26 October 2021

No Arminius fund has any direct exposure to Chinese equities. This is a deliberate policy: we can read the Chinese-language financial accounts of Chinese companies, so we know that these contain some of the most imaginative fiction outside the bestseller lists. But we want our investors to understand what is currently happening in the world’s second-largest economy, so this is the second in a series of articles on the recent events in China.


In the first article in this series, we pointed out that consumer protection was a key element of the new policy of “common prosperity”. China’s tech giants – e.g. Alibaba, Baidu, Bilibili, JD.com, Kuaishou, Tencent – have been exploiting their customers just as aggressively as their US counterparts Amazon, Apple, Facebook or Google. So have their smaller competitors in both countries, but the tech giants attract the most attention and pay the biggest fines.

The breakneck expansion of China’s tech giants was built on the same philosophy as America’s tech giants – “move fast and break things.” That is, they have diversified into new areas of business without paying much attention to the regulatory environment, figuring that such minor details can be fixed up later. Amazon, for example, argued for many years that its sales to customers in any State other than its home State of Washington should not attract State sales tax. Only after a lot of legislation and court decisions did Amazon agree to collect State sales tax – a modern application of the old Chinese saying: “It is better to seek forgiveness than to ask permission.”

This is why the State Administration for Market Regulation (SAMR) put out a consultation paper in August 2021, setting out a long list of prohibited behaviours which are widespread in tech industries, including:

  • Using or arranging false or misleading publicity material, e.g. fabricating fake business transactions, or fictitious rankings, or phony data, or non-existent customers, or misrepresentations about competitors
  • Promoting fake recommendations or hiding critical comments
  • Using logos, icons, designs, or rigged search results which are intended to trick users into believing in a fake website – what Anglo law calls “passing off”
  • Hijacking website traffic by means of false links
  • Selling the same product at different prices depending on the buyer’s transaction history or shopping habits
  • Using data, algorithms, and other technical means to influence user choices
  • Forcing customers to download unwanted or harmful applications
  • Blocking, intercepting, or altering users’ legitimate applications, downloads, or computer operations
  • Tampering with search results
  • Interfering with other companies’ digital services
  • Forcing vendors to use only one platform to sell their goods
  • Setting up “walled gardens” which exclude competitors and re-route users to the platform’s associates, e.g. how Alibaba used to force users to pay with Alipay so as to exclude Tencent’s WeChat Pay (and vice versa).

The regulator obviously has a thorough understanding of the tech industry works! For years, China’s tech industry has been operating like the Wild West: the companies have been able to get away with almost anything because the regulator SAMR was very new and very understaffed. It was stitched together in 2018 out of three existing institutions, and until recently it had only 40 people in its anti-trust section.

The central government has been formulating its new rules for the tech sector since 2019. The October 2020 decision to halt the IPO of Jack Ma’s USD$300 billion company Ant Financial Services was a very clear signal that a new sheriff had arrived in Dodge City. (USD$300 billion is THREE times the value of CBA, Australia’s largest bank.)

On 24 October 2020, the Chinese billionaire Jack Ma, founder of the tech giants Alibaba and Ant, brought the wrath of China’s top leaders down upon his head, by telling them in a public speech that they needed to change the way they regulated finance and technology companies like Alibaba and Ant. Jack may well have been totally sincere and altruistic, but it shouldn’t have come as a surprise to him that his advice was not well received. The Chinese Communist Party has spent the last hundred years telling the private sector what to do – not the other way around.

Retribution was swift. The IPO of Ant was cancelled days before it was due to list, Ant was forced to restructure into a smaller and tightly regulated financial holding company, and an inquiry was launched into how the Ant IPO got to be fast-tracked. In addition, Alibaba was fined $4 billion for anticompetitive behaviour, and Jack Ma himself has been keeping an extremely low profile with no public speeches.

This was not an isolated instance of the Party disciplining an unruly individual. SAMR (the State Administration for Market Regulation) is China’s equivalent of the ACCC, APRA, AQIS, and the TGA all rolled into one. Besides supervising a diverse bunch of markets, since 2019 it has been working on an update of China’s antitrust laws, which were drafted before the rise of today’s giant tech companies and intended to apply to physical industries. The official Chinese terminology for “antitrust” or “antimonopoly” is fanlongduan (反垄断), and we are going to hear this word a lot.

On 13 April 2021, SAMR and four other regulators called 34 of China’s top tech companies into a meeting to “discuss” the new antimonopoly regulations. The list of attendees is a Who’s Who of Chinese tech, including Alibaba, Tencent, Baidu, Didi, JD.com, Kuaishou, Meituan, ByteDance, Bilibili, Pinduoduo, Qunar,  Netease and Ctrip. The tech CEOs fell over themselves to line up behind the new policies, and several gave tangible commitments to “common prosperity” by setting up large charitable foundations.

The new anti-monopoly regulations focus on protecting consumers, preventing illegal corporate behaviour, and eliminating unfair competition, but the Chinese leadership was also very angry that the tech giants had expanded into financial services without the appropriate licences, not to mention a total lack of ethics. The companies had boasted of analyzing the data provided by their customers so as to decide the size and pricing of consumer loans, as well as to design “innovative” financial products.

The tech giants’ growing presence in financial services ran directly against the Chinese leadership’s long-running campaign to bring the shadow banking system under regulatory control. Soon after taking office in 2013, Xi Jinping had set about improving the stability of China’s financial system by instituting a step-by-step program of controlling or eliminating the unregulated operators (aka “shadow banks”). This program began with the P2P lenders, but focused on the trust companies and the wealth management products which they sold through the regulated banks with the suggestion (but not the legal obligation) that the banks stood behind these products. The program then moved on to extend control over the private payments systems Alipay and WeChat Pay (which handle over 90% of payments in China): they were forced to obey the banks’ prudential standards for clearing, deposit-taking, and reserving.

The primary objective of the program was to de-risk the financial system, either by eliminating troublesome players (e.g. the P2P lenders) or by bringing important financial products (e.g. the enormous online money market fund Yu’ebao) under regulatory control. Secondary objectives of the program included discouraging money laundering and enabling the regulators to monitor all activities in real time. It is no accident that the digital currency which is currently being trialled by the People’s Bank of China is based on complete transparency to the regulators, because it allows them to record and scrutinize all transactions.

The April 2021 rules for tech companies forced them to not only obtain the appropriate licences for all their financial services businesses, but also to put their financial services businesses under specific holding companies, to separate payments platforms from their other financial services, to get permission for overseas IPOs, and to comply with new data collection and privacy standards in their personal credit reporting businesses.

This is why SAMR’s April 2021 meeting with the tech giants included the big four financial regulators – the China Banking and Insurance Regulatory Commission (CBIRC), the People’s Bank of China (the central bank, aka PBOC), the State Administration of Foreign Exchange (SAFE), and the China Securities Regulatory Commission (CSRC). All four are bigger and older and smarter than SAMR, and they exercise much more bureaucratic power.

So we see that China’s crackdown on tech companies was motivated by the need to keep the financial system as stable as possible, as well as the policy objectives of increasing consumer protection and eliminating anti-competitive behaviour. What about the other crackdowns in China?


To be continued in S01E03…

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