Chinese regulatory tightening moves beyond tech companies

THE announcement by the authorities in Macao on September 14 that there would be a 45-day public consultation on gambling in the territory shows that Chinese regulatory tightening has moved beyond internet technology companies to other areas.

The share prices of US casino companies that operate in Macao – the only place where gambling is legal in China – plunged.

The government of the semi-autonomous Chinese territory was considering changes in nine areas, Macao’s economic and financial secretary Lei Wai Nong said. Those areas include the number of gambling licences issued and their duration, a stronger review mechanism for approving operators, and employee welfare.

Investors have already seen some $3 trillion (R44 trillion) wiped off the market value of the country’s biggest tech companies over the government’s tightening of regulations that seek to curb monopolistic behaviour and promote a better lifestyle for its citizens.

Regulators have cut the amount of time players under 18 can spend on online games to an hour of play on Fridays, weekends and holidays, in response to growing concern over gaming addiction, which some commentators have labelled a “social opium”.

The State Administration of Market Regulation (SAMR), similar to SA’s Competition Commission, said it would further regulate the sharing economy such as ride-, bike- and home-sharing.

China is building its own statebacked cloud system – “guo zi yun” – which translates as “state asset cloud”, in direct competition to cloud services offered by Chinese tech giants such as Alibaba, Huawei and Tencent. Many state-controlled entities will then be forced to migrate to the state cloud from the private cloud.

In the same way that subliminal advertising, which are messages that the conscious mind cannot perceive, is banned in most countries, so the Cyberspace Administration of China said that companies must abide by business ethics and principles of fairness and should not set up algorithm models that entice users to spend large amounts of money or spend money in a way that may disrupt public order.

In May, three financial regulators widened curbs on China's cryptocurrency sector by barring banks and online payment firms from using cryptocurrency for payment or settlement. They also barred institutions from providing exchange services between cryptocurrencies and fiat currencies, and prohibited fund managers from investing in cryptocurrencies as assets. Provincial-level governments then curbed bitcoin mining, which was using large amounts of energy.

The housing ministry and seven other regulators have also sought to “improve order” in the property sector to prevent an asset bubble.

Fitch Ratings said there were legitimate economic and regulatory considerations at play in China’s regulatory crackdown on internet-oriented technology enterprises, private education firms and overseas listings, but a blunt policy execution and communications strategy could alter the regulatory risk premium that global investors require for investing in Chinese securities.

“The government’s policy considerations broadly encompasses data privacy, national security, socio-economic considerations, and a recognition that regulatory oversight has not kept abreast with the reach and influence of China’s online sector,” Fitch said.

It noted that many of these regulatory issues are not China-specific, and other governments have also implemented related reforms in recent years.

“China’s new regulations will affect the competitive landscape, profitability and cash generation of companies in the relevant sectors, but we do not believe the changes will have negative spillovers for China’s broader corporate environment,” Fitch added.

With China tightening regulations, it may be wise for investors to question whether there could be knockon effects outside China if other regulators follow suit. Global giants elsewhere could well be vulnerable to some form of regulatory sanction.