The biggest winners ultimately will likely be the tech sector and others that are leveraged off consumerism and technology.
That’s something you are unlikely to read in the mainstream media, which has portrayed it negatively, in political terms. In doing so, the popular media has largely ignored the regulatory merits and economic benefits of the moves. The so-called “China Tech Busting” – as it had often been described – was cast as a phenomenon of the “Chinese Communist Party”, although it is pretty much what the West had been talking a good game about doing (but doing very little about it) for years.
“Pro-market, anti-monopoly…..and pro-innovation”. Don’t take our word for it. An insight published by Brookings Institute recently described China’s regulatory actions as “pro-market, anti-monopoly intervention, and pro-innovation opening of big company chokeholds on digital transformation.” The insight was written by Tom Wheeler, a visiting fellow and business leader with extensive experience in telecommunications, media and technology companies. He was a former Chairman of the US Federal Communication Commission under the Obama Administration.
Leveling the playing field. The first actions were taken against Ant Financial in November last year, when its initial public offering was suspended due to what the Shanghai Stock Exchange described as "changes in the financial technology regulatory environment”. But long before then, banks have been complaining about fintechs having unfair advantage on an uneven playing field.
In short, Ant Financial – despite having expanded into online banking – was not subject to the same capital adequacy and leverage requirements as bricks and mortar banks. Back in 2018, Orient Research estimated Ant Financial’s capital adequacy was 2%, far short of the required minimum then of 8% if it was treated as a bank. Note that Chinese banks have average capital adequacy of over 10% currently. In a report published earlier this year, independent research house TS Lombard said Ant Financial was “six time more levered than a typical Chinese bank.”
The previous exemption from standard banking capital requirements gave Ant Financial a balance sheet advantage over its banking competitors, and allowed it to take on much more risk.
Yet, the regulatory arbitrage is now over. The China Banking and Insurance Regulatory Commission (CBIRC) has imposed the same capital adequacy requirements on fintechs engaged in “financial operations” as traditional banks.
Creating a more competitive market for Small and Medium Enterprises (SMEs). After only three months after expressing concern over so-called “platform companies” anti-competitive business practices, Chinese regulators have issued a set of new rules.
Among other things, the rules disallow exclusivity contracts for sellers. This was allegedly a common practice among online retailers of requiring sellers to “choose one between two”. Under this practice, sellers could not operate on two different platforms.
Getting better deals for consumers. In its guidelines, the State Administration for Market Regulation (SAMR) also set new rules against market collusion. SAMR said it wanted to “stop monopolistic behaviours in the platform economy and protect fair competition in the market.”
Chinese regulators had expressed concern earlier in the year about internet companies using data, algorithms and other technical tools to exchange information to facilitate anti-competitive behaviour, in ways that were difficult to detect.
According to country and industry intelligence company China Briefing, the new guidelines now clarify that “a monopoly agreement is identified when different operators behave in a coordinated way due to the use of data, algorithms and other tools that allow them to synchronize their activity.”
Better personal data protection. Part of the better deal for consumers is better supervision of the handling of personal data by internet companies. The new rules require companies to get consumers’ consent for data collection, forbid companies from denying services to customers who decline consent, and they enable consumers to access their personal data held by companies.
A healthier ecosystem. China’s internet giants had for years blocked access to one another’s products and apps. These practices will henceforth be regarded as unfair monopolistic practices. As US tech news publisher TechCrunch reported: “The thick walls that (Chinese) tech companies build against each other are starting to break down……Alibaba has submitted an application to have its shopping deals app run on WeChat’s mini program platform….For years, Alibaba services have been absent from Tencent’s sprawling lite app ecosystem, which now features millions of third-party services. Vice versa, WeChat is notably missing from Alibaba’s online marketplaces as a payment method. If approved, the WeChat-powered Alibaba mini app would break with precedent of the pair’s long stand-off.”
As the walls come down, consumers will benefit, and a more dynamic digital ecosystem will likely emerge.
It was achieved without breaking up companies as some in the media speculated. Regulators have fined Alibaba an amount equivalent to 4% of its 2019 revenue – nothing it cannot quickly get over. It avoided a forced breakup or divestment of assets some had speculated as a possibility. Life goes on.
Broadly, the new regulations should be good for consumers, SMEs, and those parts of the economy that depend on technology and innovation. There is a lot more in the guidelines issued by SAMR but they have already been reported elsewhere. The bottom-line here is that, new regulations should boost innovation rather than inhibit it.
In arguing the case for the US government to do the same as Chinese regulators, Tom Wheeler wrote for the Brookings Institute: “The Chinese Government, it would seem, has embraced the benefits of good old fashioned American competition, and moved quickly on its implementation. In the United States, however, protecting domestic American competition – and consumers – remains a work in progress that legislators, regulators, and courts have yet to resolve.”
For China’s tech giants, it would be a period of necessary pain as regulators implement the new normal. But as there will be more visibility of the regulatory stance and enforcement measures, the new normal should create a healthier ecosystem that would be more sustainable. This would be positive for users and operators, including the tech giants and their smaller peers, even if the tech giants would likely remain dominant. Meanwhile this period of recalibration also presents a buy on dip window for investors, to build positions for the quality growth winners with robust earnings and long term prospects.