BOFIT Viikkokatsaus / BOFIT Weekly Review 2021/18

China has had anti-monopoly legislation to prohibit the abuse of market power for over a decade, but instances of enforcement of competition law against cartels has been quite rare. Since the announcement of an anti-cartel campaign at the Communist Party’s leadership meeting last December, the government has sprung to action. In February, the State Administration for Market Regulation (SAMR) clarified its guidance on what technology companies should do to comply with anti-cartel and anti-monopoly laws. The anti-monopoly law is being revised this year, with amendment proposals to be presented to decision-making bodies by December.

At the beginning of April, the online commerce platform Alibaba was fined a record $2.8 billion for competition violations. Soon after the Alibaba fine was issued, SAMR summoned the leadership of China’s large technology firms onto the carpet to warn them of heavy fines if they continued to abuse their dominant market positions. In total, 34 companies involved in online commerce, food delivery, video apps and gaming were given a month to shape up. At the end of the month, SAMR still handed out small 500,000 yuan fines to ten firms and announced an investigation had been launched into food delivery giant Meituan.

Due in part to the earlier ambiguity of cartel laws and their previously relaxed enforcement, China’s huge tech firms have been able to dominate market segments by forcing vendors to choose between their services and that of rivals. Tech firms have also been accused ignoring privacy protections of user data and permitting the sale of counterfeit products on their platforms. The recent actions of the watchdog SAMR now make it easier also for clients, consumers and competitors to bring civil actions against tech firms that commit regulatory abuses.

In addition to the amended anti-monopoly law, the government has added new regulations with teeth. One example is how the regulator has approached Alibaba’s payment and credit services subsidiary, the Ant Group (BOFIT Weekly 46/2020). The Ant Group and other fintech firms, which have long benefited from looser regulation compared to the traditional banking sector, have become market leaders as a result. Since the anti-cartel campaign was launched at the party leadership conference, regulators have adopted a distinctly harder line. For one, the Ant Group has been forced to reorganise itself as a financial holding company, placing its operations entirely under the supervision of China’s financial regulators and the central bank. Capital requirements on financial holding companies were tightened last November, so the Ant Group, like others, will see a significant increase in its capitalisation requirement.

The motivation for stricter capitalisation requirements reflects several sad instances of firms that expanded rapidly with borrowed money only to subsequently be bailed out by the government to preserve systemic financial stability. It appears that the Ant Group has been made an example of China’s brave new regulatory environment. Another fintech giant, JD Technology, had to abandon its IPO plans at the beginning of April. According to media reports, JD Technology is also establishing a financial holding company.

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