How China has been clamping down on big tech empires

The crackdown may cause more Chinese investors to see Southeast Asia as a haven.

China’s new antitrust guidelines, which it released in February, serves to clamp down on the “monopolistic behaviors” of the country’s big tech firms, tightening the government’s grip on the internet space.

At the same time, the increasing efforts to regulate the opaque private equity space mean the environment is even more precarious for tech companies and investors.

anti-monopoly, China, private equity

Photo by BP Miller on Unsplash

Around the world, the internet sector is generally becoming more regulated. But in China, the impact is imminent.

Past investment deals of companies including Alibaba and Tencent are under an antitrust probe. With the rising scrutiny in China, perhaps neighboring Southeast Asia could benefit from having a more lenient environment.

War on tech monopolies

The fight against these tech firms has been a long time coming.

China established the State Administration for Market Regulation (SAMR) – the regulator for market competition, monopolies, intellectual property, and drug safety – back in March 2018. The move was a significant change to China’s antitrust enforcement since the anti-monopoly regulation came into force a decade prior.

But at the end of last year, the iron fist came down hard.

In November, SAMR released a draft of the antitrust guidelines targeting the platform economy. The move led the stock value of many listed tech companies to plummet.

In the same month, regulators halted Ant Group’s planned dual listing in Shanghai and Hong Kong.

But more regulatory actions soon followed. In December, SAMR issued fines to Alibaba and affiliates of Tencent and logistics giant SF Express over three separate acquisition deals in what was said to be the first wave of antitrust law enforcement.

In February this year, China formalized the draft laws, banning internet platforms from forcing merchants into exclusivity deals, offering different prices based on user data, and using algorithms to manipulate the market.

The sweeping clampdown affected companies across several sectors, including ecommerce, video-streaming, fintech, and logistics.

The screws are not only tightening on tech firms but also on the private equity space. In January, Chinese regulators issued 14 new measures to bolster transparency in the traditionally opaque 54segment. Large private equity firms have also been ordered not to raise funds from retail investors.

Timeline: Companies under increased regulatory scrutiny

November 2020

  • Ant Group dropped its planned US$37 billion market launch after regulators intervened. An antitrust investigation followed.

December 2020

  • Tencent-backed online game-streaming platforms Huya and Douyu were put under investigation for their merger, which they announced in October last year.
  • Tencent was slapped with a 500,000 yuan fine (around US$77,000) for failing to seek regulatory approval when subsidiary China Literature acquired Chinese media and entertainment company New Classics Media in 2018.
  • Alibaba was fined the same amount in connection with its US$2.6 billion acquisition deal with department store chain Intime Retail.
  • Hive Box, a logistics firm backed by parcel giant SF Express, was fined the same sum over its acquisition of China Post Smart Logistics.

March 2021

  • SAMR issued fines to 12 tech companies, including Alibaba, Tencent, Didi Chuxing, Baidu, Suning, and ByteDance in relation to over 10 investment deals. The companies were each charged 500,000 yuan for not seeking approval for past arrangements.

A warning

Many companies in China owe their meteoric rise to the authorities’ previously hands-off approach. Now with special privileges gone, sustaining the same growth in a stricter environment will be challenging.

Among the areas regulators also hope to address is the collection and use of big data.

As opposed to data monopolies, tech giants will become more like technology vendors, Alex Sirakov, founder of Shanghai-based investment advisory firm AquariusX, tells Tech in Asia.

“Eventually, data will not stay monopolized by the ubiquitous closed-loop mentality of big tech operators,” Sirakov says.

In addition, major tech companies are expected to increase due diligence not only on data use and business expansion but also on their investments.

Probably as a result of this, Alibaba’s startup investments slid to US$2.7 billion for the period between November and February this year, dropping from around US$6 billion from the same period a year ago.

Deals made by China-focused private equity and venture capital firms also slowed for a second consecutive month in February, according to Deal Street Asia. Specifically, the total value of investments was down more than 30%, and the number of deals dropped by nearly 15% for that month.

Spillover effect?

The market uncertainties in China are not only caused by the regulatory shakedown but also the broader economic and political factors.

In the past, such uncertainties spilled over to neighboring Southeast Asia.

For instance, the region started generating a lot of interest from overseas investors when the China-US trade tension intensified in 2018, Ee Fai Kam, head of research and data operations at Preqin, tells Tech in Asia.

Naturally, many international manufacturers started looking at Southeast Asian markets such as Vietnam, Thailand, and Indonesia as their alternative manufacturing base.

When China experienced a capital winter two years ago, tech investors from the country started paying attention to Southeast Asia as well.

That’s not to say that capital is generally diverting away from China toward the region, Kam says. However, Southeast Asia does stand out as a more lenient and less saturated market.

The region could start to attract Chinese capital when its economy rebounds after the pandemic.

Investors are indeed showing interest in Southeast Asia’s technology development, according to Mickey L. Tantiphipop, associate at Southeast Asia-focused Cento Ventures. In fact, he says, the growth rate of the number of deals participated by Chinese investors doubled year-on-year prior to 2016. Investment from China last year did not digress from this trend, he says, although it was more gradual.

anti-monopoly, China, private equity

Compared to 2019, the number of deals done by Chinese investors in Southeast Asia grew in 2020 in terms of volume and its share of the total deals done.

“Noting that the causal relationship between the regulation in China and investment in SE Asia tech is difficult to justify without more nuanced research,” Tantiphipop tells Tech in Asia, “the closest we can speculate is from the correlation between the timing of the regulatory tightening and the change in the investment trend.”

The investment activity during those years only grew along with the region’s general investment trend rather than showing a stark divergence, he added. It is too soon to tell the regulatory impact on private equity in the region.

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