduoduo, and Didi, for a meeting in December to discuss oversight of the group-buy industry. 
• Community group buying is a platform-based grocery service that employs a network of organizers who coordinate selling products to their neighbors. By combining individual orders into bulk shipments, group-buy companies can offer lower prices to customers. 

China is taking aim at its flourishing livestream e-commerce market with the introduction of new regulations released Friday from seven government agencies including the nation’s top cyberspace watchdog and market regulator.

Why it matters: The new rules are the latest in China’s tightening grip on the internet sector. Regulators have in recent months stepped up antitrust regulations on tech firms and halted fintech firm Ant Group’s mega dual listing.

• Livestreamed e-commerce has become essential to marketing in pandemic-era China. According to China’s Ministry of Commerce, more than 4 million e-commerce sessions were livestreamed in the first quarter of 2020.
• Major e-commerce and short-video platforms have tried combining the two markets, with Alibaba’s Taobao Live, Tencent-backed Kuaishou, and ByteDance’s Douyin emerging as leading players in the field. 

Details: Central government agencies including the Cyberspace Administration of China, the Ministry of Public Security, and the commerce ministry rolled out on Friday new rules targeting the livestream e-commerce space that will go into effect on May 25. 

• The regulations require livestream platforms to set up a system to internally rank users by metrics such as views and transactions.
• Platforms should also establish risk management systems to guard against suspicious or illegal marketing tactics, taking measures such as pop-up warnings, limiting traffic, and stopping the livestream, according to the new rules.
• Platforms must verify livestream the identity of livestream hosts prior to every session. Regulators also called for platforms to take the necessary steps to secure users’ personal information.
• The rules forbid minors under the age of 16 from hosting livestream e-commerce sessions.

Context: The State Administration for Market Regulation, China’s top market watchdog, previously introduced a set of rules governing livestream sales, misleading practices, and user data privacy on March 12 at the annual 315 consumer rights protection gala. These regulations were an important complement to the E-Commerce Law in 2019 as selling via livestream gained popularity. 

• Taobao Live is one of the largest livestream platforms in terms of merchant size, user base, and sales volume, with an estimated 2019 gross merchandise value (GMV) of between RMB 200 billion and 250 billion ($30.5 billion to $38.5 billion). 
• Kuaishou launched a livestream feature in 2017 and reportedly sold an estimated GMV of RMB 35 billion in 2019. Livestream e-commerce accounted for 19% of the company’s revenue that year. 
• The China Advertising Association (CAA) issued the first livestream e-commerce code of conduct on June 24, detailing rules against false and misleading advertising on livestreams and requiring real-name registration from merchants and individual livestreamers. 

Tencent, Didi Chuxing, and Alibaba’s grocery unit joined Chinese tech peers in promising on Thursday to uphold rules against anticompetitive behavior amid a sweeping crackdown across the sector that began with e-commerce giant Alibaba.

Why it matters: In the wake of Alibaba’s RMB 18.2 billion ($2.8 billion) fine for using “forced exclusivity” tactics, regulators are sharply reining in China’s biggest internet companies.

READ MORE: What is ‘forced exclusivity’? And why did it get Alibaba fined $2.8 billion?

Details: On Tuesday, the Chinese State Administration for Market Regulation (SAMR) convened with the Central Cyberspace Administration of China and the State Administration of Taxation regarding China’s biggest internet companies.

• Tech firms were ordered to complete self-inspections within one month, in line with requirements laid out during the meeting.
• Gaming and social media behemoth Tencent promised to abide by the provisions of the Anti-Monopoly Law, filter out illegal advertisements, refrain from illegal collection and misuse of personal information, and protect intellectual property rights. 
• The rest of the 11 companies that issued on Thursday pledges to comply include some of China’s top tech firms such as ride-hailing platform Didi Chuxing, short video app Kuaishou, entertainment platform Bilibili, online travel agency Trip.com, and Alibaba’s supermarket chain Hema.
• Covering a variety of internet market segments, all company letters contained commitments to anti-monopoly practices and fair competition.

Context: The regulatory crackdown on anti-competitive practices started late last year with small antitrust fines for Alibaba, Tencent, and others, culminating in Alibaba’s record penalty on Saturday.

• The meeting on Tuesday between regulatory bodies addressed topics such as antitrust regulation and the practice of “forced exclusivity” notably used by Alibaba, where it imposed penalties on merchants if they operated outside of Alibaba’s ecosystem. 

Updated: revised first bullet point under “Details” for clarity.

E-commerce platform Tmall said that it will change its store-opening policies in an effort to lower merchant costs, just days after Chinese regulators penalized parent company Alibaba for anticompetitive behavior.

Why it matters: This change in store-opening rules is the first since 2009 for Alibaba’s B2C e-commerce platform. It follows a record RMB 18.2 billion ($2.8 billion) fine levied on Alibaba on Saturday for “forced exclusivity,” a practice where platforms pressure merchants to use only one company’s platform or services.

Details: Under the new store-opening processes, merchants will not be required to prepare company materials such as a “Brand Evaluation PowerPoint” for review, according to a Chinese media report. They will instead be assessed on their store performance during a seven-month trial period.

• The revised policy requires that merchants undergo four separate evaluations at the 30-day, 90-day, 150-day, and 210-day marks, the report said. Tmall will review the store’s transaction volume, product, logistics, retail experience, consultation experience, and complaints-filing process. The platform will first implement the new guidelines in the categories of beauty, personal care, home cleaning, and maternity.
• Tmall merchant Li Zhongtai told e-commerce media outlet Ebrun that to open a Tmall store, merchants previously were required to have five certifications, including a business license and a trademark, as well as an operations plan and factory pictures. He said that the new policy will lower the entry barrier for merchants, who can now focus efforts on actual store operations.
• Alibaba will also waive select fees for sellers on its e-commerce marketplace Taobao, allowing them to use premium store discount tools (in Chinese) for free. These include tools to issue vouchers, create item packages, and to set customized or blanket discounts on store products.

Context: After pledging to end forced exclusivity in a company statement, Alibaba chairman Daniel Zhang said in a Monday briefing that the company would spend billions to lower merchant costs. CFO Maggie Wu said that the e-commerce giant’s merchant-support initiatives will include reduced fees and charges for sellers, and increased investment in business growth measures.

The crypto mining rig makers

• Cryptocurrency rig maker Ebang’s stock lost 20% of its value in four days after a short report from Hindenburg research accused it of fraud. The stock has dropped another 5% since April 12. (TechNode)
• Canaan (finally) reported its fourth quarter and full-year 2020 earnings. The company’s revenues continued to decline though it narrowed its losses. The company’s outlook was more positive: It said that it has laid a “solid foundation” for growth in Q1 2021. (TechNode)
• Bitmain sued relative newcomer MicroBT for intellectual property theft for the second time. MicroBT’s founder was a chip engineer at Bitmain. A previous lawsuit over similar claims was dismissed by a Beijing IP court in 2018. (The Block)

The bell tolls for Filecoin

The Distributed Storage Office of China’s Communications Industry Association warned that Chinese companies are using distributed file storage protocol Filecoin to issue unauthorized wealth management products and conduct illegal financing. A new regulation defining illegal fundraising is set to to come into effect on May 1. (China Police Net, in Chinese)

The exchanges

• Traffic on Chinese crypto exchanges from outside China is growing quickly, indicating a rising interest on Chinese tokens. (Wu Blockchain Twitter)
• Binance launched trading of tokenized stocks, starting with Tesla. The carmaker’s stock on Binance is “backed by a depository portfolio of underlying securities.” (Binance)
• The number of transactions on Binance Smart Chain reached an all-time high on Thursday, nearing 5 million. This is more than four times higher than the 1.3 million conducted on Ethereum on the same day. The exchange’s coin, BNB, also reached a historic high of $416 on the same day, and has climbed to $577 since. (BSCScan)
• Huobi’s charity arm pledged $1 million in Bitcoin and Ethereum for UNICEF’s crypto fund, the UN agency’s crypto-backed venture capital department. (TechNode)

Mining and threats

• Carbon emissions due to crypto mining in China could undermine global sustainability efforts, according to a new research paper by Chinese scientists. Environmental goals set in the central government’s 2021-2025 Five-year plan are a big concern to the industry, which consumes vast amounts of electricity. In March, the province of Inner Mongolia proposed shutting down crypto mines to meet green development goals. (Nature Communications)
• On Wednesday, the Sichuan Power Exchange Center said that electricity used for legal crypto mining will increase 150% to 11.3 billion kWh in 2021, with average electricity prices of $0.02/kWh, up 16% from 2020. (Sichuan Power Exchange Center)
• Silicon Valley investor Peter Thiel said Bitcoin mining is a weapon for China, due to its high concentration in the country. Thiel was speaking at a virtual roundtable discussion hosted by the Richard Nixon Foundation. (South China Morning Post)

Shares in Hong Kong for Alibaba Group jumped 8% after company chairman Daniel Zhang promised on a call with investors on Monday an end to its practice of forced exclusivity following a RMB 18.2 billion ($2.8 billion) penalty for antitrust practices.

Why it matters: The penalty imposed onto Alibaba, a bellwether of China’s tech sector, highlights Beijing’s continued efforts to curb anti-competitive practices at major tech firms, which were seen as practically “immune” to such regulations before.

• The RMB 18.2 billion penalty is equivalent to 4% of the group’s 2019 revenue, and is by far China’s largest for antitrust violations, dwarfing recent punishments levied on peers Tencent and Vipshop.

Details: Alibaba Group does not expect a material impact on its business by ending forced exclusivity, Zhang said during a Monday briefing on the company’s response to the penalty. Forced exclusivity is a practice in which e-commerce companies punish merchants who also sell on competitor platforms, and was the primary reason for the penalty, according to the regulator. Zhang also said the e-commerce giant would spend billions to lower merchant costs.

• The company will report to regulators on its progress in eliminating exclusive arrangements and platform improvements. Zhang promised that the company will keep communication with regulators “open and transparent.” Alibaba was required to submit a self-examination report plan within 15 days of the penalty announcement.
• The company will invest more on improvements in areas like merchant training and development of the merchant back end workstation, Zhang said. “We don’t view this as a one-off cost, but as a necessary investment to enable our merchants to have a better operation on capital,” he added.
• Vice Chairman Joe Tsai said he is not aware of any other investigations involving the company relating to the anti-monopoly law, although the regulators continue to conduct a broad review of Chinese tech firms’ investment transactions.
• CFO Maggie Wu said the penalty will be reflected in the group’s net income in the March quarter results.
• Wu added that the company’s merchant support initiatives will be reflected in both top- and bottom-line growth, with reduced fees and charges to merchants and increased investments in business growth measures. The company has reserved billions of RMB for the expense, she said.

Last week, UK-based semiconductor design company Arm announced plans for the next generation of chips. The v9 architecture comes ten years after the release of v8, which is currently the standard used for mobile phone central processing units (CPUs) and many other processors.

There are some good articles on the new features v9 brings to the table, most notably the Realms feature, which promises to increase security by running applications while data is protected from inspection or intrusion by the host or any other software running on that host. The new architecture will also bring AI/ML extensions for AI support across its CPUs, network processing units (NPUs), and graphics processing units (GPUs), and the ability to improve performance by accelerating workloads in a CPU environment in ways that previously required external hard accelerators.

Licensing architecture

I’ve written an overview of major architectures in China elsewhere, but here’s a brief recap: Many Chinese companies design Arm-based chips, but most will license complete Arm cores on a single-use or multi-use basis, so they don’t have to design a core themselves.

More ambitious chip design companies may get an architecture license, which allows the licensee to change the design itself. This is what you need to create a customized core like the Kirin line of phone CPUs, designed by Huawei’s HiSilicon for use in its phones. But it’s difficult to build a core from scratch, so you have to be highly skilled.

Currently, only two companies in China have an architecture license for v8: Huawei and Phytium Technology, a fabless chip design company focused on Arm server chips..

Notably absent

Arm’s press release included several quotes from high-profile partners around the world, including representatives of three major Chinese smartphone brands; Xiaomi CEO Lei Jun, Vivo CTO Shi Yujian, and Oppo Head of Research Levin Liu. Notably absent were Huawei and Phytium Technology.

Both Huawei and Phytium previously bought architectural licenses from Arm, in part as a way to advertise their independence and control. To help them sell such a message Arm also created Arm China, a separate company that has its own issues.

The smartphone makers that did make the press release, have never been architectural licensees of Arm v8. This could change as they look to develop their own chips. All these companies have been investing heavily in building their own internal chip design capabilities.

However, I think for the time being they will stick with application processors from Qualcomm or MediaTek. As part of Arm’s presentation MediaTek announced that its first smartphone chip using the v9 architecture will be available by the end of 2021, sooner than any Chinese handset OEM would be able to design their own. That’s a lot sooner than they’re likely to be able to make their own.

Chinese handset companies will likely license Arm cores for individual designs, such as Xiaomi’s recent image signal processor design. Xiaomi’s previous attempt at an application processor was somewhat of a failure, and it makes sense for the company and others like Oppo and Vivo to focus first on simpler designs that can help them differentiate their products and also help them gain valuable real-world chip design experience.

So what are we to make of the absence of current licensees Huawei and Phytium? Are they not considered key partners, can they license v9 architecture, and does it even make sense for them to?

Can Huawei buy the v9 architecture?

Huawei has struggled to access semiconductors and IP since the US placed it on a list of companies which require licenses to buy US or US-linked technology. The absence of either company in Arm’s presser could imply that one or both won’t be able to upgrade to v9.

In response to such speculation, Arm has said that it can continue to license its IP to China including Huawei, concluding that its IP is of UK-origin and so not subject to the US ban. Ian Smythe, vice-president of solutions marketing at Arm said, “Following a comprehensive review, Arm has determined that its Arm v9 architecture is not subject to the US Export Administration Regulations,” adding that Arm had informed US government agencies of this conclusion.

That might not be the last word for Huawei. Ultimately, the US government may conclude that Arm’s Austin facility, which contributes to a lot of its high-performance architectures, means that Arm’s IP is sufficiently of US-origin to face export restrictions.

Phytium on thin ice

Phytium is not on the export ban list, and as such does not face the same restrictions as Huawei. However, it is on a list of “military-linked” companies that face restrictions on cross-border investments.

Also, the Washington Post reported today that that the Trump administration was planning to put Phytium on an export blacklist, but “ran out of time”. The article also reported Phytium chips are used at supercomputing centers that design advanced weapons systems for the People’s Liberation Army. This could heighten Washington’s scrutiny of the company, potentially leading to sanctions.

My best guess is that they will go ahead and secure a v9 license without much trouble, but they may be trying to keep a low profile in the hope that the US will not decide to target them. Watch this space.

Now or never

An architectural license gives Huawei and Phytium a certain amount of security: Once granted, the license is permanent, meaning Huawei would be able to continue designing new v9 chips indefinitely whatever actions Washington takes. But under present circumstances it might not be too useful.

An architectural license does not mean the licensee is licensing a specific core. They receive a set of specs for Arm’s cores and a testing suite. This allows the licensee to customize their own processor to fit their application. They can make cores that are faster, smaller, or less power hungry than standard Arm cores, or otherwise differentiated from standard Arm licensees.

Qualcomm and Apple rely on such licenses to create their chips, as did Huawei for its Kirin series. There are only a handful of such licensees globally, mainly because it costs a lot and requires a lot of time and internal expertise to create your own custom Arm core, while there are perfectly good cores available to license at a much cheaper price.

A license alone isn’t enough to make chips. If Huawei is able to buy an architectural license and does so, it still has no access to the EDA tools it needs and the fabs to actually manufacture a high-end Arm-based chip.

But it could be now or never. As competing companies move to v9, Huawei’s v8 license will soon be obsolete. It could actually make sense for the company to go in on an architectural license it can’t use for now in the hope that further down the line either restrictions on the company are removed or domestic self-sufficiency gets to a point where Huawei can get back into the high-end chip game.

With Nvidia’s acquisition of Arm also on the horizon, Arm could soon become a US-owned company. It could make sense for Huawei to lock in access to its IP now, although the same concerns could also motivate China to block the deal.

Conclusions

Access to IP is a chokepoint for semiconductors in China. As I’ve written before, RISC-V may help with this to some extent, but it isn’t as mature as Arm yet, and processor cores are just one of many different types of IP within a chip.

Despite RISC-V’s growth, Arm’s v9 architecture will be a core component for handset, server, IoT and automotive chips for the coming decade. For Huawei it may make sense to get in now, while it still can.

For its part, Arm will want to be free to license to Chinese companies and will be happy to take Huawei’s money. However, the reach of the US government can be long and if the Nvidia acquisition goes through I struggle to see companies on the entity list being allowed access. 

Some domestic analysts argue that Huawei should not rely on architectural licenses. “You may get a v9 license this time, but what about v10 or v11, etc? Does endlessly licensing foreign IP mean independence?” (my translation).

It would be strange to see China without any Arm architectural licensees, but that is a prospect.

We may also see new Arm licensees. Perhaps the likes of Oppo or Vivo will decide it makes sense for them. We all know they are investing huge sums into their own IC design capabilities.

On March 12, China’s top antitrust regulator said it had issued fines to 12 Chinese companies over 10 investment deals in the internet sector that were in violation of the Anti-Monopoly Law. The State Administration for Market Regulation (SAMR) disclosed the 20 companies that were involved in those deals. 

Nearly all of the companies mentioned were Chinese companies considered “big tech,” or their subsidiaries. They include Alibaba, Tencent, Didi Chuxing, Baidu, JD.com, ByteDance, Meituan, and Suning. Those firms were fined for failing to report merger and acquisition (M&A) deals in advance, which is considered a violation of China’s antitrust law.

Bottom line: The penalties—RMB 500,000 (around $76,095) each—were trivial for companies of such size. But the regulator’s move was a warning: China’s tech antitrust campaign, which began in November, has not ended and will only grow in scope and severity.

A brief timeline

• August 2016: Chinese regulators open an investigation into the merger deal between Chinese ride-hailing platform Didi Chuxing’s merger with US rival Uber. The investigation appeared to be unofficially suspended by the time Uber filed for a public listing in April 2019.
• January 2019: SAMR launches an antitrust probe into Tencent Music Entertainment’s dealings with the world’s three largest record labels. A year later, the regulator decided to suspend the investigation.
• January 2020: SAMR proposes an overhaul of China’s 2008 Anti-Monopoly Law and introduces a set of antitrust regulations tailored for the internet industry. The revision of the law is in the pipeline to be approved by China’s legislature.
• November 2020: The Shanghai technology bourse halts an initial public offering for Alibaba’s Ant Group, citing “changes in the regulatory environment.”
• November 2020: SAMR proposes new guidelines targeting anticompetitive behavior to include internet companies. The new rules widen the reach of certain antitrust terms that previously only applied to the physical economy.
• December 2020: SAMR imposes antitrust-related fines on three acquisition deals involving Alibaba, Tencent, and SF Express, a move that legal experts described as the country’s first batch of antitrust enforcements against tech firms.
• December 2020: SAMR announces an anti-monopoly investigation targeting Alibaba.
• February 2021: SAMR’s guidelines targeting internet companies come into effect.
• February 2021: SAMR imposes a RMB 3 million penalty on the operator of Chinese flash sale online retailer Vipshop.com for unfair competition.
• March 2021: Reuters reports that SAMR is looking into Tencent’s WeChat for monopolistic practices and how the popular messaging app had possibly squeezed smaller competitors.
• March 2021: SAMR issues fines to companies including Tencent, Didi Chuxing, and Baidu over 10 investment deals in the internet sector that were in violation of the Anti-Monopoly Law.

Most fines are about unreported deals: SAMR issued three rounds of fines to tech companies over anti-competitive practices. Except for the Vipshop case, the fines were all related to a clause in the 2008 Anti-Monopoly Law that requires companies to report investment or acquisition and merger deals that could create a “market dominant player,” or one that will hold more than 50% share of its relevant market. 

• In those cases, firms were fined the maximum amount allowed by the existing legal framework, or RMB 500,000 each.
• SAMR’s overhaul of the Anti-Monopoly Law will allow regulators to issue fines up to 10% of the offending company’s annual revenue.
• Most deals in question can be traced years back. For example, Baidu’s 2014 acquisition of smart home equipment maker Ainemo was fined in the March action.
• SAMR hasn’t, so far, asked any of the companies to reverse the deals in question. But lawyers we talked to said the companies may be asked to do so as SAMR steps up enforcement.

SAMR is waiting for the law to catch up: The regulator is pushing for an overhaul of China’s Anti-Monopoly Law and other regulations—its punitive concentration on unreported M&A deals is evidence that it may lack the essential legal vehicles to rein in internet companies. It also may explain why the regulator dropped investigations into the Didi-Uber merger deal and the Tencent Music Entertainment case.

• China on Feb. 7 formalized SAMR’s internet antitrust guidelines and, on Feb. 8, the regulator used it to fine Vipshop over unfair competition behaviors identified by the new guidelines.
• The guidelines, dubbed the Antitrust Guidelines for the Platform Economy, specifically targets internet companies. It forbids internet platforms from forcing merchants into exclusivity deals, offering different prices based on user data, and using algorithms to manipulate the market.
• Vipshop was fined based on clauses about exclusivity deals, according to SAMR.
• SAMR’s proposed amendment to China’s Anti-Monopoly Law also asks authorities to consider factors such as network effects—services that rise in value as their user bases grow—as well as company size and data assets when determining whether a company is a dominant player. But the amendment—different from SAMR’s guidelines which were active starting in February—is not effective yet. China’s legislature said in March that it would review and approve the revision “this year.”

What’s next? Growing quickly by buying smaller competitors is a common practice in China’s tech industry. Giants created by merger deals include Meituan, which merged with rival Dianping in 2015; and classified advertising site 58.com, which merged with rival Ganji in the same year. 

• Didi Chuxing, China’s largest ride-hailing platform, also established its dominance in the market through the 2016 deal with Uber.
• The problem is that companies are usually not aware that they may be obligated to report those deals for antitrust review. As China steps up anti-competitive regulations in tech, M&A deals will be more and more subject to market regulator review, potentially stopping tech companies from scaling in size by merging with rivals.

The worst is yet to come: While China’s antitrust regulators have been taking relatively mild measures against tech firms, signs show that more serious moves are on the horizon.

• In September, Tencent offered to take NYSE-listed search engine Sogou private in a $3.5 billion deal as its sole owner. In December, Reuters reported that SAMR wanted to “make an example” using the deal and is “planning a thorough review that could mean the deal may miss a July 2021 completion deadline.”

However, existing monopolies may not have to worry about being broken up. “There are no such provisions for breaking up monopolies in China’s antitrust law,” Deng Zhisong, an antitrust lawyer at Dentons law firm in Beijing, told TechNode in December. What the regulator can do is issue steep penalties and veto deals that don’t pass muster. 

China’s top antitrust regulator is looking into Tencent’s WeChat for monopolistic practices and how the popular messaging app had possibly squeezed smaller competitors, Reuters reported, citing anonymous sources. 

Why it matters: The latest development in China’s antitrust campaign indicates that Tencent, the country’s largest social media and gaming company, might be the next tech behemoth to be targeted. The company had previously been sued by rivals for anti-competitive behaviors.

Details: Wu Zhenguo, the head of China’s State Administration of Market Regulation (SAMR), expressed concern about some of Tencent’s business practices, and asked the firm to comply with antitrust rules when he met with Tencent founder Pony Ma this month, Reuters reported Wednesday, citing two people with direct knowledge.

• SAMR was gathering information and looking into WeChat’s business practices, and how the super app—China’s largest instant messaging app with more than 1 billion users—may have competed unfairly against smaller rivals.
• Ma, Tencent’s low-key chief executive, was in Beijing this month for China’s annual parliamentary meeting and visited the SAMR office two weeks ago. He met with SAMR officials to discuss compliance at his company.
• Tencent did not respond to requests for comment on Wednesday.

Context: SAMR had previously targeted Tencent in its antitrust actions. It fined a Tencent affiliate in December over unreported acquisition and merger deals and punished Tencent earlier this month for the same reason.

• Tencent is also involved in a lawsuit with Douyin, ByteDance’s Chinese version of TikTok, which accused the company of violating China’s antitrust law by blocking Douyin’s content on its WeChat and QQ instant-messaging apps.
• Tencent is about to report its fourth-quarter earnings on Wednesday. The company is expected to report a 42% rise in its quarterly profit, according to Reuters, but analysts said the investor focus will be on regulatory developments.

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

Recorded live on Clubhouse, Elliott chats with University of Hong Kong professor Angela Zhang about her new book “Chinese Antitrust Exceptionalism.” They explore the unique structural and cultural frameworks that distinguish China’s antitrust approach from that of other prominent nations, how China may use antitrust in its competition with the US, and what investors can learn from Ant Group’s halted IPO. 

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:                   

• Angela Huyue Zhang – @AngelaZhangHK

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

China’s market regulator introduced on Monday a set of e-commerce laws pertaining to more recent developments in the sector, including livestreamed sales, user data privacy, and forced exclusivity.

Why it matters: The new rules addressing newer innovations in China’s massive e-commerce industry are an important complement to the E-commerce Law that came to effect in 2019.

Details: The State Administration for Market Regulation, China’s market regulator, unfurled (in Chinese) rules regulating transactions made online at the annual 315 consumer rights protection gala held Monday.

• The rules require platforms which sell via social e-commerce and livestream e-commerce as well as merchants on these platforms to comply with the responsibilities of online transaction marketplaces as described in the law. Selling via livestreams and social media are innovations that have gained popularity since the release of the e-commerce law in 2019.
• Livestream e-commerce platforms are required keep the videos for at least three years after the end date of the live video session.  
• The platforms have to gain user consent for the collection and utilization of personal information including biometric data, medical and health information, and financial accounts.
• The new rules will also ban services that engage in misleading practices such as falsifying selling volume and audience numbers, or promoting favorable reviews over others.
• The guidelines also prohibit practices that facilitate “forced exclusivity,” including suppressing product listing rankings of merchants who decline to sell exclusively on one platform, removing or blocking such online stores, and raising service fees for such sellers.
• The measures are important for “improving the online transaction supervision system, regulating the online transaction space, maintaining fair competition, and creating secure online consumption,” a report from state-backed news agency Xinhua cited the regulator as saying.

READ MORE: New law brings structure, discipline to the willful world of Chinese e-commerce

Context: China has stepped up regulation of the flourishing e-commerce industry over the past few years.

• China’s Electronic Commerce Law came into effect in 2019.
• In June, the China Advertising Association (CAA) issued rules banning false and misleading advertising on livestreams and requiring real-name registration from both merchants and individual livestreamers.

A Chinese Apple user has sued the American tech giant over its higher prices for apps and services compared with Android marketplaces, citing China’s antitrust law, local media reported on Wednesday.

Why it matters: China has recently tightened regulations on tech companies’ anti-competitive practices. While those moves mainly targeting local firms, the suit may thrust Apple into the spotlight.

• Firms that have been fined or investigated in recent months include Alibaba and affiliates of Tencent and logistics giant SF Express.

Details: Jin Xin, an Apple user has accused the company of “abusing its market dominant position” for charging developers high commissions, and barring users from using payment methods other than Apple’s in-app purchase feature, local newspaper Southern Metropolis Daily reported Wednesday.

• Jin, whose gender and age were not disclosed, said in a court filing that pricing for apps and services like video-streaming app iQiyi, podcast app Himalaya, and music app NetEase Music are higher in Apple’s App Store than in Android app stores. 
• The plaintiff said that was because Apple charges app developers commissions as high as 30% of sales, which were ultimately transferred to consumers.
• Users cannot choose payment methods other than Apple’s in-app payment so that they have to accept higher prices, Jin said.
• Citing China’s Anti-Monopoly Law, the plaintiff said in the court filing that those practices were “anti-competitive behavior” and had deprived users of their rights of fair trade, according to the report.
• The Shanghai Intellectual Property Court will hear the case, said the report, but the hearing date is not finalized.
• Jin could not be reached for comment. Apple did not respond to a request for comment on Wednesday.

Context: China has recently formalized new antitrust guidelines targeting tech companies, which forbid online platforms from forcing merchants into exclusivity deals, and offering different prices based on user data.

• State Administration for Market Regulation (SAMR), China’s top antitrust watchdog, in January 2020 proposed an overhaul of the country’s Anti-Monopoly Law to include internet-based services in the scope of antitrust regulations.

China on Sunday put into effect new antitrust guidelines targeting internet platforms, subjecting the country’s tech industry to tougher rules on competition.

Why it matters: The guidelines formalize earlier draft rules announced by China’s State Administration for Market Regulation (SAMR), the nation’s top trustbuster.

• Some of the country’s top internet-based services, including Ant Group’s Alipay, food delivery app Meituan, Tencent’s instant-messaging app WeChat, and online marketplace Taobao, will be subject to the new guidelines. 

Details: The new rules forbid internet platforms from forcing merchants into exclusivity deals, offering different prices based on user data, and using algorithms to manipulate the market.

• Pricing products or services differently according to customer purchasing power, consumption history, or user preference is now considered monopolistic behavior, according to the guidelines.
• The guidelines widen the parameters for determining a firm’s “market-dominant position” to include factors such as transaction volume, user base page views, and technological barriers. 
• SAMR, which issued the rules, said the guidelines will provide a legal basis (in Chinese) for the country to tighten antitrust regulation of internet platforms.

Context: In December, SAMR issued fines to Alibaba and affiliates of Tencent and logistics giant SF Express over three separate acquisition deals, a move that legal experts described as the country’s first batch of antitrust enforcements against tech firms.

• SAMR in January 2020 proposed an overhaul of the country’s Anti-Monopoly Law to include internet firms in the scope of antitrust regulations.
• Last week, Douyin, ByteDance’s Chinese version of TikTok, said it had sued Tencent for monopolistic behavior including blocking Douyin’s content on WeChat.

Beijing has imposed a RMB 3 million fine on the operator of Chinese flash sale online retailer Vipshop.com for unfair competition.

Why it matters: Coupled with a RMB 500,000 penalty for irregular pricing dealt out in December, regulation pressure is rising as Tencent-backed Vipshop’s share prices reach historical highs after doubling over 2020.

• How the government addresses Vipshop, a major Chinese e-commerce player, could signal what’s ahead in the ongoing anti-monopoly investigation of its bigger peer, Alibaba.

Details: China’s State Administration for Market Regulation, the country’s antitrust watchdog, announced Monday it will fine Vipshop RMB 3 million (around $464,000) for unfair competition.

• In order to gain a competitive advantage, Vipshop had developed and utilized a system to obtain information about brands that sell through its and competitor’s platforms from August to December last year, according to the announcement.
• The data collected were referenced for monopolistic practices such as pressuring brands or merchants to only sell on its platform, a practice called “forced exclusivity.” It would throttle traffic, block, or even remove from the platform products from merchants that sell on multiple platforms, and boost traffic to sellers that sold exclusively on Vipshop.

READ MORE: Forcing sellers into exclusivity deals on marketplaces is illegal: regulator

• The company confirmed the news in a Weibo post, saying that it did not object to the facts in the ruling, and that it will comply and “rectify and reform” to maintain market order.

Context: China has stepped up regulation of internet giants over the past few months.

• In December, Beijing issued antitrust-related fines for three acquisition deals involving Alibaba, Tencent-backed China Literature, and an SF Express subsidiary. Each of the companies was fined about RMB 500,000.
• China’s market regulator fined JD.com, Alibaba’s Tmall, and Vipshop RMB 500,000 each for irregular pricing in the same month.
• Vipshop is reportedly considering a secondary listing in Hong Kong. The Beijing-based company went public on the New York Stock Exchange in 2012, raising a total of $71.5 million.

Douyin, ByteDance’s Chinese version of TikTok, said on Tuesday it had sued Chinese social media giant Tencent for monopolistic behavior including blocking Douyin’s content on its WeChat and QQ instant-messaging apps.

Why it matters: The legal move comes as China tightens antitrust regulations for tech companies and refines its laws to better rein in the internet sector. While similar lawsuits had often resulted in a stalemate, it is believed that officials and judges will now be less tolerant of internet companies and anti-competitive behavior.

• The lawsuit is also seen as a tactical move as Douyin’s biggest domestic rival, Tencent-backed short video platform Kuaishou, is preparing to list in Hong Kong.

READ MORE: China’s tech giants aren’t ‘immune’ to antitrust any more

Details: ByteDance has filed a lawsuit with the Beijing Intellectual Property Court, accusing Tencent of violating China’s Anti-Monopoly Law by restricting WeChat and QQ users from sharing Douyin’s short-video content, the company said on Tuesday.

• Tencent’s practice, it said, ran afoul of the Anti-Monopoly Law’s provision of forbidding “misusing a market-dominant position, and antitrust behavior of excluding and restricting competition” (our translation).
• ByteDance asked the court to require Tencent to cease such behavior and make a public apology. The Beijing-based firm is also seeking compensation of RMB 900 million (around $13.9 million) from Tencent.
• There are no other operators that provide services that rival WeChat and QQ, ByteDance said, meaning that Tencent enjoys a “market-dominant position”—the threshold for citing the Anti-Monopoly Law in court.
• Tencent said in a statement that ByteDance’s accusations were “false” and that the company will bring a countersuit.
• Tencent said Douyin had acquired WeChat users’ personal information by “means of unfair competition” and had breached the platform’s rules.

Context: China has ramped up antitrust regulations in the tech industry in recent months. In December, the State Administration of Market Regulation (SAMR), China’s top antitrust regulator, issued fines to Alibaba and affiliates of Tencent and logistics giant SF Express over three separate acquisition deals, a move that legal experts described as the country’s first batch of antitrust enforcements against tech firms.

• SAMR had previously proposed an overhaul of the Anti-Monopoly Law in January and introduced a set of antitrust guidelines tailored for the internet industry in November.
• In March, ByteDance complained that WeChat had started blocking links to its enterprise messaging app and productivity tool Feishu.

The Trump administration faces further legal obstacles in its ongoing effort to ban Chinese video-sharing app Tiktok. In his final days in the White House, the US president is seeking a tough-on-China technology legacy, including blacklisting China’s largest chipmaker. Meanwhile, a bill passed by the US House of Representatives earlier this month could potentially accelerate the pace at which Chinese tech firms return home to list.

Tiktok untouched

On Monday, US District Judge Carl Nichols in Washington fully blocked the Trump administration’s move to ban Tiktok in the US, NPR reported.

• Nichols found that Trump “overstepped his authority” in using his emergency economic powers to try to block transactions between Tiktok and US companies. 
• Tiktok’s lawyers had demonstrated that Trump government officials’ “failure to adequately consider an obvious and reasonable alternative before banning TikTok” showed that the decision to ban the app was “arbitrary and capricious,” Nichols wrote in the ruling.
• The ruling blocks a Trump executive order issued on August 14 which would outlaw US transactions with Tiktok. The ban is set to take effect on Dec. 12. 
• On Oct. 30, a federal judge in Pennsylvania blocked the decision after Tiktok users challenged it in court.
• Trump administration had set a Dec. 4 deadline for Tiktok parent Bytedance to either sell or spin off the app’s business in the US. The government said that day that it would not extend or enforce the deadline. Trump said previously that he had approved “in concept” a deal in which American companies Oracle and Walmart would create a US-based company, Tiktok Global, to take over the app’s US operations. But the deal is subject to Beijing’s approval, which hasn’t yet said a word about it.

Tough-on-China tech legacy

The Trump administration on Thursday added Shanghai-based Semiconductor Manufacturing International Corp. (SMIC), China’s largest chipmaker, to a blacklist that could cut it off from American investment, Reuters reported. Foreign policy and political analysts said that Trump wants to leave a “tough-on-China” legacy that cannot be reversed by his successor, Joe Biden.

• The US Department of Defense on Thursday added SMIC and state-owned oil giant China National Offshore Oil Corp. (CNOOC) to a list of entities designated as owned or controlled by the Chinese military. 
• While the list, mandated by a 1999 law requiring the defense department to compile a list of Chinese military-controlled companies, did not trigger any penalties, a recent executive order issued by Trump will bar US investors from buying shares of the blacklisted firms starting late next year.

US bill to drive Chinese tech firms home

A bill passed by the US House of Representatives last week is likely to accelerate US-listed Chinese tech firms’ pace going home. The bill will bar Chinese companies from US exchanges if they don’t fully comply with American auditing rules, Reuters reported.

• The potential that US auditors will be able to inspect Chinese companies’ audit documents has already led some Chinese tech firms to delist from US stock exchanges or dual-list their shares in Hong Kong. 
• So far, companies like online media firm Sina and online travel agency Ctrip have decided to delist from US markets, while e-commerce firm JD.com and gaming giant Netease have debuted secondary listings in Hong Kong.
• “The Holding Foreign Companies Accountable Act” bars securities of foreign firms from being listed on any US stock exchanges if they have failed to comply with the US Public Accounting Oversight Board’s audits for three years in a row, according to Reuters.
• The act would also require US-listed companies to disclose whether they are owned or controlled by a foreign government.
• Chinese companies are likely to shrug off the bill because they have alternative capital-raising venues at home, the SCMP cited analysts as saying on Dec. 3. 
• The Hong Kong exchange, another popular destination for Chinese tech firms seeking to list overseas, is keen to attract tech firms with corporate shareholding structures allowing shares with extra voting rights, according to the SCMP.
• In mainland China, regulators are permitting companies that are not yet profitable to list, overhauling previous strict listing thresholds and potentially luring more tech firms to list at home.
• The audit bill was unanimously passed by the US Senate in May. The White House said last Wednesday that President Trump is expected to sign the bill into law.

Facing eviction from an apartment managed by “second landlord” platform Danke Apartment, a young graduate jumped out of his 18th story apartment after setting it on fire in Guangzhou Dec. 3. 

The tragedy was only the latest fallout from the troubled second landlord industry. Numerous tenants of Danke Apartment flocked to social media in recent weeks to share their experiences of being evicted by landlords from their apartments. Some said that the locks of their rooms were changed and they couldn’t go back home after coming back from a business trip. Some said their water, electricity and gas were cut off. 

The crisis at Danke, fueled by mismanagement of small loans and a race for growth, is further spurring a conversation about financial risks associated with major tech platforms—one that’s recently had serious consequences for Ant Group’s IPO.

Thousands of landlords claim they haven’t received the rent from the company for months, while tenants insist that they have been making payments. Many Danke tenants borrow money to pay the platform a year’s rent in advance in return for discounted rates.

It’s not just landlords and tenants. On Nov. 10, hundreds protested at the company’s Beijing headquarters, including suppliers and maintenance workers. Similar protests have happened at Danke offices in different cities across China.

Danke, which means “eggshell” in Chinese, is a second landlord platform in China. Similar to Wework, second landlord platforms rent whole apartments on a long-term lease, then divide them into smaller units and furnish each one before subletting them. The company was listed on the New York Stock Exchange in January this year, becoming the second Chinese long-term rental player to list in the US. However, since its founding in 2015, Danke is yet to make a profit.

The company has relied on rental loans to fuel its growth. Under this model, Danke gets one year’s rent upfront directly from a partner bank, while tenants make monthly loan payments in lieu of paying rent. Meanwhile, Danke pays landlords on a quarterly or monthly basis, creating free cash for rapid expansion. But the loans model meant that when a platform runs out of money to make rent payments, tenants can face eviction while still owing money to a bank.

READ MORE: ‘Second landlord’ platforms get tenants in debt to fund growth

By March this year, Danke reported operating over 415,000 apartments in 13 cities. According to Danke’s financial reports, it recorded a net loss of $174.3 million in the first quarter this year, 51% wider compared to the same time a year earlier. In 2019, its annual net loss stood at $493.7 million.

We don’t know the exact number of tenants affected, but Danke partner Webank said Dec. 2 that about 40,000 evicted tenants have registered with them. On Dec. 4, Webank began allowing evicted tenants to assign responsibility for the debt to Danke, in a measure widely assumed to be a response to the Guangzhou suicide. 

 Anger at Danke

The suicide of the fresh graduate fueled people’s mounting anger towards Danke, many expressed sorrow and anger online. In a typical post, a Weibo commentator wrote: 

When will the government deal with this case? Those cheated are mostly poor young people who have just stepped out of the ivory tower. Danke operates [around] 500,000 apartments and serves more than 1 millions tenants around major cities in China, it’s a big issue relating to people’s life. It’s now in a crisis, but no one deals with it—so disappointing.

Danke’s flawed business model has also been condemned by establishment voices:

More evilly, this business model transferred its potential risk from the apartment operator to the landlord and tenants. The company took the profits while leaving the risks for financial institutions or even the whole society.

— Caixin editor Zhang Hong, in a Dec. 2 podcast.

Who’s to blame?

But other voices argue that the model isn’t all bad. Business outlet Latepost argued that the second landlord model is a good idea brought down by risky finance:

An investigation into Danke crisis: in this game of chance, the whole society pays

Latepost
Nov. 27, 2020

The business of long-term apartment rental is not irrational: It has real demand. The “floating population” accounts for nearly 20% of the whole population of China. When renting a house, the quality of its decorations cannot be guaranteed, and disputes always happen when a tenant checks out. 

However, long-term apartment operators can change this situation. They improve living experience with standardized decoration and use technology to match supply and demand efficiently. Tenants can find their ideal apartments more easily, while property owners can rent out their houses more quickly. It’s a win-win strategy. 

 …

But when startups go with the flow of the internet industry and focus on unrestrained expansion, risks will build up quickly. As the industry deliberately pushes tenants to take out rental loans in order to take advantage of the time gap to fuel its expansion, the main risk bearers will no longer be the startups and venture capital investors. 

…

If the company fails, founders and investors take the risks of entrepreneurship; but property owners’ rent will also be delayed; tenants may be evicted while still having to pay the loans; suppliers bear the debts and workers cannot receive their wages. 

Now everything is in a mess.

…

No matter how this farce ends, one truth cannot be hidden: business growth relying merely on debt increase will inevitably accumulate risk. Leverage can multiply gains, but also intensify loss. They will not disappear into thin air. 

Webank, an online bank owned by Tencent, also found itself at the center of the crisis.  As Danke’s rental loan partner, Webank helped fund Danke’s wild expansion and allowed Danke to get away with loaning more than 30% of the rent to its tenants, which is the upper limit set by the government.

Several state media outlets blamed internet financial institutions like Webank for lax enforcement of lending rules—such as this article in the state-owned Economic Daily, later deleted.

Regulation of rental loans should be strengthened

Economic Daily
Dec. 2, 2020

The government has required companies to open a custodial account to manage rent and deposits. If related rules were implemented strictly, the money would not be appropriated. Of course, it’s difficult to to count on banks to enforce this rule, so the relevant authorities should take the lead to strengthen oversight of rental loans.

If the company is paying rent monthly, the article recommended, the bank should issue the loans month by month.

According to the rule, if tenants paid rent monthly, then Webank should not pay Danke the whole year’s rent at one time. Traditional banks would have to evaluate every month when they lend; the whole process is complicated. But online banks can innovate payment methods, simplifying operations and allowing rental loans to be granted and repaid on a monthly basis.

A broader moral?

Another piece from Guangming Wang, a state media website, drew a broader lesson from this crisis. 

The broken “eggshell” (Danke) shows the embarrassment of the regulatory environment

Guangming Wang
Dec. 2, 2020

The crisis, the article wrote, was the inevitable result of a new business model under an old regulatory system. It also tied this crisis to the failure of P2P lending—a disastrous case of under-regulation that’s remembered as the original sin of Chinese tech regulation—stating that “the improvement and innovation of related systems have reached a critical point.”

“To solve this kind of problems, we should seize the momentum, accelerate reform and innovation of related systems, enhance effectiveness in the operation of the systems, so as to boost the development of new business and new models,” the article read. 

Guangming Wang wasn’t alone in connecting the dots between high-profile failures of star Chinese tech companies.

An article from Digital People TMT, a website belonging to the People’s Daily group, compared Danke to three other failed Chinese companies—LeEco, Ofo, and Luckin Coffee—all of which relied on immense funding for “blitzscaling” growth before flaming out. But what the article has to say about small loans could be most relevant as regulators consider a new approach to fintech firms like Ant Group.

From LeEco to Ofo, from Luckin to Danke, it’s time for an era to end

Digital People TMT
Nov. 25, 2020

This is an era when the virtual economy has misled the real economy… 

If Danke really wants to protect young people like an eggshell, it should have a business model that respects its users, instead of trapping them into debts and leaving them homeless.

…

This is an era when financial tools and leverage prevail. Because the real economy is being bullied by the virtual economy, whether it is for survival or “exponential growth” businesses have to rely more on financial and leverage tools, which leads to “novel financial services” permeating these so-called “new economy” enterprises, fueling their growth while hollowing them out.

…

Chinese internet companies’ fascination with finance is increasingly a widespread syndrome– from top giants to unicorns, all want to get involved in making small cash loans… When the systematic financial risks caused by this twisted growth mentality penetrates every aspect of our life through so-called “innovative enterprises,” it’s everybody’s problem.

…

It’s time for this era to end.

China’s Huawei is falling behind in the race to supply telecommunications equipment for 5G networks in Europe, its largest market outside of its home turf.

As Sweden decided in October to exclude Huawei from its next-generation mobile networks, seven out of 27 European Union member states have made moves to heavily restrict the Shenzhen company’s participation in the buildout of 5G. The list includes heavyweights like France and the UK. 

Among countries that have not made decisions on Huawei, six have signed a declaration of intent to keep their networks “clean” of Chinese technology under the US “Clean Network” initiative. Signing the Clean Network initiative does not appear to bind countries to bar Huawei gear. 

While regulators are driving the shift against Huawei, telcos are jumping the gun. In another five countries, telco operators have signed contracts to procure 5G equipment from Huawei’s competitors, Nokia and Ericsson, likely anticipating regulation.

Experts say that the Shenzhen-based company may eventually face de facto expulsion from Europe’s 5G networks as countries move to make their final decisions.

Huawei supplied around 50% of the equipment for Europe’s 4G networks, according to a 2017 report by the European Trade Union Institute, an EU-backed research center. However, the company now faces a much less welcoming environment for 5G—at least two countries have banned its gear outright, and a dozen others are considering heavy restrictions.

“Chinese vendors will play a minuscule role in parts of Europe’s mobile networks that are considered sensitive or critical,” Jan-Peter Kleinhans, director of the project Geopolitics & Technology at German think tank Stiftung Neue Verantwortung told TechNode. 

Kleinhans said that he could imagine a full exclusion of Huawei equipment from Europe’s 5G core networks “in the long run.” 

“Since the European Union put the onus on member states to objectively assess risks and adopt mitigating measures to ensure the security of 5G rollouts, most countries have increased their scrutiny of Huawei,” Jan Stryjak, associate director at market research firm Counterpoint, told TechNode. “Since no country would want to be alone in bucking the trend, solidarity seems to be the name of the game.”

European countries so far haven’t banned Huawei from all of their 5G core networks, a Huawei spokesperson told TechNode on Friday. “Huawei calls and pushes for the establishment of network security standards, and hopes all vendors to be subject to the same scrutiny.”

The company said its commitment towards the European market is “unchanged.”

The EU toolbox

The first step towards an EU-wide policy on 5G security came in January, when the EU Commission released the so-called EU 5G toolbox: A blueprint for how the 27 member states should evaluate 5G gear provider risks and trustworthiness. 

The toolbox requires member states to assess supplier risk profiles on a national or EU level and apply restrictions on those deemed high-risk. 

“The EU toolbox recommends a set of key measures that should be taken by all member states and by the Commission. These measures will apply to everybody, without targeting any actor or country in particular,” Marietta Grammenou, a European Commission spokesperson, told TechNode in an email. 

The toolbox does not mention Huawei or China by name, but instructs national regulators to consider the “risk of interference by non-EU state or state-backed actors,” echoing US rhetoric. 

Some countries have taken a middle-of-the-road approach: They have chosen to raise security requirements for all vendors in a way that amounts to a ban on Huawei without naming it.

The EU toolbox was rolled out after the US government embarked on a campaign to pressure allies into excluding Huawei equipment from their 5G networks, and marked a sharp shift from earlier guidance in EU security directives, where country of origin did not feature prominently as a concern. 

Scholars have said that Huawei is owned and controlled by the Chinese state but the company maintains that it is a private company 100% owned by its employees.

The toolbox leaves the decision to ban Huawei up to member states: “While everyone who complies with our rules can access the European market, member states have the right to decide whether to exclude companies from their markets for national security reasons,” Grammenou said.

“Since mobile networks are considered a critical infrastructure with a direct impact on national security, member states are free to develop their own strategy and thus balance between costs and security,” Kleinhans said.

As countries set their own paths, a likely result is “a highly fragmented regulatory landscape,” Kleinhans said.

Security concerns

As more regulators and telecommunication operators put limits on Huawei, it’s getting more tempting to jump on the bandwagon. Europe’s military and intelligence community, meanwhile, has been voicing objections to Huawei gear, citing national security concerns.

“With no country wanting to be the odd one out, it wouldn’t be surprising if all member states follow the same trend,” Stryjak said.

While only two countries have specifically banned Huawei from future network buildouts, lawmakers and politicians are signaling that other European countries will likely follow their example or heavily restrict the company’s involvement. 

In July, the UK banned Huawei from its 5G networks and ordered its telecommunication operators to remove existing Huawei gear from their networks by 2027, citing a US ban on the company in May that could cut the company off from the global semiconductor supply chain. 

In a similar move, a Swedish telecom regulator said in October that potential grantees of the country’s 5G spectrum must not use products from Huawei in new core networks and existing Huawei gear must be phased out before 2025.

Sweden’s Huawei decision was made based on assessments by the country’s Armed Forces and the Security Service, the Swedish Post and Telecom Authority (PTS) said. On the announcement of the Huawei ban, Klas Friberg, head of the Swedish Security Service, said “China is one of the biggest threats to Sweden.” The country, Friberg added, must not forget when constructing its 5G network that China “is conducting cyber espionage to promote its own economic development and develop its military capabilities.”

Europe’s biggest economies and political epicenters, including Germany and France, have also indicated that they are turning against Huawei.

In October 2019, Germany’s spy chief Bruno Kahl said Huawei “can’t fully be trusted” to participate in the country’s 5G network rollout. While German Chancellor Angela Merkel was in September reportedly vehemently opposed to any restrictions that would single out Huawei, she faced a contingent of politicians who sought to effectively ban Huawei from German 5G networks. Later in the month, they appeared to have won.

In July, Reuters reported that the French National Cybersecurity Authority (ANSSI) had granted licenses to some operators that use Huawei gear. But the bulk of the authorizations were for three or five years, whereas most applications for 5G kit from European rivals Ericsson or Nokia received eight-year licenses.

Notably, the ANSSI informed operators during informal conversations, not stated formally in documents, that licenses granted for Huawei equipment would not be renewed once expired, according to the report.

The Huawei issue has been a flash point in escalating tensions between China and the US. For more than a year, the US government has continued to pressure its allies to exclude Huawei equipment. Not doing so, it said, poses the potential risk of Beijing using vulnerabilities in the company’s gear to spy on foreign 5G networks, an allegation Huawei has repeatedly denied. 

A full ban on Huawei equipment would almost certainly be seen by Beijing as choosing sides, and fodder for retaliation. 

Most recently, a UK oversight body said in October that Huawei had failed to adequately solve security flaws including a “vulnerability of national significance” in gear used in the country’s telecom networks despite previous warnings. 

In April 2019, Vodafone told Bloomberg that it found “hidden backdoors” in the software that could have given Huawei unauthorized access to the carrier’s system providing internet service in Italy. The carrier said at the time that the issues had been resolved after it asked Huawei to remove them.

‘A matter of time’

Huawei has not disclosed how much revenue it earns from Europe. According to the company’s annual results, it generated RMB 206 billion (around $31.1 billion) from Europe, the Middle East, and Africa in 2019, or around 24% of its total revenue for the year.

Stryjak of Counterpoint said that there could still be a play for Huawei in the radio access network (RAN) market, the less sensitive area of 5G networks that connect end devices to core networks. However, he said, Huawei’s RAN business in the continent is still subject to the “suspicion that governments and operators now hold.”

“It seems only a matter of time before all of Europe’s core 5G networks are Huawei-free,” Stryjak said.

Productivity tool Notion said Monday its service is no longer accessible from within China, weeks after a Chinese company launched a similar app that has been accused of copying the US startup.

Why it matters: Sites inaccessible from within China are usually services that provide information or methods of communication. It is rare that productivity tools like Notion are restricted from offering services in the country.

• The San Francisco-based startup announced last week it was lifting limits on its primary note-creation feature for users on its free plan, boosting the popularity of the collaboration software with individual users alongside rivals such as Airtable and Evernote.
• The app allows users to publish their notes for public view, making it essentially a content management system. Some have speculated that Notion’s publishing function is one of the reasons it is restricted in China.

Details: Notion’s status Twitter account tweeted Monday its service had been “blocked by a firewall in China” and that the company is “monitoring the situation.”

• The site is not accessible from any of the provinces or municipalities in mainland China, according to Chinaz (in Chinese), a website performance tool.
• The blockage has sparked an outcry on Chinese social media platform Weibo with many users complaining that they have been barred overnight from accessing their notes stored on Notion.

Context: Just weeks before Notion was blocked in China, a Chinese company launched a Notion clone called Hanzhou.

• An anonymous user of V2ex, a Chinese online developers forum, accused Hanzhou of plagiarizing Notion’s user interface, functions, and even its code in an article published on Saturday.
• Hanzhou was launched in April by a startup based in Wuhan in central Hubei province, according to the website’s registration information on a database maintained by China’s Ministry of Industry and Information Technology. The company could not be reached for comment.
• Founded in 2013, Notion hit a $2 billion valuation in April after raising $50 million from Index Ventures and other investors.

Popular video-conferencing app Zoom has suspended individual users in China from hosting meetings on the platform. One of the company’s Chinese resellers announced the changes earlier this month.

Why it matters: US-based Zoom has become one of the most popular choices for Chinese business professionals working from home to host meetings amid the Covid-19 pandemic. It is also widely used by individuals to host webinars and give online courses.

• The app has placed between fourth to seventh in the rankings of Apple’s iPhone App Store’s business category in China from since mid-February, according to app intelligence firm Sensor Tower.
• The restrictions on individual users come as China is set to hold an annual meeting of its congress, the country’s most important political event, later this month. The gathering is usually accompanied by a rise in internet controls and restrictions.

Details: Zoom has suspended free users in China from hosting meetings starting from May 1. Individuals are no longer allowed to purchase its services, said Shanghai Donghan Telecommunications, one of Zoom’s Chinese partners which runs the website zoom.com.cn.

• The Shanghai-based company said it has suspended all new user registrations on the website. Businesses need to contact their sales representatives to buy licenses for the service.
• A woman answering a call at Shanghai Donghan’s office said the restrictions on individual registrations are due to “regulatory requirements,” but she refused to give further details.
• She said that companies will have to provide a business license issued by Chinese market regulators to purchase services from the company. Fees can only be transferred from a corporate bank account.
• Free users, either individual or corporate, are able to join meetings, the company said on the website.
• Shanghai Huawan Telecommunications, another Chinese partner of Zoom which runs the website Zoomvideo.cn, only allows corporate users to register and purchase services, but it doesn’t inspect users’ corporate information before purchases were made, according to TechNode’s review.
• It is unknown if Zoom’s US headquarters made the decisions. The company didn’t immediately reply to an email requesting comments.

Context: Chinese users of Zoom began to switch to localized versions of the app, including those provided by Shanghai Donghan and Shanghai Huawan in September after the service was blocked in the country in the same month.

• Zoom is also facing scrutiny in overseas markets because of its reliance on China for product development. The company, founded by Chinese immigrant Eric Yuan, has had part of its product development team based in China since it was founded in 2011.
• The company admitted in April that some users “mistakenly” had their calls routed through data centers in China, resulting in a backlash from foreign government agencies and companies that fears their meetings might become vulnerable to Chinese surveillance.

Does Tencent have a monopoly on China’s instant messaging market? You might think so. It has nearly 1.2 billion monthly active users, the same company owns QQ, with more than 800 million users. It’s hardly possible to live in Chinese cities without using WeChat to make contact, pay bills, and recently, pass health checkpoints.

But a recent attempt to prove that Tencent is a monopoly in a Chinese court collapsed in January, according to court files made public on April 17.

The failed attempt indicates how limited China’s current antitrust law has been applied to internet firms. The lack of antitrust enforcement in the digital world has also given internet giants the implicit nod to abuse their market power to crack down against competitors, said experts.

A Tencent suit

Zhang Zhengxin, a lawyer at Beijing-based Yingke Law Firm, sued Tencent a year ago for banning WeChat users from accessing links to Taobao, an online marketplace owned by e-commerce giant Alibaba.

Attempts to access Taobao links on WeChat will yield a warning page that asks users to copy “relative links”—links that users tend to visit—to their browsers, even though WeChat provides an in-app browser that allows users to access the web.

The Beijing Intellectual Property Court held a hearing on the suit in December, in which the two sides fell into a standoff around whether WeChat is a market monopoly.

Zhang accused Tencent of “effectively turning down his transaction request” because of WeChat’s Taobao ban and cited China’s Anti-monopoly Law, which bans such behavior. However, the clause only applies to a company when it “enjoys a dominant market position.”

The 2008 law has outlined how to define a company as having such a dominant market position. However, the law came into effect before the internet became a big thing in China and, so far, there were no internet companies in the country that have been identified as a market monopoly.

A recently proposed revision to the antitrust law could give law enforcement agencies and market regulators a better legal basis to take action. The experts we talked to, however, doubt whether regulators really want to rein in the country’s booming internet industry. 

Is Tencent a monopoly?

Zhang, representing himself, filed the lawsuit against Tencent last April over WeChat’s blockage of links to Taobao and Bytedance’s short video app Douyin, known as TikTok in overseas markets, citing the country’s Anti-monopoly Law. He claimed in an indictment to the court that by blocking those links, Tencent is “effectively turning down his transaction request” and that such behavior is banned by the Anti-monopoly Law.

One of the focuses of the hearing in court is whether Tencent is a monopoly in the so-called “instant messaging (IM) service market,” according to court files recently made public.

Zhang claimed that Tencent’s WeChat holds a dominant position in China’s IM market since its market share by user base and usage is far more than 50%. As a matter of fact, the share could be much bigger. According to a report (in Chinese) by Qianzhan Industry Research Institute, nearly 93% of Chinese mobile IM users have installed WeChat in 2018.

Tencent, however, argued that it doesn’t hold a dominant position in the IM market because there is no such market due to the dynamic characteristics of the internet.

The company claimed that the relative market in which a company is deemed to be a monopoly should be inferred from users’ specific demands. Zhang’s demand was to share links of Taobao to other users, so any products that could fulfill such a function should be included in the “relative market,” the company said during the December hearing.

A Tencent representative declined to comment on the case when contacted by TechNode.

A relative definition

China’s current Anti-monopoly Law said companies with more than 50% share of the “relative market” can be presumed to be dominant players. It also requires law enforcement agencies to consider factors of their abilities to control the supply chain and the market access threshold of competitors. 

While in cyberspace, the definition of a “relative market” can be vague—Tencent’s argument is proof of how nebulous they can get. Legal experts have long criticized (in Chinese) the law because it was designed to regulate companies in traditional industries: it hardly took the internet, a more and more important sector to the country’s economy, into consideration.

In January, China’s State Administration for Market Regulation (SAMR), the country’s top antitrust regulator, announced a draft revision of the Anti-monopoly Law, which expanded the definition of what forms a dominant position.

When delimiting whether internet companies enjoy dominant market positions, law enforcement agencies should also take factors such as network effect as well as their scale and ability to deal with data into consideration, said the proposed amendment.

Nevertheless, some have questioned whether the proposed overhaul would really change China’s antitrust enforcement.

Still might not be enough

China’s current legal framework is enough for antitrust authorities to take action against internet companies, but the authorities are just being very cautious because they may be afraid of getting it wrong in what are mostly very dynamic and fast-moving markets, said Adrian Emch, a partner at law firm Hogan Lovells in Beijing.

If China’s market regulators were to decide to carry out more aggressive enforcement against internet companies, then it could be undertaken within the existing legal framework, Emch wrote in a paper published in December.

As a matter of fact, before it proposed revisions to the antitrust law, the SAMR already tried to curb internet companies over potential antitrust violations.

The agency launched in January 2019 what is known as China’s first “internet antitrust investigation” into Tencent Music Entertainment’s dealings with the world’s three largest record labels after rivals complained that Tencent paid excessive fees for the initial rights and then passed those costs along to competitors.

Observers were cheered (in Chinese) that the investigation would open a new era where internet companies also fall into the rule of China’s antitrust law.

However, the SAMR decided to suspend the probe in January, according to Bloomberg. The regulator didn’t disclose how far the investigation went and why it was terminated, but it came after Tencent Music reached a music licensing deal with Bytedance in late 2019.

“If you look at the market, there are many large and competitive internet players in China, so the antitrust authorities may ask themselves how much intervention, if any, is really necessary,” Emch told TechNode in an interview.

“Antitrust enforcement doesn’t take place in a vacuum, but is done against a specific legal and factual background. In China the background is different from, say, Europe where most of the main players in the internet industry are US companies.  In China, the largest internet players are domestic players and the local regulatory and policy framework is different from Europe.”

Zhang said the overhaul of the Anti-monopoly Law is a “cheering step” made by regulators.

“I believe [the revision] will give market regulators a greater legal basis to launch antitrust probes into internet companies and curb their ‘unfair competition’ including blocking links of competitors,” he said.

His challenge to Tencent, however, didn’t see the proposed revision becomes effective.

Case not closed

He applied to the Beijing Intellectual Property Court in January to withdraw the case, according to a court file released on April 17 on a website (in Chinese) maintained by the country’s Supreme People’s Court. 

He told TechNode after the court file was released that he dropped the case because he “felt there was a lack of evidence.”

While Zhang refused to give more details on the lawsuit, he told TechNode in an interview on April 9 that China’s current antitrust legal framework has done little to reach its power to the internet sector.

It looks like internet firms are immune to China’s antitrust law, he said.

A group of Chinese investors who lost money on Luckin Coffee have filed the first in a batch of lawsuits to a local court over the beverage chain’s alleged accounting fraud, the lawyer representing them told TechNode Thursday. They are suing the company for making false financial statements that led to investor losses.

The US-listed Chinese company may fall under Chinese courts’ jurisdiction for fraud, thanks to a recent revision to China’s Securities Law. The new law, which came into effect March 1, added a clause that expanded its authority to cover overseas-listed Chinese companies that have domestic investors.

Yang Zhaoquan, director of Beijing Vlaw Law Firm, said it is the first time investors have tried to hold a company accountable in China for fraud perpetrated in US markets. 

He told TechNode that he has sent out documents for the first lawsuit to a court in the southeastern coastal city of Xiamen, where Luckin is headquartered.

Luckin announced on April 2 that a preliminary internal investigation showed that it reported an estimated RMB 2.2 billion ($311 million) worth of phony sales to investors, from the second to the fourth quarter of 2019.

Shares of the company plummeted 75.6% on the disclosure that day. Shares of the company were suspended from trading on April 7. The closing price of its shares was $4.39, only 8.8% of its all-time high.

Luckin did not immediately respond to TechNode’s request to comment on the news.

Read more: Luckin fraud admission leaves more questions than answers

10 suits to come

Vlaw law firm began recruiting (in Chinese) plaintiffs for lawsuits against the company on April 7, looking for Chinese investors and China-based expats who held or purchased Luckin shares from Nov. 13 to April 2.

Yang expects to file a total of 10 independent cases over the coming days, each representing a single investor. The plaintiffs seek to recover the money they lost on Luckin’s stock, as well as commissions paid to brokers, Yang said.

Yang said that one of the investors lost 70% of their investment when the stock crashed.

While the current suits name only Luckin as the defendant, Yang said he and his clients will consider listing auditors and brokers that participated in Luckin’s stock issuance as respondents depending on the development of the cases.

History of fraud

The company already faces lawsuits in the US from law firms that launched investigations into it on behalf of the company’s US investors.

Foreign investors have long complained that Chinese firms listed in the US get away with fraud because of a legal loophole between the two countries: China’s old Securities Law didn’t claim jurisdiction over Chinese companies listed overseas, while US courts and regulators who do have jurisdiction have little to no power to enforce judgments in China.

“In the last 10 years, we’ve been responsible for delisting over a dozen China-based companies for fraud, but nobody has gone to jail, nobody has paid a fine. It is not illegal in China to steal from US investors,” Dan David, the founder of Wolfpack Research, said in an interview with Bloomberg TV on April 7.

On the same day, the US-based short seller and securities analysis firm released a short-selling report, accusing Chinese video-streaming platform Iqiyi of inflating its 2019 revenue by up to 44% and overstating user numbers by up to 60%.

“Prior to this, investors couldn’t claim in China for their losses because of overseas-listed Chinese companies’ financial misconduct,” Yang said. This is the first case trying to achieve that and it could set a precedent that such misconduct has consequences, he said.

However, the new law allows only Chinese and China-based investors to sue in Chinese courts. Most American investors will still count on claiming any cash through US courts.

Unclear jurisdiction 

While the China Securities Regulatory Commission (CSRC), the country’s top securities regulator, denounced Luckin’s financial chicanery, legal experts have questioned whether the company falls under Chinese securities laws’ rule.

Liu An, a securities lawyer at Beijing-based law firm Dentons China, said in an interview with reporters on April 3 that the new law may not apply to Luckin if it can prove that its fraud stopped before the law came into effect this March.

The new Securities Law also added a clause that bans foreign securities regulators from investigating or gathering evidence in China, making formal an obstacle some US investors have complained about for years. The law, however, said foreign regulators can team up with their Chinese counterparts to investigate publicly traded companies.

“The CSRC pays high attention to Luckin Coffee’s financial misconduct and condemns the company for those financial misconduct behaviors. Publicly traded companies, wherever they are listed, should strictly comply with relevant markets’ law and regulations and fulfill their duties of accurately revealing financial information,” the agency said in a statement on March 3.

Cao Yu, vice president of the China Banking and Insurance Regulatory Commission” said on Wednesday that Luckin’s accounting fraud is a “harsh lesson,” while saying that the commission has a “zero tolerance” attitude towards such behavior.

Liu said during the interview that Nasdaq-listed Luckin does not fall under the CSRC’s jurisdiction, so the commission could only release a statement condemning it.

However, the CSRC said in the statement that it would launch an investigation into Luckin Coffee’s alleged financial misconduct “based on arrangements around international securities regulations.”

“It doesn’t seem possible that the CSRC will launch the investigation on its own initiative. It may choose to cooperate with the US Securities and Exchange Commission,” Yang told TechNode.

China Tech Talk is an almost weekly discussion of the most important issues in China’s tech. From IPOs to fake data, from the role of WeChat to Apple’s waning influence, hosts John Artman and Matthew Brennan interview experts and discuss the trends shaping China’s tech industry.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

China’s social credit system (SCS) gets a lot of attention outside of China yet it’s still very misunderstood. Many scholars and China watchers have shed light on the topic, but none have done it so concisely and accessibly as Kendra Schaefer and her team at Trivium China. She joins us this week to explain how the SCS is a broad framework for better regulation and enforcement and how it applies to companies, individuals, and government agencies.

Key questions

• What is the purpose of the SCS? How far along is its development?
• Is the SCS only for individuals?
• How does the SCS apply to companies?
• How are China’s cities gamifying SCS?

Links

• 77: Peer-to-peer lending in China—Tech-driven shadow banking with Andrew Polk
• The apps using social credit in China
• Executive Summary: UNDERSTANDING CHINA’S SOCIAL CREDIT SYSTEM
• China’s Social Credit System: An Evolving Practice of Control
• Keeping track of social credit
• EUROPEAN CHAMBER REPORT ON CHINA’S CORPORATE SOCIAL CREDIT SYSTEM A WAKE-UP CALL FOR EUROPEAN BUSINESS IN CHINA
• Become a member of TechNode Squared

Guest

• Kendra Shaefer, @triviumchina

Hosts

• John Artman, @knowsnothing, TechNode
• Matthew Brennan, @mbrennanchina, ChinaChannel

Editor

• Peter Isachenko

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• Music: “Theme from Penguins on Parade” by Lee Rosevere, Music for Podcasts 3

A new EU report published on Wednesday warned that “hostile third countries” may force 5G suppliers to facilitate cyberattacks serving their own national interests, but refrained from singling out China and its telecommunications equipment giant Huawei.

Why it matters: The EU report, which aims to help ensure a high level of cybersecurity across 5G networks of its member states, said a “strong link” between the supplier and government of a given third country could leave the specific hardware supplier subject to interference.

• Such interference may stem from the fact that the third country has “no legislative or democratic checks and balances in place,” said the report.
• Though the report didn’t name China or Huawei, it echoes a US government argument against Huawei that Beijing could use a Chinese law from 2017 to force Huawei to hand over network data to the government.

Details: The advisory report is a result of a national cybersecurity risk assessment by all EU member states, aiming to help them identify the main threats and threat actors when rolling out their 5G networks.

• Threats posed by states or state-backed actors are perceived to be the most serious as well as the most likely actors, as they “can have the motivation, intent and most importantly the capability to conduct persistent and sophisticated attacks on the security of 5G networks.”
• It also recommends member states to look into the ownership structure of their 5G suppliers, which is another point of contention in the US government’s allegations against Huawei.
• Huawei said in a statement on Thursday that it welcomed the EU 5G network security risk assessment and the company was ready to work with its European partners to deliver safe networks.
• “We are pleased to note that the EU delivered on its commitment to take an evidence-based approach, thoroughly analyzing risks rather than targeting specific countries or actors,” Huawei said.
• The Shenzhen-based company reiterated that it is a “100% private company wholly owned by its employees.”

Context: The US has been urging European nations to exclude Huawei from their 5G network rollouts, saying its equipment could be used by the Chinese government to spy on their communications.

• Some of the United States’ closest allies, such as Australia and Japan, have banned Huawei equipment from their 5G networks, but none of the EU member states have complied with President Trump’s call.
• As of late July, Huawei has secured 50 5G commercial contracts globally, of which 28 were signed in Europe, said Chen Lifang, president of the company’s public affairs and communications department, in July.

Chinese video surveillance gear maker Hikvision said on Wednesday that US sanctions against the company won’t have a long-term impact on its businesses due to its limited reliance on US technology.

Why it matters: The latest US Commerce Department’s move to blacklist the Hangzhou-based company has put it in a similar position with Chinese telecommunications equipment maker Huawei, and both of which are targeted because of their ties with the Chinese government.

• The company is one of the world’s largest manufacturers of video surveillance equipment and plays a key role in China’s ambitions to export its surveillance to the world.
• The company is partly owned by the Chinese government through a series of entities that report up to the State-owned Assets Supervision and Administration Commission, the country’s powerful central body that oversees its state sector.
• China Electronics Technology Group Corp., a state-owned defense and military electronics manufacturer, owns 40% of Hikvision, making it its biggest shareholder.

Details: Hikvision has “relatively low” reliance on US semiconductors as it sources most of its chips from domestic suppliers such as HiSilicon, a Huawei semiconductors subsidiary, said company CEO Hu Yangzhong on a conference call with analysts on Wednesday afternoon.

• Hu said the company is still heavily relies on some advanced components from the US, including some photoelectric devices and lens for its surveillance cameras but declined to reveal the percentage of US components to its total supply.
• The company pledged to expand investment into research and development as well as designing their own chips, according to Huang Fanghong, the senior vice president and secretary of the board.

Context: The US Commerce Department on Monday added the company, along with other Chinese government agencies and private firms, to a so-called “Entity List,” barring them from buying technology and equipment from American companies without approval from the US government.

• A similar move against Chinese telecommunications equipment maker Huawei has forced the companies to lower revenue forecasts by $30 billion over the next two years and has made it difficult for the company to sell its new smartphones in overseas markets.
• Hikvision suspended trading for its shares on the Shenzhen Stock Exchange on Tuesday, saying that the company is evaluating the impact of the incident.

The US Commerce Department on Monday placed 28 Chinese government agencies and companies, including video surveillance gear maker Hikvision and artificial intelligence firms SenseTime and Megvii, on a trade blacklist over Beijing’s alleged treatment of Uighur Muslims and other predominantly Muslim ethnic minorities in the Xinjiang Uighur Autonomous Region.

Why it matters: The move came just three days before the visit of Chinese vice-premier Liu He to restart high-level trade talks with Washington to end a yearlong trade war between the world’s biggest economies.

• The Commerce Department, however, said the announcement was not tied to this week’s resumption of trade talks with China.
• Being added to the trade blacklist bars entities from buying components and technology from American companies without US government approval.
• A similar move against Chinese telecommunications equipment maker Huawei has forced the companies to lower revenue forecasts by $30 billion in the next two years and made it difficult for the company to sell new smartphones in overseas markets.

Details: The organizations added to the so-called “Entity List” include the Xinjiang Uighur Autonomous Region People’s Government Public Security Bureau, 19 subordinate government agencies, and eight commercial firms across China, according to a Commerce Department filing.

• The companies include Hangzhou-based Hikvision and Dahua Technology, two of the world’s largest manufacturers of video surveillance gear.
• The list also includes some of China’s largest artificial intelligence startups such as Sensetime, the world’s most valued AI private company, Alibaba-backed facial recognition firm Megvii, and another facial recognition software maker Yitu, as well as iFlytek, a Shenzhen-listed voice recognition software maker.
• A US Hikvision spokesperson said on Monday the company “strongly opposes today’s decision by the US government” and that the move could “hurt Hikvision’s US business partners and negatively impact the US economy,” according to Reuters.
• Hikvision, with a market value of about $42 billion, receives nearly RMB 15 billion (around $2.1 billion) in revenue, or 30% of its total revenue, from overseas. The company said in May that it retained a human rights expert and former U.S. ambassador Pierre-Richard Prosper to advise the company regarding human rights compliance.
• Beijing-based Megvii said in a statement (in Chinese) on Tuesday that the company “vigorously protests the decision” made by the US Commerce Department and it will keep communicating with the agency.
• Sensetime said in a statement (in Chinese)Tuesday that the company “strongly opposes” the decision and urged the US government to reconsider the case.
• Yitu shares Sensetime’s attitude towards the US sanctions, adding that the company wishes to be treated by the US government fairly, according to a statement by the company on Tuesday.

Context: The move comes as two of the AI startups have started their plans to go public on China’s Nasdaq-style tech board and the Hong Kong Stock Exchange.

• Megvii has in August filed in Hong Kong to conduct an initial public offering targeting proceeds of at least $500 million, according to Reuters.
• Shanghai-based Yitu is also considering a listing on China’s Star Market as early as this year, Bloomberg reported last month, citing people familiar with the matter.
• New York-based Human Rights Watch said in June that its review of the Integrated Joint Operations Platform (IJOP) app, one of the mass surveillance systems used by the police and other authorities in Xinjiang, found that Megvii “seems not to have collaborated” in the development of that app, reversing the organization’s initial description that the IJOP app used a “facial recognition functionality” made by Megvii to “check whether the photo on the ID matches the person’s face or for cross-checking pictures on two different documents”.
• Sensetime has opted out of operations in Xinjiang by selling out its 51% stake in a security joint venture in the region, the Financial Times reported in April.

The story has been updated to include Yitu’s statement in the Details section.

More than half of all companies have been pruned from the peer-to-peer (P2P) lending market after regulators introduced tougher rules aiming to curb illegal and risky lending practices.

The tightened regulations over the past three years, including introducing a new trial registration program that will require platforms to register on a monitoring system, has not only led to the collapse of many smaller platforms but larger players are feeling the pressure as well.

However, despite the country’s on-going efforts to clamp down on illegal lenders, predatory lending platforms that haunted Chinese school campuses in 2016 have resurfaced.

Predatory student loans again became one of the trending topics on Weibo in the past few weeks, after Chinese media National Business Daily reported (in Chinese) earlier this month a large percentage of online lenders still have loan operations that target college students. Articles with the hashtag “campus loans rising from the ashes” (校园贷死灰复燃, our translation) attracted 280 million views in one day.

Bottom line: Although regulators cracked down on campus loans in 2017 and forbid lending platforms to target vulnerable groups like university students under the age of 18, many still have a thriving business under the regulatory radar. Blanket actions have put an end to many scams and fraudulent practices, but there are deeper problems under the surface, including debt-loading Chinese millennials.

• 42% of the platforms tested by the National Business Daily still lend to students or have active loan businesses on campus. Some platforms were found offering loans to students at annual interest rates as high as 199%.
• Many illegal lenders allow students to get loans with their student cards or resident ID cards. Making borrowing as easy as by a few clicks on smartphone help platforms expand their user bases faster.
• The list of predatory platforms includes those backed by big tech firms: New York-listed PPDai, fintech platform WeCash, and PPmoney (Jidai). These platforms either still have active operations on campus or have failed to enforce their policy against lending to students.
• The collection of repayments is often enforced by violent thugs who blackmail or threats of violence or harm to intimidate the borrowers. Some women were forced to send lenders images of themselves nude or performing pornographic acts as collateral. These predatory lending services continue to thrive in regulatory loopholes.

A brief timeline: Fintech services started to flourish in China with increasing access to the internet, rising disposable income, and the prevalence of mobile devices. Online lending was one of the industries that saw rapid growth.

For years, regulators let P2P lending industry grow under lax regulations. As a result, the industry has been plagued with scammers and fraudulent platforms.

In 2015, the industry was at its peak, but cracks soon appeared.

• P2P lending platform Ezubao, a Ponzi scheme, was abruptly shut down in December. It was later revealed that the platform had defrauded RMB 59.8 billion ($9.14 billion) from more than 900,000 investors.

In 2016, news of students unable to repay mounting debt committing suicide made headlines. Universities did little to stop it. Public pushback over the practices of loan companies prompted the government to act.

• In May, the Ministry of Education and the China Banking Regulatory Commission (CBRC) issued a notice to universities urging them to regularly monitor illegal on-campus lending practices. The first major regulatory move against campus loans.
• The CBRC rolled out regulatory measures to counter growing predatory loans on campus in different regions across the country. Many companies suspended their lending operations on campus.

In 2017, regulators started to tighten rules for the consumer lending industry, including loans to college students and abusive debt collection practices.

• In April, the CRBC called for actions to prevent online lending institutions from offering loan services to university students under 18 years of age and to market their products and services to borrowers without the ability to repay, among other illegal practices.
• In June, the CRBC, along with the Ministry of Education, and the Human Resources and Social Security Ministry issued a joint directive to ban lending institutions from extending credit to university students with only a few exceptions.
• At the same time, lending to households and individuals for consumption grew at an alarming rate. Regulators began enforcing tougher rules on banks to tighten scrutiny on consumer loan applications.

In 2018, regulators tightened their grip on illegal loan activities, leading to the collapse of hundreds of smaller lenders.

In 2019, illegal campus loan activities that seemed to have died down, resurfaced. According to Chinese media, not just small online platforms, but also leading P2P lenders continue to give out loans to university students.

P2P lending platforms feel the pressure as regulators squeeze them out of the market

Rising from the ashes: Despite continued government efforts to eradicate illegal lending platforms from school campuses, the problem persists. It remains unclear whether more measures will be rolled out to curb campus loans, but Huang Dazhi, senior researcher at Suning Financial Research Institute, told TechNode that regulators have already made it clear over the past three years of that the industry will continue to shrink and only compliant platforms will remain.

• A recent wave of illegal repackaged campus loans, with more legitimate-sounding names such as consumer installment loans, allow consumers to repay debt in set intervals.
• Other forms of illegal lending methods are gaining momentum like “career training loan programs” (培训贷, our translation) that dupe fresh graduates or young people seeking to develop professional skills into enrolling training programs that cost tens of thousands of renminbi. Many of these programs, often jointly set up by career training services and P2P lenders, attract victims with the promise of job offers upon completion of the program.
• The issue is perpetuated by social media and entertainment platforms’ inability to keep off advertisement of predatory loans. Illegal lending platforms still use popular sites Weibo, streaming platforms like Tencent Video, and game apps as vehicles to spread their message, and more students have fallen victim because of it.

Addiction to debt: As opposed to financial institutions that often have strict eligibility requirements, illegal online lending platforms have a very low threshold when giving out loans have a special appeal to university students.

• Policy banks in China offer financial aid or scholarship programs, and commercial banks aren’t proactive in the space.
• The quick rise of illegal lenders is also fueled by the younger generation’s addiction to debt. Platforms are more than happy to court tech-savvy millennials, a major driver of consumption.
• Ant Financial’s Huabei, JD’s Baitiao, and a myriad of online lending platforms have become essential channels for young people to secure loans. Illegal platforms too thrive in the same fertile ground.
• According to data (in Chinese) from Rong 360, 50.17% of the “post-90s” generation of consumers borrow for their daily consumption. Over half of the young people resort to online lending services (not including credit card, Huabei, and JD Baitiao).
• Other statistics show that the post-90s and the post-00s generation account for 43.48% of total consumer debt and around a third of them take out additional loans to repay debt.

The big picture: Since 2008 when China loosened its credit conditions in a bid to stimulate its economy amid the global recession, household borrowing increased rapidly. This was followed by years of risky lending and eventually led to the rise of online financial services including P2P activity.

• The central bank recently released a three-year development plan to strengthen support for the fintech sector and strengthen financial risk control.
• Heavy-handed regulations have led to the collapse of hundreds of lending platforms. Recently, even larger companies have started to pivot away from the P2P lending business as regulators introduce tougher rules.

Predatory lending platforms’ abusive practices have ruined many young lives. Their stories became news with sensational headlines, but it is unclear whether regulators are taking real action to stop illegal activities.

The student loan problem is just a small part of China’s massive financial system, but it has revealed deeper issues. The younger generation’s culture of irrational spending creates a demand for credit, and illegal lenders continue to feed on it. Large financial institutions are being encouraged to come in and fill the need, but they remain inactive. Although regulators have intervened numerous times over the years with general guidance and rules, illegal practices persist in dark corners.

Go further:

• INSIGHTS: P2P lending in crisis as regulatory bubble pops
• China’s P2P lending market could be decimated this year amid Beijing crackdown
• China’s Generation Z Is Hooked on Credit
• China’s online P2P lending industry is undergoing a massive shake out

Huawei has been given another 90-day reprieve that allows the Chinese telecommunications equipment giant to purchase components from United States companies to supply existing customers, the US Department of Commerce announced on Monday.

The extension of the reprieve “is intended to afford consumers across America the necessary time to transition away from Huawei equipment, given the persistent national security and foreign policy threat,” said the department in a statement.

While renewed access to US suppliers has given Huawei more breathing room, a closer look at Huawei’s smartphone supply reveals glaring vulnerabilities. Despite its efforts to find alternative sources or build in-house replacements, the hardware giant still relies heavily on American sourcing.

Temporary relief not enough

On May 16, the Trump administration put the company on a trade blacklist barring it from buying parts and technology from American companies. The US government then issued a “temporary general license” for exports to Huawei to maintain its existing production, effective from May 20 through August 19.

Under the shadow of US sanctions, Huawei reported a 23.2% year-over-year increase in revenue for the first half of the year last month.

But the company was not cheered by the growth. Chairman Liang Hua warned that its consumer business, which contributed 55% of revenue in the first half, would face huge difficulties in the following months.

In January, the company announced its ambitions to overtake Korea’s Samsung to become the world’s biggest-selling smartphone vendor by the end of this year. The company surpassed Apple in smartphone sales last year after shipping over 200 million units.

However, in June, Huawei announced that it had given up on fulfilling this ambition because of the US sanctions.

That same month, Bloomberg reported that Huawei was preparing for a 40% to 60% decline in international smartphone shipments.

Analysts have attributed the loss of international market share to Google’s restriction on Huawei’s access to its Android operating system and apps. A recent teardown, however, of Huawei’s newest 5G-enabled handset shows that some US-made components are also critical for Huawei’s smartphone production.

The keys to a 5G smartphone

Most of the parts found on the motherboard of Huawei’s Mate X 20 5G are made by the company’s in-house chipmaker HiSilicon and other Asian manufacturers. There are, however, a few key components that enable the phone’s 5G connectivity are made by US companies, according to iFixit, a computer repair company based in the US.

The teardown shows that the phone’s radio frequency (RF) front-end chips, the key communication module that connects a phone between the RF transceiver and the antenna, are made by two American companies.

These include a middle/high-band front-end module made by Qorvo, a North Carolina-based chipmaker, and a low-band front-end module made by the Massachusetts-based Skyworks.

It could prove hard for Huawei to find alternative sources to these components. According to Southwest Securities, a Chongqing-based securities firm, the market is currently dominated by Broadcom, another American semiconductor manufacturer, Skyworks, and Qorvo with market shares of 29%, 28%, and 18% respectively.

While these three American companies have a combined 75% share of the RF front-end chip market, the third-largest player, Japanese electronics company Murata with 22% of the market, is also likely to be bound by the US restrictions.

The Tokyo-based company, whose 5% of sales come from Huawei, said in May that it had been looking into the implications of US ban on Huawei, according to the Japan Times.

“American suppliers usually have more advantages in some key components for 5G phones, such as RF front-end chips,” said Will Wong, a Singapore-based analyst at research firm IDC.

“I believe Huawei can find alternatives to these RF front-end chips, but it will take time for it to find sources that can compare favorably with American supplies in terms of stock and quality,” he said.

Though US-made components only make up a fraction of the Huawei phone, they contribute to a large proportion of the phone’s costs. Another teardown by Tokyo-based research firm Fomalhaut Techno Solutions of Huawei’s P30 Pro, the company’s newest flagship model, shows that while US components account for less than 1% of the phone’s parts, those components add up to over 16% of the cost of all parts, according to Nikkei Asia Review.

Uncertainty keeps consumers away

Despite being granted the extended reprieve, the cloud of uncertainty still hangs over Huawei.

In addition to the Monday announcement, the Commerce Department also added another 46 Huawei affiliates to the entity list, hinting that the US government is not completely dropping the pressure on the company.

Before the first 90-day reprieve’s expiration, Huawei on August 9 unveiled its long-awaited in-house mobile operating system HarmonyOS, which many have speculated will be their Android replacement.

At the launch of the new OS, Huawei’s consumer business group chief Yu Chengdong demonstrated a wide range of devices on which the company plans to install the system, including personal computers, smartwatches, and virtual reality glasses.

But he didn’t mention any plan to install it on smartphones. Later, he told reporters that HarmonyOS is ready to run on phones and migrating from Android to HarmonyOS would only take a few days if the company had to.

Huawei didn’t want to harm its relationships with Google at that time since the results of the US restrictions were still uncertain, according to Wong.

That uncertainty also dampened consumer confidence in overseas smartphone markets, said Wong, adding that consumers don’t want to run the risk of losing access to popular Google services on their Android phones.

Huawei’s smartphone shipments in Europe tumbled 16% year on year in the second quarter, according to market research firm Canalys. By contrast, the company’s smartphone sales in Europe saw a 50% yearly surge in the first quarter.

The dramatic decline has indicated how smartphone consumers are sensitive to such uncertainty, given that Huawei’s smartphones were not affected by the US in most of the time in the second quarter.

“Huawei will find it difficult to operate in the overseas smartphone markets in the short term, no matter how the US ban ends up with,” said Wong.

China’s largest search engine Baidu and ride-hailing platform Didi have beefed up their anti-graft campaigns, dismissing more than 40 employees and reporting wrongdoings to the police.

Why it matters: Increasing numbers of Chinese tech firms have launched anti-corruption campaigns as they seek to mimic the Chinese state’s approach to misconduct.

• Since 2013, Chinese president Xi Jinping has led an extensive crackdown on corruption that has targeted everyone from members of the government to corporate figures.
• Apart from Didi, companies including lifestyle services giant Meituan, dronemaker DJI, e-commerce company JD, and used-car trading platform Guazi have sought to weed out graft from within their ranks.

“Any employee who violates the law will not be tolerated. Serious cases will be sent to the public security department.” —Baidu wrote in a leaked email last week. The company confirmed the authenticity of the email to TechNode on Monday.

Details: Baidu dismissed 14 employees that were allegedly involved in 12 cases of internal corruption, the company said in its email. Allegations include bribery and infringing on trade secrets, among others.

• Meanwhile, Didi laid off 30 members of staff for their alleged involvement in bribery and collusion during the first half of 2019, according to a statement on popular messaging app WeChat.
• In one case, a service consultant helped drivers that did not meet the company’s requirements register on the platform.
• Employees from both Didi and Baidu fabricated expenses for reimbursements, the companies said.

Context: To encourage honest work, JD earlier this year went as far as sending employees on a prison tour in Beijing.

• Didi employees were involved in 60 cases of corruption in 2018, the company said in January.
• Drone maker DJI made headlines this year after it announced it was investigating 45 employees for graft. The company said it could lose as much as $150 million from cases of internal fraud.
• Alibaba, Tencent, and Xiaomi have launched similar investigations.
• Chinese telecommunications giant Huawei is also not immune. In 2017, the company’s executive vice president of its consumer business group in Greater China was investigated for accepting bribes.

Last June, we reported that longstanding Bytedance app Jinri Toutiao had launched “Jinri Games,” its version of WeChat mini-games, or lightweight games which run on WeChat’s platform.

Within Toutiao’s selection of in-app mini-programs—another adaptation of a WeChat innovation—Android users could for the first time choose from a variety of casual games.

Since then, mini-games have become available in Bytedance’s humor app Pipixia and most recently, Douyin. The additions allow independent gamemakers to adapt or develop 10-megabyte programs for each platform.

These moves preceded Bytedance’s March acquisition of gaming company Mokun Technology. That could mean that the $75 billion startup will begin releasing homegrown offerings which could rival those of Tencent.

But it faces stiff opposition in doing so, not only from WeChat’s parent company but also from other major platforms like NetEase or Steam, not to mention China’s strict internet regulators.

Mini-games for developers

When Douyin launched its mini-game ecosystem in February, certain aspects made it a potentially more attractive choice for developers compared to WeChat.

First and foremost, its revenue split was more generous. Douyin allows developers of small- and medium-sized games to collect 60% of mini-program income. Developers of larger games with a daily advertising revenue exceeding RMB 1 million receive 50%. First-time mini-program developers gain an extra 10% income across the board.

Douyin revenue model

In comparison, WeChat only offers revenue incentives for mini-programs it deems “original,” whether in terms of game mechanics, artwork, storylines, or background music. From November 2018 through May 2019, developers earned between 30% to 70% of game revenue, depending on their originality and advertising income as well as in-game purchases.

On June 1, WeChat revamped its revenue structure, giving more “original game” developers the chance to receive 70% of ad revenue. In addition, advertising revenue share for other developers were adjusted to 50% across all categories. The new changes helped to level the playing field with Douyin.

WeChat revenue model

However, Douyin still holds some advantages. For one, the app makes it easier for developers to get extra benefits. Compared to WeChat’s “original game” certification process, which requires applying for approval, qualifying to be a first-time developer on Douyin’s platform is relatively simple.

In addition, Douyin’s capacity to spawn viral videos could give games a publicity boost. WeChat only allows users to send mini-programs to friends and group chats; on Douyin, the home of short-video stars, games can be shared more broadly across audiences with less effort, provided the related videos are catchy enough.

The same may be true for games on Toutiao. Due to its AI-powered content sorting, the news app may help trending mini-programs gain traction more quickly than word-of-mouth.

Finally, both WeChat’s and Douyin’s revenue structures still fall short of what is offered by popular platforms such as Apple’s App Store or Google Play: a solid 70% cut of ads and in-app purchases. However, the barrier to entry for mini-game developers is significantly lower on Douyin and WeChat due to their small size.

Homegrown games

Bytedance has been busy doing more than just creating platforms for games. It’s also been inventing offerings of its own, including a Douyin title called “Music Jump Ball,” set to viral video songs and reminiscent of the landmark WeChat mini-game “Jump Jump.”

In March, Bytedance spent an undisclosed amount to acquire Shanghai-based Mokun Technology, which had previously developed a mobile game distributed by Tencent. As of last month, Bytedance had formed an 100-person team to focus on game development, Chinese media outlet LatePost reported. The team became the company’s third game-focused division, joining existing teams for casual games and mini-games.

In China’s current media environment, however, content creation carries potential pitfalls. Tencent and other gaming-heavy platforms suffered heavy losses last year when authorities, citing concerns over the health of minors, stalled the release of licenses for new titles for nine months.

Nor is Bytedance a stranger to content controversy. Its app Pipixia was originally released to replace the defunct Neihan Duanzi, which ran afoul of rules banning vulgar content. And the popular Toutiao has been censured multiple times for, among other things, hosting pornographic content and mocking a Communist martyr.

The upbeat

Highlights from recent headlines

Product launch and product removal

• Tech Planet: Bytedance is internally testing a short-video-based English-learning app named “Tangyuan English,” leveraging its existing advantages in the short-video vertical to push into the Chinese education landscape.

By pulling English-teaching videos from Douyin, Tangyuan English could leverage traffic from the viral short-video platform and substantially reduce the cost of user acquisition, which reportedly exceeds RMB 1,000 per user for some online education companies. Prior to Tangyuan English, Bytedance had launched six education products; two of those are English-learning apps that are struggling at the moment.

• TechNode: “Bytedance’s new social app Feiliao, also known as Flipchat, has been removed from Apple’s App Store fewer than two months after its release.”

As of July 16, the app had been restored on Apple’s App Store. As Bytedance’s newest experiment in the social app market, Feiliao’s performance has been lackluster. The app only has 543 reviews on Apple’s App Store and an average score of 3.9, with a number of users complaining about excessive restrictions on content, as well as slow responsiveness.

User base numbers

• Caixin Global: “ByteDance, the parent company of popular short-video platform TikTok, said Tuesday it now has 1.5 billion monthly active users globally across its portfolio of apps.”

Bytedance’s global monthly active users (MAU) rose sharply over the past half-year, growing 50% compared with the figures from January. However, the gap between the company’s combined daily active users (DAU) of 700 million (as of the end of June) and its MAU indicates that users still do not use Bytedance products as frequently as apps like WeChat.

Meanwhile in Russia

• Reuters: “The Chinese video app TikTok will store Russian user data locally to comply with Russian law, the communications watchdog Roskomnadzor said on Monday after a meeting with the company.”

Russia’s requirements are similar to those being implemented in China, which require companies like Apple to hand over all data collected on Chinese users. Apple sends all Chinese iCloud data to the state-owned Guizhou-Cloud Big Data Industry (GCBD). Storing data locally is not without its risks. After the iCloud transfer, many iOS users in China reported a dramatic increase in the number of spam messages, though whether this is related to GCBD is unknown.

Investigations and allegations

• Pandaily: “UK regulators are investigating ByteDance‘s short-video application TikTok on how they handle the personal data collected from younger users, and whether it prioritizes the safety of children on its social network.”

TikTok has already revised its user agreement to limit users under 13 to an ecosystem where only curated, age-specific videos are available. However, it seems that these nonbinding restrictions have not done enough to satisfy UK regulators.

• Economic Times: Two Indian parliamentarians alleged that short-video app TikTok shares user data of Indians with China’s government and helps spread “fake news” and “malicious content” in India, just days after another member of parliament made a similar claim.

Despite the allegations, Indian courts are not likely to ban TikTok unless it finds solid proof of illegal data collection and transfers. In response to one of the claims, TikTok stated that it abides by the laws of the countries where it operates. In April, TikTok was banned in India for two weeks for spreading pornography and encouraging predatory behavior.

1. Investments and acquisitions

According to business intelligence platforms Tianyancha and Qichacha, investment and acquisition activity at Bytedance from 2015 to 2019 has largely been aligned.

Interestingly, the number of funding transactions appears to have slowed down in 2019. Based on Bytedance’s record, the majority of investments (15 of 22 transactions so far) have taken place in the first half of the year.

2. Stages of investment

Series A funding, including pre-Series A, Series A, and Series A+, makes up more than 40% of total investments. Bytedance doesn’t seem as interested in ponying up post-Series C, although the dollar amounts for later-stage funding (see figure 5) tend to be higher.

3. Disclosed amount of investment per year

A full 10 of Bytedance’s 22 investment figures are undisclosed or described simply as being in the “tens of millions [of RMB].”

That said, combined with graph #1, they could potentially show fewer but bigger bets on businesses. While the number of investments declined in 2019, the cumulative value of the transactions appears to have shot up.

4. Types of investments*

Based on disclosed figures, we start to see interesting but incomplete patterns regarding Bytedance’s sectors of interest.

One investment in Lixiang Qiche (literally, “ideal car”) makes up the entirety of the auto sector shown in figure 4. By contrast, while Bytedance has invested five times in content/news startups (twice in the same company, the Indian local-language news platform and Helo competitor DailyHunt), the total known dollar figures fall far short of entertainment or education.

Due to incomplete information, we also don’t know how much Bytedance sank into its two investments in AI companies.

* We counted each company once. For startups that straddle sectors, we chose the “dominant” category.

5. The data

And finally, for reference, here are all the companies listed as having received investment from Bytedance within the last four years.

Types of investment: number of companies

The upbeat

Highlights from recent headlines

Developments in India

• The Indian Express: Bytedance’s content platform Helo, which features 14 Indian languages, hit 50 million monthly active users in June 2019 and is projected to reach 100 million monthly active users (MAU) by the end of the year.

While viral short-video app TikTok is big in India with nearly 300 million users, of whom 120 million are active every month, its English interface may deter a large number of Indian users who aren’t fluent in the language. Helo was Bytedance’s solution to this problem, and it has not disappointed. If the app is able to reach its MAU goal, it will have achieved a growth rate of 300%. However, compared with TikTok, which has already began monetizing in India, Helo still does not have a monetization scheme in place.

• Medianama: “Bytedance, the Chinese tech company that owns TikTok, is trying to persuade central and state government officials [in India] to join the platform and use it to promote various government initiatives.”

Bytedance has become increasingly wary of business-disrupting situations since the ban on TikTok in April. The company promised to invest $1 billion in India over the next three years, and to increase the number of local employees to 1,000 by the end of the year. If the lobbying proves to be successful, Bytedance could further reduce the risk of being banned or removed from one of its largest markets.

• NDTV: A 12-year-old Indian boy accidentally hanged himself while attempting to make a video for a TikTok challenge. TikTok said that it does not promote any hashtag challenges or activities that might cause harm to users.

This is not the first death to have happened during the making of a TikTok video in India. Also in June, a 22-year-old dancer broke his neck while doing a backflip for a TikTok video; he died eight days later. While TikTok is not directly responsible for either case, the accidents could potentially sour public sentiment.

Legal disputes

• TechNode: “Lawyers for internet giant Bytedance stated Thursday in a Beijing court that user contact lists taken from phones should not be considered private information.”

In response to the flurry of media reports that followed the trial, Bytedance issued a statement later that day, saying that legal arguments must be interpreted within the context of the trial and that it always asks for user authorization before using personal data. Since the user who brought the lawsuit asked for just RMB 1 in compensation, the case has more of a reputational than monetary impact on Bytedance.

• TechNode: “Beijing Haidian People’s Court issued an injunction against the two owners of short-video app Shuabao on June 28, prohibiting them from downloading short videos and related comments from Bytedance’s Douyin and uploading them to their own platform.”

While it is unknown how much Bytedance will ask for in damages, the fact that the company demanded RMB 90 million from Baidu for a similar case in April suggests that the sum could be sizeable. As Douyin grows in popularity, content appropriation like this may happen more frequently.

Hiring for monetization

• NetEase Tech (Chinese): Douyin is poaching a large number of senior monetization and operation personnel from Baidu as it speeds up its monetization to maintain an edge in the competition with Kuaishou, sometimes offering twice the salary that Baidu gives.

As the audience and KOLs of Douyin and Kuaishou increasingly overlaps, the two platforms will probably engage in an even-fiercer rivalry in the near future. Just last month, Kuaishou announced its goal to reach 300 million daily active users before Spring Festival 2020. Bytedance’s new hires could help it speed up the expansion of its e-commerce business and widen its lead in the competition with Kuaishou.

Alongside a renewed surge of interest in Huawei, some major English-language media outlets are raising the alarm about a seemingly much more frivolous offering: the ByteDance short-video app TikTok.

We’ve covered how the company’s platforms spread misinformation and put minors at risk in important international markets. But the connection between TikTok, which is operated separately from domestic counterpart Douyin, and the Chinese government’s invasive approach towards data is much less clear.

To begin to tackle the issue, we compare the app’s privacy policies at home and abroad. Then we review the most important highlights from recent headlines.

TikTok (US)

TikTok has six different privacy policies based on user location: Germany, the rest of the EU, India, Russia, the US, and other countries. Within the US, privacy policies are further divided up between 13 years and older users and those under 13.

The variation among policies reflects the varied implementation of data protection regulations across the world, including the US Federal Trade Commission’s (FTC) historic $5.7 million legal victory against TikTok for violating child privacy protections.

To reflect this new reality, the US version of TikTok’s privacy policy was split and updated this past February. The new US privacy policy states: “If we become aware that personal information has been collected on the Platform from a person under the age of 13 we will delete this information and terminate the person’s account.”

Videos and user profiles of under-13 users can no longer be viewed publicly; nor are those users allowed to message others in-app, although some personal, geographic, and “general user data” is collected by TikTok. Minors in the state of California can request to have all their personal content removed from the platform.

As we’ve pointed out before, however, there are no binding in-app measures to prevent underage users from simply lying about their age.

Due in part to these reasons, TikTok scored only 35 points out of 100 (“use with caution”) on the evaluation of its privacy performance by the nonprofit Common Sense Media. In the “Compliance: following statutory laws and regulations” category of the report, TikTok rated only 17. By comparison, Instagram scored an all-around 39, and also received a 39 for compliance with regulations.

“It is no secret that tech companies are illegally and knowingly collecting personal information from children,” said Common Sense Media CEO Jim Steyer in a February statement shared with TechNode.

Referring to the popular video app that Bytedance acquired in November 2017 and merged with TikTok last August, Steyer said: “Musical.ly wasn’t the first company and they won’t be the last, which is why we need the FTC to continue to regularly enforce the Children’s Online Privacy Protection Act and hold companies accountable in a big way.”

In a May editorial on Quartz, media design professor and data privacy activist David Carroll points out another major issue with the US version of TikTok. Before the February update, an older edition of its privacy policy stated that data belonging to international users could be shared with “any member of affiliate of our group, in China.”

The new version doesn’t clarify whether this is still the case; in response to Carroll’s inquiry, Bytedance representatives said that US user data is not stored in China and cannot currently be accessed by the Chinese government, but didn’t confirm the same for data collected before February 2019.

Douyin (China)

Douyin’s privacy policy is similar to TikTok’s US edition in many respects. For instance, the app states that with user consent, it may collect personal information, contacts, video content, and information from connected third-party social network accounts.

Regarding young users, however, the policy, which hasn’t been updated since October, has much less clearly delineated regulations.

Some 8,900 Chinese characters into the text of the terms, the platform states that users under 18 “should read and agree to this privacy policy” under the guidance of their parents or guardians.

The policy then states it will protect underage user information in accordance with domestic law, and will share and use their data only as permitted by regulations, parents, or guardians, seemingly placing all three on the same level. The platform continues by saying that “if we find” that minors’ data has been collected without parental/guardian consent, they will try to delete the information as soon as possible.

The rest of the policy also contains repeated mentions of “relevant laws and regulations.”

• Douyin has a live-streaming component, and live-streamers are required by Chinese law to authenticate their identities. The app’s privacy policy states that Douyin may collect users’ real names, ID card numbers, and phone numbers. Later on, the policy clarifies that users can have most of their data deleted with the possible exception of real-name information; users can, however, still email feedback@douyin.com to request to have it modified.
• Similarly: “When you use the identity authentication feature provided by ‘Douyin’ software and related services, we will protect your sensitive personal information in accordance with the relevant laws and regulations and/or the requirements of the identity authentication feature (for example: Sesame authentication).”
• Personal information will not be shared without consent except in some cases. These exceptions include national security, national defense, public safety and health, the “greater public interest,” criminal cases, and the broad category of “other circumstances prescribed by laws and regulations.”
• Under the “canceling your account” section, the policy states that “we will delete all of your account information or anonymize relevant information, except as otherwise stipulated by laws and regulations.”

In case it wasn’t abundantly clear that user data is subject to China law alone, the terms also stipulate: “We will store personal information collected and created in the course of domestic operations in the People’s Republic of China, and will not transfer the above information abroad.”

The upbeat

Highlights from recent headlines

Strategic moves

• Beijing News: Bytedance’s aggregator Jinri Toutiao has set up a 200-person gaming unit that focuses on advertising, publishing, and developing mini-games.

While Tencent’s games rely on in-app purchases for revenue, Bytedance’s mini-games on Jinri Toutiao and Douyin are essentially ad distributors—users can acquire special items or rewards by watching short ads. However, Bytedance’s current emphasis on mini-games is likely to change as it further integrates personnel and technologies from Mokun Technology, the game company it acquired in March.

• TMTPost: Bytedance is making a foray into consumer hardware by developing educational gadgets that will be released in 2019.

The Financial Times reported on May 27 that Bytedance is developing a smartphone with its apps pre-installed, sparking speculations about the company’s strategy in the hardware market. But according to a Bytedance spokesperson, the company’s first consumer hardware product will be an educational device. Bytedance also said that the alleged smartphone is a continuation of a project from Smartisan, a phone maker from which Bytedance acquired a number of patents, and that it will retain the Smartisan brand.

• Quartz: Bytedance has hired Sameer Singh, former CEO of Asian operations of media investment firm GroupM, to be its vice-president of monetization for India.

Indian users account for almost 40% of TikTok’s 500 million users, making the country one of Bytedance’s largest markets. TikTok’s monetization strategy revolves around advertising but has been making far less progress than its Chinese version Douyin. A hire with close knowledge of India’s marketing landscape could speed up Bytedance’s monetization process in the country.

Ongoing legal disputes

• 36Kr: Tencent filed two lawsuits against Bytedance, demanding the company stop users from live-streaming or uploading videos containing Tencent games “CrossFire” and “Honour of Kings” on its apps.

Bytedance is likely to face more pushback from Tencent as it attempts to secure a larger piece of the video game pie. Including the two most recent cases, Tencent has filed eight lawsuits against Bytedance in less than seven months for live-streaming and creating videos using Tencent hit titles. As of right now, circumstances appear to be in Tencent’s favor—a court in Guangzhou ruled in February that a Bytedance short-video app, Xigua Video, must remove all “Honour of Kings” content.

Conforming to regulations

• TechNode: “Bytedance’s Douyin has on Thursday updated its existing anti-addiction system to give parents more control over their children’s use of the app, further complying with regulatory requirements to limit youth access to short videos.”

Douyin’s new anti-addiction feature is similar to Tencent’s “super-parent” and NetEase’s “Child Guardian” measures, both of which allow parents to control the time and money their children can spend in-game. While the Cyberspace Administration of China (CAC) did not explicitly require Douyin to implement the parent control functionality, the fact that it’s in line with the CAC’s guidelines suggest that it could potentially become an industry standard.

In September 2017, the Chinese government banned all cryptocurrency exchanges, killing most and forcing the biggest to go offshore. Since then, ICOs and cryptocurrencies have been a no-go for China’s blockchain industry, at least within the country. That doesn’t mean, however, that blockchain has disappeared.

The Chinese government has shown a keen interest in harnessing technology to solve problems as diverse as corruption, payments, and medical care. Local governments in Guangxi, Hangzhou, and even China’s “second capital” Xiong’ an are all looking at applications of blockchain to better manage their cities as well as bring greater transparency to their economy and government.

Blockchain Dreams: Regulations and Rewards, a panel discussion featured during TechNode’s Emerge conference, looks at the current state of the blockchain industry in China, including regulations and opportunities by answering these key questions:

• How do international developments affect the Chinese blockchain industry?
• What is China’s vision for blockchain?
• Are there opportunities for smaller blockchain companies outside of government contracts?

Panelists will include representatives from Consensys, Ant Financial, Points. The conversation will be a deep dive into the forces and trends shaping blockchain in China. This is a must-attend for anyone seeking insight into the future of blockchain in the Middle Kingdom.

At Emerge, we will dive into emerging China tech trends such as AI, corporate innovation, blockchain, digital marketing, shift to enterprise, the slowing economy, and the expansion to Southeast Asia. We will be previewing other topics in the upcoming weeks so stay tuned.

Despite a lull in new game titles being approved, revenue in China’s gaming sector should recover by late 2019 and rebound by 2020, but gaming companies will continue to feel pressure on their profit margins, according to a report by market research firm Niko Partners

The lack of approvals comes after the State Administration of Radio and Television (SART) was formed in March to replace the State Administration of Radio, Film, and Television (SARFT), which in turn forms part of a broader push by the Chinese government to strengthen its control over cultural policies. The Ministry of Culture, which also oversaw approvals is also in the throes of restructuring.

However, the regulatory upheaval has yet to be completed and new game titles haven’t been published since March, resulting in diminishing revenue and slow growth in the industry. Niko Partners says the restructuring is due to be complete by the end of 2018, but agencies have until April 2019.

In October, Chinese regulators also limited game publication through a process known as the “green channel,” the only official way to get games on the market since the government froze new approvals. The system was introduced in August and allowed developers to run a one-month monetization trial for certain games

Chinese gaming revenue grew by 46% in 2017, but due to the regulatory shuffle, along with a crackdown on “cultural content,” just 11% year-on-year growth is predicted for 2018. Mobile gaming revenue is expected to reach $15.6 billion, 2.4% lower than projected in April. PC gaming has also been hit, with revenue anticipated to reach $15.2 billion, 3.8% lower than forecast.

In the biggest gaming market in the world, tech giant Tencent has become the biggest loser. The company has lost more than $200 billion in market value this year, in part due to the gaming crackdown. Tencent has announced its third large-scale restructuring in its 20-year history in order to focus on enterprise users, with a major push towards cloud computing.

Ding Lu is a “hand-chopper,” internet slang meaning an online shopping addict. The boutique store operator from northeastern Heilongjiang Province made her first online purchase in 2004—when she was still a vocational school student.

Since then she has graduated, started her own career and become a mom. Ding also runs her own shop on Alibaba’s e-commerce platform Taobao, where she sells fashion items and garments. It’s a channel that also helps boost sales of her bricks-and-mortar store. “As an online buyer and seller at the same time, e-commerce is in every aspect of my life,” she says.

Ding, now 30, is typical for those born in the 1980s: she’s a first-hand witness to China’s e-commerce boom. That sector has grown from a budding concept to a trillion-dollar industry in less than a decade.

Much like its first group of users, who have gone from teenagers to grown-ups during the period, China’s e-commerce industry is also facing growing pains. From January 2019, it will also be subject to a new set of rules with which it must navigate its path to adulthood.

China’s became the world’s largest online retail market in 2013, when total sales reached $314 billion, surpassing the US, which tallied $255 billion in the same year. China’s e-commerce retail sales jumped to RMB 7.18 trillion (around $1.15 trillion) in 2017 from RMB 5.43 trillion in 2016, a 32% year on year surge. This marked the first time it broke the $1 trillion mark, according to China’s Ministry of Commerce.

Alibaba’s Singles’ Day shopping extravaganza hit a record-breaking gross merchandise volume of RMB 213.5 billion this year with the figure surpassing last year’s RMB 168.2 billion in less than 16 hours. The event also is a good indicator of the staggering growth of China’s online sales.

Despite the exponential growth, the industry’s development has long been plagued by shady business practices from selling counterfeits to “brushing” of orders, the unruly business practice aimed at crippling competitors by creating fake orders.

Responding to the sector’s flourishing-yet-troubled development, China’s legislative body passed the Electronic Commerce Law on August 31 this year, stepping up to regulate the country’s e-commerce operators for the first time. The law will take effect on January 1, 2019.

The emergence of newer forms of e-commerce—which bring buyers and sellers together—is a major factor contributing to the government’s current shift in attitude toward tougher regulation of e-commerce, according to Ron Wardle, CEO of Export Now (Shanghai) Inc. and industry expert.

Wardle, who is from the US, said that, in the past, sellers and buyers essentially were limited to a Tmall or JD platform, and it was up to the platforms to help regulate and ensure safe transactions between the buyer and seller. “Nowadays, with so many channels and platforms that one can sell or buy on, the government wants to ensure or provide seller and buyer protection,” he added. “This provides a good commercial environment and is healthier for the economy.”

Small players in the spotlight

Most people would envision e-commerce platforms like Taobao or JD when talking about e-commerce regulation. But in China, e-commerce is far more ubiquitous. A major provision under the new law broadens the definition of e-commerce operators, to not only include e-commerce platforms like Taobao and third-party retailers that sell goods on e-commerce platforms (for example, Taobao vendors) but also players who do business through various online channels, such as WeChat and short video app Douyin.

The inclusion of non-traditional e-commerce channels effectively brings the small-sized yet flourishing e-commerce players under regulation. Over the past three years, the number of users who run what they call “micro-shops” as a part-time job, increased manifold. The market size of micro-stores hit RMB 522.6 billion in 2017, up around 45% year on year, according to research institute Zhiyan.

They sell a range of goods from regional food specialties to cosmetics. Since most of the micro-businesses have neither physical store nor business license, it puts users at a disadvantage when they have problems with the product they purchased.

“I tried to complain to a micro-store operator about dubious diapers and asked for a reimbursement last year,” said Deng Shuang, a 32-year-old mother of one. “After a short talk, they removed me from their WeChat contact list. There’s little one can do in cases like this.”

Now, the regulations will require most online vendors to get approval from the regulatory authorities before selling.

One form of micro-business will be dealt a tough blow is daigou (代购), or personal shoppers, who mainly use WeChat and other social media as their means of marketing. Daigou range from groups with large sophisticated operations to individual Chinese who travel or live overseas. They earn extra money by selling quality overseas products to their compatriots.

Customers choose daigou because their products tend to be less expensive and more likely to be authentic when it comes to overseas branded merchandise. However, complicated industrial and commercial registration procedures prescribed by the law could wipe out easy-come, easy-go students and travelers who want to make extra money from the industry, while import taxes would reduce margins.

“I think about 70% to 80% of the shopping agents will stop running their daigou businesses,” one daigou surnamed Ren told local media. “But I think it’s the trend. Daigou has finished its historical mission as a ‘grey industry’,” he said, referring to parallel importing.

Wardle believes the new regulations will push the daigou agents to use “official” cross-border channels that are subject to regulation and involve registration and taxation. For those who still prefer existing channels on WeChat or Weibo, they too must follow the new regulations in order to participate in the new e-commerce economy, he added.

China is clearly getting serious about regulating the daigou business. In July, a Taobao shop operator who runs daigou business was sentenced to 10 years in prison and fined RMB 5.5 million for smuggling and tax evasion.

Platforms under scrutiny

Compared with small retailers who must suffer a painful transition under the new legislation, the more established e-commerce platforms are in a better position to cope with the risks in operating their businesses.

The impact of the new e-commerce law on large players like Alibaba and JD.com is small because many of the requirements set down by the law have already been put in place by these major platforms, according to a report by local media that cited Paul Haswell, a partner at international law firm Pinsent Masons.

Lawmaker Yin Zhongqing told Xinhua that the law puts more emphasis on the obligations and responsibilities on the e-commerce platform operators. Previously, only individual merchants were responsible when caught selling counterfeits. But the new law requires the e-commerce sites to share a jointly liability for selling fake goods on their site. Platform operators that fail to do so could face penalties of up to $30 million.

Alibaba said it has been closely following the progress of the formation of the e-commerce law in China. “We hope the introducing of the new law will bring positive development to the industry,” the company said in a statement without elaborating. JD.com declined to comment on the regulation.

With the goal of bringing more structure and credibility to online e-commerce transactions, the new law put forward a series of customer-rights protection measures to improve the online shopping experience. For example, the new legislation will protect consumers against untrustworthy reviews. Order “brushing,” and getting positive reviews written by customers in exchange for monetary rewards will be illegal. Deleting review, especially negative ones, could result in a fine of up to RMB 500,000.

It also states that an e-commerce business shall deliver commodities or services to a consumer according to its commitment or in the manner and period stipulated with the consumer. This means platforms would be held accountable for the timely delivery of their products, including during peak periods such as around Singles’ Day.

Wardle says both sellers and buyers should live by the same motto: “Doing the right thing, is always the right thing,” he said.

China’s gaming boom hit by freeze in licensing as propaganda body takes charge – SCMP

What happened: The Chinese Communist Party’s propaganda department is being given the power to license online games as it seeks greater control of cultural content. Approvals of new games have been suspended since March, with delays expected for the next six months.

Why it’s important: China’s gaming industry is the biggest in the world, but the past six months have been trying for game developers. Changing regulations have resulted in the slowest first-half growth in the sector in a decade. Tencent has even attributed its disappointing first-half results to the regulatory reshuffle. The company pulled hit title Monster Hunter: World from its WeGame platform days after it was released due to complaints about violence and tightening regulation. However, the government sees the initiative as a way to battle myopia and regulate what it sees as harmful content.

China’s ban on cryptocurrency promotional events now extends beyond the capital to Guangzhou – SCMP

What happened: Guangzhou’s Development District has banned events promoting cryptocurrencies to continue “maintaining the security and stability of the financial system.” This is the first ban of its kind outside the country’s capital, where similar events are prohibited following a crackdown in the city’s Chaoyang District earlier this month.

Why it’s important: The move is the latest in a widening clampdown on cryptocurrencies that began in September last year with the ban on ICOs and exchanges. The government recently reiterated that fundraising through cryptocurrencies lures investors through the idea of “financial innovation, but are just Ponzi schemes.” China’s big tech companies are rushing to remain compliant after regulators have begun shutting down online media relating to crypto. Baidu recently shuttered a slew of related online forums and Tencent and Alibaba are restricting virtual currency transactions made through Alipay and WeChat Pay.

China’s State Administration of Press, Publication, Radio, Film, and Television (SAPPRFT) today issued a notice (in Chinese) to local regulators, urging them to further reinforce scrutiny over inappropriate online entertainment content—in particular, those made from illegally-downloaded footage.

The authorities stated in the notice that all the online entertainment shows and clips must not distort or uglify classic arts or literary works, and must not be remade from original content. Also, online teasers and behind-the-scenes videos will be screened under stricter standards to make sure there’s no clip online related to shows or films that haven’t obtained permissions to distribute. No “uncut” versions could be shown online, according to the notice.

In addition, regulations regarding sponsorship for online entertainment content will be reinforced. No production companies or organizations should cooperate and receive sponsorship—be it title sponsorship or advertisements in other forms—from parties that haven’t obtained the right to distribute content online. Local regulators should take full charge of overseeing online entertainment content, says the notice.

It’s not the first time for China’s authorities to tighten scrutiny over online video content. Last month, SAPPRFT urged online video streaming platforms (in Chinese), such as Youku, iQIYI, Tencent, and Baidu, to intensively remove over 1,500 accounts that uploaded vulgar content or videos distorting classic communist work.

In January, Beijing’s culture regulator also issued a notice that requires video streaming sites to self-censor all kid-targeted videos such as animations and cosplay dramas in a bid to wipe out inappropriate content.

China’s Ministry of Industry and Information Technology announced Monday its plans to set up a national committee for the standardization of blockchain and distributed ledger technologies.

The move comes against the backdrop of an increasingly standardized industry. International standardization entities, including the International Organization for Standardization (ISO), International Telecommunication Union (ITU), and World Wide Web Consortium (W3C) have pioneered this initiative. China is a participant in drafting the standards compiled by the blockchain arm of ISO, according to the announcement.

China has witnessed an impressive growth for the sector with a 30-fold increase in the total cryptocurrency market capitalization during the year. The enthusiasm of Chinese tech giants is evident in the increasing number of firms involved in the sector. Baidu, Xiaomi and NetEase all launched their crypto pet project. E-commerce giant JD launched AI Catapult Accelerator to focus on blockchain startups.

But there is always a tricky side of the boom—regulations. Chinese policymakers are eager to fuel wider adoption of blockchain technologies by setting up framework and standards.

But on the other hand, they are taking a very cautious and gradual approach to the goal to protect and educate investors amid the under-unregulated cryptocurrency ecosystem. Despite the rumors for a centralized digital currency, China’s central bank governor Zhou Xiaochuan said that the country, which still does not recognize Bitcoin as a legitimate payment method, is not in a hurry to issue its own digital currency.

Zhihu, China’s answer to Quora, announced Monday that the platform has upgraded its community management rules, comment system, and security system, local media is reporting (in Chinese).

The platform will maintain the rights to suspend comment functions and open pre-publication review for comments. At the same time, a machine plus human approach was adopted as well to strengthen content regulation, according to a statement released by the firm.

This announcement can be translated as quick response from the company under pressure from government. On March 2, Beijing cyberspace authorities ordered Zhihu delisted from all app stores due to their inefficiency to purge “illicit information” on the platform. The suspension spans seven days from March 2 to March 9. The app is unavailable during the period, but people who have already installed the app will not be affected.

Launched in December 2010, Zhihu is the go-to place for Chinese internet users who want to seek expert insights into various areas. The firm has become China’s first unicorn in knowledge sharing sector upon the completion of $100 million Series D in Jan. 2017.

Chinese internet giants are getting more restrictive and knowledge sharing service, which may easily involve sensitive topics like politics and human rights, is one of the most closely watched sectors by local authorities.

Fenda, the voice message Q&A app that went viral in June 2016, has gone through something similar. The service was suspended for 47 days in August 2016. The firm claimed the prolonged time out was meant for scheming larger plans. But the more popular theory is that the service is restructuring under the pressure of regulators, because would be weird for a new hit app to suspend over a month only for updating, losing the best timing for obtaining users.

Governmental influence expands well beyond knowledge sharing. Some of China’s most popular apps like Weibo and Toutiao all faced backlash once they touched a nerve with the authorities.

Authorities in several provinces in China, including Beijing, Hunan, Zhejiang, and Hebei, are reportedly reinforcing inspection over online games (in Chinese) which distort history and spread explicit content, as reported by state media Xinhua.

The reinforcement came after the state’s plan jointly released last month by China’s publicity department, cyberspace management department and other relevant ministries to combat explicit and inappropriate online games. The statement also pointed out that many games lack cultural connotation as the market scale continues to grow.

The inspection this time focuses more on reviewing and removing games that “distort history, defame heroic figures, or spread deviant values.” Also, the move underscores a broader state’s plan to regulate content. WeChat, for instance, recently announced that its media platform will regulate user’s information dissemination behavior and those trying to conduct marketing activities by distorting China and CCP history.

Many popular online games are rumored to be included on the authorities’ list (in Chinese) for further inspection, including games like NetEase’s Onmyoji (“阴阳师” in Chinese), female-targeted romance game Miracle Nikki (“奇迹暖暖” in Chinese), and Tencent’s Contra Comeback (our translation, “魂斗罗：归来” in Chinese). These games are said to spread violent, exotic, and gambling content.

The state’s move might also get in the way of Tencent’s smash-hit game Honour of Kings. The game reportedly has over 100 million daily active users, and was criticized by state media last year for “spreading negative energy.” The game, also known as Kings of Glory and Strike of Kings, has already debuted in Europe and is available in the US under the name Arena of Valor.

China’s leading internet portal and gaming company NetEase saw its shares drop by 3.23% on NASDAQ (in Chinese) on Thursday US time after Xinhua reported that the government plans to clean up “illegal” and “inappropriate” online games.

China’s publicity department, cyberspace management department and other relevant ministries jointly released a statement (in Chinese) on Thursday outlining the government’s plan to regulate explicit and inappropriate online games. The statement specified that it is targeting games with large numbers of players which have significant social influence. The statement also said that the government will strictly ban games that contain illegal content from going abroad.

NetEase and Tencent are the companies that are most likely to be affected by the newly released guidelines. During the first three quarters of 2017, Tencent’s online gaming arm pocketed RMB 73.52 billion (roughly $11.28 billion) in revenue while revenues for the entire year are expected to exceed RMB 100 billion ($15.34 billion). For the first half of 2017, NetEase’s net profit reached RMB 6.89 billion ($1.05 billion). Tencent and NetEase are undoubtedly the two major players in China’s online gaming market, holding up 49% and 18% of the market share respectively, according to a report from GPC.

The state’s move may also get in the way of Tencent’s smash-hit game Honour of Kings. The game reportedly has over 100 million daily active users, and was criticized by state media earlier this year for “spreading negative energy.” The game, also known as Kings of Glory and Strike of Kings, has already debuted in Europe and is now available in the US under the name Arena of Valor.

In part 4 and the finale of the Taiwan Turnaround series looking at how Taiwan’s internet tech scene is catching up, TechNode looks at the effects that regulations have had on the startup economy and how the government plans to be more accommodating. Read Part 1, Part 2 and Part 3.

In February 2017, Uber was forced to suspend its operations in Taiwan after the government deemed the ride offering app as breaching transportation laws and passed penalties of as high as TWD 25 million per infraction  (around $827,000) against unregistered drivers. While Uber is no stranger to run-ins with regulators, this fine was the highest the ride-hailing company had faced anywhere in the world.

“These developments directly threaten the interest of over a million Taiwanese citizens [who offer rides through Uber],” Uber Asia Pacific’s regional general manager Mike Brown wrote in an open letter to the authority. “They also send a clear message to would-be startups to steer clear of Taiwan, deterring both local entrepreneur and foreign investment.”

Taiwan is not alone. Governments all over the world are grappling with how best to regulate the internet sector. However, entrepreneurs and commentators in Taiwan are echoing Uber’s sentiments: the regulations need to encourage innovation, not kill it.

No go

Ivan Lin returned to Taiwan to start lifestyle e-commerce company Add Ons after working on the mainland for more than 15 years. When he was filling forms for a business operation license, Lin couldn’t find a right product category that described what his business was selling.

“Because e-commerce covers such a wide range of products, [the government staff] asked us: ‘why are you applying for so many product categories?’ ” Lin told TechNode in a phone interview. “[There is no] category for e-commerce, that’s why I have to apply for so many. In case you find out [I don’t have the right license].”

From the moment of being incorporated, internet startups in Taiwan have to navigate within commercial regulations that are not prepared for digital business models. More often than not, the government takes a heavy-handed approach instead of a laissez-faire attitude or amending the rules to be more friendly.

Another sharing economy concept, the bike rental, has also taken a hit in Taiwan. oBike, a Singaporean company, was the first to provide the Taiwan market with dockless rental bikes. However, oBike had not anticipated Taiwan’s strict parking rules. The company had tried to liaise with local governments about releasing the bikes into circulation but in July 2017, Xinbei city government outlawed the bikes from parking in 17 zones in the city.

“The Xinbei city government distributed a public notice that has portrayed the legal release of oBikes into circulation as illegal, creating a false impression that [oBike] has breached the rules. [oBike] will seek legal action,” a representative from the company said in a statement (in Chinese), as reported by Liberty Times Net.

Another obstacle oBike faces in the Taiwan market is the petrol-fuelled scooters that a large percentage of the population prefers using as their mode of transport. Some oBikes were towed away by local governments after people complained that the bikes were taking up the parking for scooters.

For fintech, regulation was relaxed slightly in 2015 with the passing of an electronics payments bill. However, third-party payments companies are required to have TWD 500 million in capital or roughly $16.5 million. With such a high obstacle to entry, the fintech industry has yet to take off on the island.

Attracting talent

Taiwan’s foreign workers visa program has also been criticized as restrictive. As mentioned previously in this series, Taiwan is facing a severe talent loss. Against this background, it is even more important that Taiwan is able to attract foreign talent and ensure a smooth process of being able to work in Taiwan legally.

Portions of Taiwan’s foreign worker visa regulation are a legacy from the 1980s when fast economic growth created a labor shortage. Laws were devised to attract foreign blue-collar workers. Provisions for employing foreign white-collar workers were also drafted but confined the work available to 11 categories such as professional or technical services, teaching, and creative arts. Work falling outside of these categories needs to be approved by the central authority. The laws also provided protection for local workers, stipulating that foreign workers must not be hired over locals.

In recent years, the government has streamlined the visa application process for some foreign workers and created a program called the Employment PASS, which is a four-in-one visa. However, it only applies to foreign professionals who are dispatched to Taiwan by foreign companies. Other workers will have to go through acquiring four different documents each with its own application process to be able to work legally in Taiwan: a work permit, an alien resident certificate, a multiple entry permit and a residence visa.

In a 2015 forum held by think tank Formosan Enterprise Institute, speakers described the difficulty of attracting foreign talent as a factor hindering Taiwan startup economy’s growth and criticized the work permit and visa application process as outdated and ineffectual.

Changing mindsets

Add Ons’ Ivan Lin thinks that the government is still operating with a mindset geared towards the original equipment manufacturing (or OEM) industry, which made significant contributions to Taiwan’s economic growth. However, this doesn’t work for the internet sector.

“I find that the government focuses on quantity. The semiconductor industry has been around for nearly 30 years and the government promoted it to drive GDP growth,” Lin told TechNode. “This industry is capital intensive. To build just one new factory would require dozens of billions [in TWD] of investments and it can deliver products numbering in the billions. Internet companies do not operate on that kind of scale and provide intangible services.”

He went on to say that the leadership ranks in the government are now older and are inured to the traditional way of doing things. They are more familiar with factories than apps. Lin thinks that this is a large reason why the innovation economy has not changed much for the past 20 years.

Then perhaps it is natural that the government’s current big plan for invigorating the innovation economy, the Asian Silicon Valley Development Plan (or ASVD), is still hardware focused as it aims to build an IoT industry in Taiwan. The other primary objective for the ASVD plan is to optimize Taiwan’s startup and entrepreneurship ecosystem. And adjusting laws and regulations is one of the tactics devised to achieve that goal.

As seen in the above slide from the ASVD Plan presentation, deregulation of overseas recruitment and retention is one action and deregulation of starting companies in universities is another. Whether these plans will be implemented remains to be seen.

Open for business

Uber Taiwan resumed operation in April 2017 after a two-month suspension. Following talks with transportation authorities, Uber has decided to partner with licensed rental car companies to offer rides in the newly launched UberTAXI app. The Taiwan market may have its challenges, but companies like Uber are determined to stay and are optimistic about its future, as Uber’s Asia Pacific regional general manager Mike Brown had written in the original open letter:

“We believe it’s time to turn the conversation away from innovation-blocking actions and towards smart regulations that unlock economic opportunities and consumer choice for all. It’s time to show the citizens of Taiwan and the innovators of the world that Asia’s Silicon Valley is open for business.”

China’s food inspection authorities on Thursday released new regulations for O2O food delivery services. The new rules require the restaurants registered on the apps to have offline stores and to be licensed with certifications to run food-related businesses.

On top of that, the authorities stated in the regulations that food providers need to publicize more accurate details about ingredients, cooking process, and containers.

The rules specifically point out that the food delivery companies should make sure the food is not contaminated during the course of delivery and should deal with consumers’ complaints in a timely manner. China Food and Drug Administration (CFDA) will reinforce inspection both online and offline.

Meituan-Dianping, one of the major food delivery apps, told local media that the company has started asking the local restaurants to upload relevant certifications onto its system. The company also said that it will cooperate with cleaning companies to run sanitization tests at some of its hottest delivery spots and restaurants that see large delivery demand.

Local media reported that Ele.me, another top player in food delivery, will also take more actions with regards to the new regulations. The company will tighten up the quality of the registered restaurants by implementing a categorizing system for both Ele.me and Baidu Waimai, which was sold to Ele.me last month.

Editor’s note: A version of this post by Charles Liu first appeared on the Beijinger, a leading source of English-language lifestyle information on the city of Beijing.

China’s dismal video gaming culture continues to suffer as a new regulation, set to go into effect this Friday, will restrict the sale of imported video games on China’s biggest e-commerce platform, Taobao.

Starting March 10, the sale of foreign video games, books, DVDs, CDs, and cassette tapes (!) will be forbidden (in Chinese) on Taobao.

Punishments of the new regulation will range from a seven-day suspension to shuttering a violator’s Taobao account permanently.

According to reports, video games will henceforth only be allowed to be purchased from any of mainland China’s app stores, the online retailer 55Haitao, or from certain smaller video game channels. Meanwhile, some Taobao sellers have said they don’t know how to follow the new rule because they haven’t been given specific details.

It’s not clear how the new rule affects the selling of video games through online digital distribution retailers.

First announced last Friday, the new regulation is an amendment to the 2007  law “Enter and Exit Supervision of Printed and Audio-Visual Goods Inspection” law. For years, parallel traders (commonly known as dàigòu 代购) have operated freely within a legal gray area that did not include video games.

But the leniency was bound to end as the Chinese government continues to wrestle more control over what its citizens see and hear.

Since 2010, only government-authorized Taobao retailers are allowed to sell imported books, magazines, and newspapers, a privilege not extended to the book and movie sections of China’s iTunes store when it was shut down by government officials in April of last year, just six months after opening.

Things have been no less dire for video games.

The industry weathered a crackdown on video game advertisement for obscenity in 2014, while last year saw mobile app and video game makers face stringent pre-authorization rules before being allowed to sell their products to Chinese consumers.

Despite the lifting of 15-year-old console ban in 2015, video games in China continue to hampered by limited game libraries, high costs, and restrictions on server locations.

Just this past February, a draft law was introduced that would ban children from playing video games at night.

Editor’s note: This was written by Kayla Matthews, a freelance writer focusing on technology and online media. You can find more of her work on VentureBeat, MakeUseOf, Motherboard and Gear Diary. 

The digital content market in China has exploded. In an effort to gain control over the unregulated medium, Chinese authorities are now requiring various platforms to acquire licenses. The licenses relate to video and audio broadcasts and are more in line with the country’s traditional regulations for media.

What are the new regulations?

Most importantly, the Chinese State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) now requires social media providers to obtain a special license in order to broadcast video or audio. This new regulation will affect a variety of social providers in the country, including WeChat, Weibo, and more. The regulation also requires social media networks to have traditional broadcast licenses for any and all distributed content, not just official media.

In recent years, due to the nature of streaming content, a swath of filmmakers, producers and creators have published material unhindered. That means content has been beyond the purview of Chinese authorities, thanks to websites, mobile portals, set-top boxes and even social media networks. In other words, there’s a great deal of unregulated and content available for consumption and it’s not difficult to access.

In 2014, Chinese regulators did crack down on this behavior by requiring set-top and streaming devices to provide content only from licensed and exclusive distributors.

The new regulation will see films, TV shows, social media and similar platforms exposed to the same level of censorship as everything else in the country. Media content cannot legally be published on these channels without the appropriate public license.

What does this mean for the Chinese tech market?

While things may get a bit rocky for streaming providers and social media companies, the Chinese tech market as a whole probably won’t be affected much.

There’s such a huge demand for streaming content that companies will do what it takes to find a way to continue providing it to their customers. Furthermore, sites that feature unlicensed and content from the West are fairly well-known and seemingly tolerated. A good example of this is Bilibili.

The regulations will hinder content production from Chinese companies slightly, and providers looking to enter the country’s market, but not existing platforms or the platforms themselves.

That said, some of the difficulties in dealing with the regulations and licenses may encourage providers to skip moving into the Chinese market. This isn’t necessarily a consequence of the new laws — it’s more like a byproduct.

What platforms will be affected?

It’s primarily video streaming services that will be affected, but only for companies who operate solely in China or who are looking to get into the space. That’s not to say growth will be hindered — we can definitely expect to see more streaming and social services rising to the surface.

Other platforms include social media, chat and IM services, television providers and anything streaming-related. The latter would include any websites or web portals that provide streaming content of any kind.

When many think of the term “streaming,” names like Netflix, Hulu and HBO Now immediately come to mind. However, streaming across the rest of the internet has continued to evolve as well. There are entire web portals dedicated to providing content outside the confines of conventional software or applications.

Platforms with user-generated content will also suffer, but it’s difficult to say how regulations will impact them directly. It’s likely the smaller players will fold under the pressure, while tried-and-true providers will stick it out.

Live-streaming and user-based services may also take a hit, but the censorship here is not without merit. Several high-profile cases of live-streamed sex caused quite a ruckus in the country. One Beijing couple even streamed themselves trying to stow away in a local IKEA overnight. Spoiler alert: they were caught and promptly punished.

What will the impact be?

In the grand scheme of things, the regulations will have little impact, if any, on the big names in the space. Existing providers will simply need to tone down some of the content they offer, but this won’t stem the flow completely. In addition, Western-based providers will likely continue to be tolerated.

As you’ll notice, a lot of this is up in the air and open to interpretation. It really depends on what the Chinese regulators decide to enforce and crack down on over the coming months.

Any negative impact or consequences will be felt by smaller players and those looking to enter or get into the Chinese streaming market.

How will this affect the rest of the world?

One of the largest and most renowned streaming providers, Netflix, does not currently offer service in China. And with the new regulations in place, it doesn’t look like they’ll enter that market anytime soon. But for the company, it’s not just a matter of regulation — they would face stiff competition from other providers in the region. Namely, those supported and funded by the government.

The actions of a single provider hardly speak for the entire market, but it should provide some indication as to what many will do in the future. Fewer companies will seek to provide streaming content in China, unwilling to deal with the strict regulations and the competition.

That’s not to say the market growth will halt. There will be a shift in what providers are accepted and what kind of content is offered. User-generated content, for example, may slowly be phased out. The same is true of unregulated content, at least when it comes to providers who want to stay on the government’s good side.

The views expressed here do not necessarily represent TechNode’s editorial position.

Didi has suffered a bolt from the blue, as Beijing, Shanghai, and Shenzhen each rolled out specific regulations for the car hailing business on Saturday. The rules are harsh, to say the least, and has brought the ride hailing behemoth to its knees, arguing for possible remedy from the authorities.

The newly published draft interpretations from the three largest cities–all with tremendous migrant populations–have stipulated that drivers must of local Hukou, or family register. This is a heavy blow for Didi, as it eliminates more than half of the drivers in Beijing and Shenzhen, and dispels an overwhelming majority of Shanghai drivers from the platform.

The draft laws from these cities also raised the bar for cars in the business. Didi bemoaned that the higher standards would disqualify more than 4 out of 5 existing vehicles.

Artificially holding down supply would “more than double prices”, and the waiting time for rides would increase from the current 5 minutes on average to a whopping 15 minutes, warned Didi.

It also threatened of the adverse effects of droves of unemployed drivers, which could pose a “mass risk”and become a “social unstable factor”. Naturally, in a state of desperation, the company pulled out its trump cards– “innovation” and the “sharing economy”, both espoused by the premier himself, and predicted that such measures would brutally crush the buds of the sharing economy.

“Didi sincerely urges local governments and authors to give citizens with and without local Hukou equal employment rights. We should not let citizens lose heart and passion in innovation and entrepreneurship”, appealed the company after the new regulations rolled out.

Perhaps the most fatal of blows is the rigid Hukou specifications. “Of the 410 thousand registered drivers in Shanghai, only 10 ten thousand have a Shanghai Hukou” bleated Didi in a statement. However, these figures may be exaggerated for its own convenience, creating a victimized image and implying more severe consequences. Only 30% of Shanghai drivers were nonlocal, according to Didi’s“Mobile Transportation Employment Promoting Report” published last month, as it congratulated itself on the ability to attract local drivers who are better acquainted with roads.

More than 65% of the drivers in Shenzhen and more than 50% of that from Beijing do not possess a local Hukou, the report found.

Once the guidelines, which are still in an opinion solicitation phase, kick in, cars on the platform must have a vehicle age under 2 years, a wheelbase longer than 2700mm, and an engine capacity of more than 17.25L–specs that mid-high end cars are more likely to meet.  On the bright side, this means there were be fewer creaky manual-windowed surprises pulling up when you hail a ride.

Unlike the desolate future which Didi fears, with all but luxury sedans plucked from the platform, Technode has found that it’s possible to get qualifying Chinese models that cost as little as 80 thousand Rmb.

Just how much leeway do these local draft regulations leave before they are set in stone? That remains a question. The company has proved that it carries a lot of clout–surprise, some of the top executives in the company like Zhang Bei come straight from the government bureau of transportation– Didi’s outspoken objections to the national draft for car hailing led to an eventual version which are largely in favor of the company. Didi’s recent buyout of Uber China has been (so far) exempt from anti-monopoly investigations, again attesting a solid relationship with the authorities.

But these local interpretations have clearly come as a shock, or at least a case of  failed lobbying on the local level. Will the law be in favor of Didi in the China’s mega cites? Though Xinhua has published an commentary proposing that draft laws should leave “windows for revision” and emphasizes that even “provisional guidelines” are subject to modifications, the window of opportunity this time is short. Suggestions and objections to the draft must be made within one month, while Beijing left merely a week-long opening for rants and complaints. Didi had better start pulling some strings, or hold its peace–at least for the time being.

Whilst summer is almost upon us, unfortunately it seems that the Chinese internet finance industry is still stuck in winter. In the most recent article published by Sheng Songcheng, head of statistics at the People’s Bank of China, it said that bank deposits from money-market funds, for example Yu’e Bao, should be subject to reserve requirements just as traditional bank deposits. Such reserve requirements should be applied indirectly – only on those amounts held by banks on behalf of these investment companies.

Yu’e Bao, the investment product offered by China’s e-commerce giant Alibaba, has accumulated at least 500 billion yuan ($81 billion) in deposits as at the second week of March 2014. Similar financial products provided by its rivals Tencent and Baidu are also hugely popular in China, as more and more people demand alternative financial products in their search for higher yields.

According to the article, the annualized return of Yu’e Bao would be reduced by one percentage point if there were a 20% reserve requirement on the portion of its money placed as deposits with banks. Currently, most of the internet financial products offer a return of about 5% – 6% to investors, still well above the maximum 3.3% that banks can offer on a one-year fixed deposit.

China has always been known as the home to some of World’s largest banks and most stringent financial regulations, which never makes life easy for disruptive innovators in the financial industry. As these private Chinese online financial firms enjoy their blooming, executives of China’s largest banks have been calling for more regulation to curb the rapid expansion of Internet financing. They hope such regulations will help stop the decline of their banking deposit volumes which have been adversely affected by the emergence of online financial services. They claim that the lack of oversight and risks related to account security, yield volatility and liquidity management threaten China’s financial stability. Such a position is also well echoed in the China Financial Stability Report 2014 (“the report”), issued by People’s Bank of China (“PBOC”) on April 29th.

Among other things, the report points out that China’s internet financing is still in the initial and observation period, which requires further balance of the relationship between innovation, consumer protection and risk prevention. The report introduces five regulation principles of the internet finance industry in China, officially setting the tone of the role of internet finance as a substitution of the real economy, and it should in no way affect the stability and liquidity of the settlement capacity of banks. The principles also require the internet financing industry to establish proper industrial guidelines and information disclosure mechanisms to safeguard the legitimate rights and interests of consumers and ensure fair competition.

On the positive side, the report does acknowledge the benefit of a well-regulated internet finance industry, and that internet companies could still play a role in making China’s creaky financial system more competitive. This will improve the flow of lending to small businesses and encourage greater competition from stodgy state-run banks. At the same time, the report warns that the potential financial and economic risks associated with internet finance. The report specifically mentioned peer-to-peer (“P2P”) lending and crowd funding, stated that P2P lending and crowd funding should remain as financial platforms and stay away from illegal funding, illegal securitization and illegal depositing.

The report discussed in length about how moderate regulation should be timely casted on internet finance to ensure the healthy development and incentive for innovation. The report gives heavy emphasis on the self-regulation of internet finance firms to create an efficient substitution in areas where major Chinese banks fail to provide an efficient service, for example: small to micro amounts and high speed transfers.

Although PBOC was less blunt in taking its position than the industry expected, the message is fairly clear. These overarching principles leave some room for the regulators to further promulgate laws and industrial practices, as they deem necessary. Further news was that the regulators have also been looking to establish an industrial association in June this year to supervise the internet financial industry. Relevant proposals have already been approved by the State Council.

As there is considerable price different between iPhone and iPad in China and in places like Hong Kong, many people bring them home whenever they travel aboard.  In fact, there are more iPhone coming from aboard (called parallel import) than sold by its official channel, China Unicom, in China.  China Unicom sold about 1 million iPhone so far, but there are about 3 million parallel imported ones.

In my opinion, the best way to fight parallel import (or struggling) is to lower the price of iPhone and iPad in China, so that there is no more significant price differences.  Actually, I don’t quite understand why iPhone and iPad have to be more expensive in China than in places like Hong Kong.  After all, they all come from the same source, Apple.