Chinese regulatory crackdown is about control, not data privacy

Chinese government focuses on control

There was a notable shift in China's approach to regulating its tech giants last year when the government began investigating online shopping giant Alibaba, which filed for an IPO in 2014 and is publicly traded on the New York Stock Exchange. In April, China hit the company with a $2.8 billion fine after antitrust regulators concluded the company was behaving like a monopoly by preventing third-party retailers from selling their products on competitor platforms.

Alibaba was created by Jack Ma, who is often described as being one of the richest men in China. In a speech Ma delivered in October 2020, he criticized the Chinese financial industry establishment. Regulatory reviews of Alibaba began shortly thereafter. Chinese authorities also derailed financial technology company Ant Group, an Alibaba affiliate, from going public, initially in Shanghai and Hong Kong. The People's Bank of China ordered Ant Group to come up with a rectification plan in December 2020 to address concerns with the company's alleged anticompetitive business practices and widescale collection of user data.

Ma, who stepped down from Alibaba's board in 2020, disappeared for months, keeping silent as the Chinese government went after the companies, Li said.

The broader context is that technology, big data, cyberespionage, they all play a larger role in geopolitics than ever before.

"Just based on what happened to Alibaba last fall, you can see just how strong a hand the government has over these tech companies," Li said. "I think that puts a real damper on the competitive nature of the business environment."

On Monday, China's regulatory arm, the Ministry of Industry and Information Technology, initiated a six-month rectification program, ordering Chinese tech giants to stop anticompetitive practices and the mishandling of consumer data.

While some of the concerns from the Chinese government sound familiar -- the U.S. is also focused on data privacy and how companies like Amazon and Apple treat third-party vendors -- China's increasing crackdown on its own tech companies is less about consumer data protection and fair competition, Li said, and more about China's desire to protect its own national interests by keeping businesses domestic and preventing the outflow of data beyond its own borders.

By citing national security concerns, Li said he believes China is belatedly retaliating against actions taken by former President Donald Trump's administration to ban Chinese apps, despite the fact that China has always banned Western apps. In August 2020, Trump issued an executive order banning TikTok and WeChat from operating in the U.S. if they weren't sold by their parent Chinese companies, ByteDance and Tencent, respectively. The executive order got hung up in court and the ban never materialized.

Instead of just banning Western apps from operating in China, China is taking a new approach by attempting to keep its businesses and data out of countries like the U.S., according to Li.

"Many, if not most, apps are banned in the Chinese app stores," Li said. "But the different tactic now is by putting pressure on the outward flow of businesses and capital, which the U.S. -- just because of its own political structure -- hasn't done in the same way."

The regulatory crackdown serves as a warning to key officials within the country, as well as business owners, of the control the Chinese government exercises, and it highlights China's focus on competition with the U.S., which has become increasingly tense.

"The broader context is that technology, big data, cyberespionage, they all play a larger role in geopolitics than ever before, so nothing can be taken out of the context of U.S.-China animosity in the current environment," Li said. "With the beginning of [President Joe Biden's] administration, it was kind of a letdown to some Chinese hopes that Biden would be a little easier on China. I think that's the important factor there."

Indeed, in a statement released by the White House earlier this month, the U.S. government blamed Chinese state-sponsored threat actors for the extensive Microsoft Exchange Server cyberattacks that occurred earlier this year. The U.K. and NATO also accused China of hacking Microsoft.

Impact on Chinese tech companies

China's regulatory momentum seems to have raised concerns among Chinese tech companies.

Rinaldo Pereira

Rinaldo Pereira, senior analyst at London-based data analytics and consulting firm GlobalData, said Chinese tech firms seem pessimistic about the current business environment due to increased regulations, among other things. GlobalData determines company sentiments using an AI-based analytics tool that analyzes company filings and transcripts.

"Chinese tech companies are concerned about being slapped with heavy fines if found to be breaching China's antitrust regulations," Pereira said. "Of late, China has tightened its policies and is looking at cracking down on companies with monopolistic practices. It does seem that China considers companies listing abroad as possible data security threats and is likely to carefully monitor overseas IPOs, thereby, impacting companies hoping to gain larger investor bases."

Along with impacting IPO filings and the threat of fines, Chinese tech companies could also be facing the loss of brand image, heightened scrutiny against mergers and acquisitions, and compliance with newer, more complex regulations.

Pereira said non-Chinese firms, particularly U.S. companies, are also likely to face scrutiny under China's antitrust laws. Yet, he said it's difficult to assess the impact to foreign companies since the law appears to be "highly selective and might only impact companies China considers as a security threat."

"Currently, the only way [forward] for domestic and overseas firms seems to be compliance with new laws," Pereira said. "However, lack of clarity and geopolitical tensions around the law for non-Chinese firms makes the situation highly uncertain."

For now, The Stimson Center's Li said compliance appears to be the tactic domestic Chinese companies are taking under the additional regulatory crackdowns.

"From the responses of the Didi executives themselves, they're abiding by the rules of the Chinese government in a very, kind of, respectable way," Li said. "I think that shows there is going to be compliance with the further crackdowns, as well as just more crackdowns in general."

Makenzie Holland is a news writer covering big tech and federal regulation. Prior to joining TechTarget, she was a general reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.