As discussed on Discord, I found myself agreeing with a lot of the below transcript of GGV GR SVP Mr. Wang Lidong’s assessment of the 2022 China tech regulation landscape. (Edit: The NDRC document released today doesn’t contradict what he’s said at all and I think affirms some of it quite nicely.) The comments were made on January 5, 2022. I thought it to be quite interesting, although as always, do remember that this is just one person’s opinion. I should also emphasize though that this is an informed opinion – Mr. Wang had spent 11 years at MOFCOM after graduation and subsequently worked for a few years at Alibaba as well in its government relations department. So especially with regards to Alibaba and platform economies, I’d regard him as credible. The full document is quite long, so I’ve summarized it more succinctly below and attached the complete Chinese version at the end for those who want to wade through the original. My personal comments in italics below:
1. On internet regulations in 2022:
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The main theme of internet regulations is common prosperity, with two supporting lines: antitrust and network / data security.
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On common prosperity, guidelines affecting the next 10-20 years are predicted to come out after Lianghui (late July to early August) or after the break in September.
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Common prosperity means there will be 3 divisions: some industries will be expected to provide high quality growth & encouraged (advanced manufacturing, new energy vehicles, etc.), some will be rectified & given limits (e.g. internet) and some will become more of a public service (education, healthcare, senior care, real estate, etc.)
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Local governments will give out policies after the national ones have been established, and may have overlap with existing regulations, but it is expected that the government will try to avoid the extreme measures applied to the after-school tutoring sector
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Tax loopholes and subsidies will be fixed, and may include taking away the tax breaks currently afforded to internet companies
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On antitrust: there is expected to be less movement as most of the core oversight organizations have been established and tools published, landmark cases prosecuted. New cases will happen but they should be less unexpected
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The emphasis will be on anticompetitive behaviors instead and enforcement will spread from the top companies to more entities, but landmark cases have yet to emerge. This is much more nuanced than antitrust, and we will see if the Chinese regulators really have a coherent policy framework. I don’t expect the markets to like this …
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There will be a push towards data opening up / sharing, and the regulators are especially interested in seeing the big players do more things for the ecosystem
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Top platforms will be restricted in their investments. See below.
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After Ant is separated into fintech, consumer tech, and internet microloan entities, can expect the same for WeChat Pay
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Network / data / personal information security may have some cases this year, as CAC has strong political motivations to proactively investigate; overall the costs for compliance might be higher than antitrust. Results of the Didi case will be a landmark ruling in this category. It is quite incredible to me that there is still no resolution.
2. Will the big platforms face greater regulatory pressure in 2022?
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Probably less than 2021, especially in antitrust, as everyone has gotten hit. It’s the smaller platforms who might be more at risk for data security issues. Less but not none. The markers have been placed on the ground … don’t overstep!
3. Will philanthropic donations from internet platforms be expected to continue?
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The government is mostly interested in illegal income. As for the third distribution / philanthropy portion, the government’s attitude is that this should be a market behavior, not forced. ESG investments will probably increase but not so much as to hurt the bottom line. I’ve been saying this as well! In fact, I’ve heard from quite a few people that the government was very unhappy with these initiatives … as were the citizens, who thought them to be publicity stunts (which, let’s face it, they totally are?!).
4. How will the data security laws affect personalized ad recommendations?
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Huge impact. Companies will need customer permissions to collect data, and sensitive data like face and fingerprints cannot be collected unless there is demonstrated to be a need. The policy for investigation violations has not yet been finalized. I don’t have as well-informed of an answer as I would like here. Does anyone else have anything to contribute?
6. Internet companies and investing in network security
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The new rules (as of Jan. 4, 2022) gives great power to the authorities to investigate any suspected issues with data security. Investigations are a minimum of 30-45 days (not too different from the draft that I’ve written about before), and so is definitely something companies will need to watch for and allocate budget for. But too bad as foreign investors we are largely unable to invest in this space!
8. Can we understand from the above regulations and corresponding increases in operational costs that the government no longer encourages internet companies to innovate?
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In the last 10 years, the government had been mostly focused on poverty alleviation. Lots of internet companies benefited from favorable policies and became de facto public infrastructure (even more obvious during the pandemic). In the past Chinese internet companies were given too much freedom, and now they face rectification. It is not a sign of over-regulation. I am tired of repeating what I think about this question. But I concur.
9. But will this mean that it’ll be tougher for smaller companies and instead benefit large internet cos?
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Looking at America, that hasn’t happened (despite tougher regulations). Even this past year, internet-related investment still increased 40-50%. Maybe the speed of development decreases, but there will still be growth. I think the government so far has shown a willingness to make the compliance burden lighter for smaller companies, so I’m not convinced there will be some permanent dent on new company formation.
11. Tencent has been divesting some investments, is this related to regulations? What are regulators hoping to see?
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Tencent used to have very harsh terms for investment, but since last March / April, they’ve loosened up a lot. They’ve been talking to regulators a lot, and ultimately regulators want to see Alibaba and Tencent be “internally driven,” instead of using its traffic to buy more armies. Previously Tencent used to ask for veto rights or board seats, and regulators did not like this. There will not be clear boundaries, but a direction will be given. This didn’t seem super conclusive, but hints at restrictions in investment in the future. Although this particular rumor on 100mm+ user platform investments needing approval was quickly debunked, I’m inclined to believe that some restrictions are coming. Whether or not they are related to the divestments it’s hard to say, as new rules are often more forward looking than backwards looking.
13. The future for Alibaba and Tencent?
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WeChat and WeChat Pay need to be separated, and the latter needs to have external investors, very likely, but this probably won’t happen until Ant has finished restructuring and provides a template. Unlikely that Tencent gaming and cloud businesses will be spun off. I don’t know anything about WeChat Pay’s future, but if this is true, then it may finally put to rest rumors that the government is out to get Alibaba, versus to rein in platform companies at large.
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Regulators want to see more openness between the two. 1) open up traffic (being able to share links), 2) open up data (Alibaba is less enthused than Tencent about this) and 3) open up users (this seems challenging). I’ve forgotten all about this! But yes, this is absolutely in line with the Chinese government’s position that the total value add to the economy is of much greater importance than any single company’s profits, even if they are “world-leading.” The greater the openness, the greater the velocity of transactions through the very large slice of the digital economy these two platforms own, and the greater the boost to total value generated.
14. Will SOEs get more favorable treatment with regulators?
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No, even though investors seem to favor them. I know very few believe this but I think this is quite true. China’s great goal is to have all its SOEs compete effectively as “market entities” in the free market. The Chinese public’s trust in SOEs (especially their creditworthiness, relative to private enterprises) is more of a legacy bias that is actually expressly discouraged by the central government. Of course, there is typically a lag between articulated policy and market reality, but I do think there is a clear movement to treating SOEs as market entities.
