Chinese regulators on Thursday announced an anti-monopoly investigation by e-commerce giant Alibaba Group, which stepped up efforts by the ruling Communist Party to control the fast-growing tech industry.
News of the investigation caused Alibaba stock to drop 7% in pre-market trading and to drop 16% in the late morning to around $ 215 per share.
President Xi Jinping’s government is concerned about the dominance of online companies like Alibaba, the world’s top-selling e-commerce company, and Tencent Holding, operator of popular WeChat messaging service and Asia’s most valuable technology company. Regulators seem particularly concerned about overseeing private sector companies expanding into online banking at a time when Beijing is trying to reduce financial risk.
The ruling party says enforcing antimonopoly, especially in the tech industry, will be a priority for the next year. Since early November, regulators have tightened the reins by suspending the stock market debut of an online financial platform affiliated with Alibaba and urging industry executives to warn them of attempting to stifle competition.
“The era of free growth and ultra-high growth is really over,” said Francis Lun, CEO of Geo Securities Ltd. in Hong Kong. “The government will decide what you can do.”
Thursday’s announcement said the state market regulator was reviewing Alibaba’s policy of “choosing one of two,” which requires business partners to avoid dealing with Alibaba’s competitors. The one-sentence statement did not provide details of possible penalties or a schedule for announcing a result.
“Urgent matter”
The proposed rules, enacted in November, would prohibit exclusive contracts, subsidies, and other tactics regulators that harm competition.
“Reports of platform monopoly problems are increasing day by day,” the government’s People’s Daily said in a comment on the Alibaba probe. “Antimonopoly has become a pressing issue.”
Internet company in the United States face a similar test. Legislators and regulators are checking whether Facebook, Google and other companies wrongly impede competition in advertising and other areas.
Breakneck enlargement
Founded in 1999, Alibaba operates retail, business-to-business and consumer-to-consumer platforms. It has rapidly expanded to include financial services, film production, and other areas.
Alibaba founder Jack Ma is China’s richest entrepreneur and one of the most famous businessmen in the world with a net worth of $ 59 billion. Widely admired and a member of the ruling party, he has cleared regulatory hurdles.
Suspension of the ants population
In November, regulators shook the Chinese business community by suspending the stock market debut of Ant Group, a former Alibaba subsidiary that is the world’s largest online financial platform. It would have been the world’s largest IPO this year.
Economists said regulators were concerned about financial risk, but businessmen suggested that Chinese leaders may have been focusing on Ant because Ma complained at a business conference in October that regulators were not up to speed with the development of the industry Keep up and block opportunities.
Alibaba’s CEO later praised regulators in a speech aimed at mending potential relationships.
Ma resigned as chairman of Alibaba in 2019, but is still one of its largest shareholders. He was a leader in bringing Ant to market.
Also on Thursday, the market regulator announced that Ant executives had been invited to a meeting with regulators, but gave no indication of the status of their stock offering. Ant said in a separate statement that it would “study and strictly adhere to” the regulatory requirements but did not provide details.
Ant offers services ranging from banking to insurance to securities, connecting users with government banks and other institutions.
Tech company or financial institution?
Ant advertises as a tech brand, not a financial institution. The decision to discontinue the stock offering suggested regulators oppose it and may prompt Ant to participate in the credit-related risk and enforce his own controls.
Communist leaders are trying to reduce financial risk as a surge in debt raised concerns about a possible financial crisis and prompted international rating agencies to lower Beijing’s government bond credit rating.
Ant competes with state banks for business and squeezes their profits.
“They threaten the very survival of the state banks,” said Lun. “That can’t happen, so the government has to crack down on them.”
The explosive growth of online commerce has dramatically expanded the choices for Chinese shoppers, especially in cities and the countryside with few retail options.
940 million internet users
According to government data, China has the world’s largest population of Internet users at 940 million. An unusually large segment of the public uses e-commerce and other online services, giving Internet companies an overwhelming impact on retail, entertainment, and other industries.
Also that month, Alibaba and a Tencent Holding Ltd. fined the spin-off company for failing to apply for official approval prior to some acquisitions.
The ruling party has also tightened restrictions on the collection and use of personal information from customers.
On Tuesday, regulators met with executives from Alibaba and five other major Chinese internet companies and warned them not to abuse their dominance to evict competitors through the use of exclusive contracts, predatory pricing and other tactics, according to a statement from the state market administration regulation.
Other companies at the meeting were JD.com. Inc. – Alibaba’s main competitor; Online grocer Pinduoduo; Tencent; Meituan food delivery service and ride-hail company Didi Chuxing, the statement said.
Internet boom fueled by pandemic
The move follows a boom for the internet industry after millions of Chinese families were ordered to stay home and move on to shopping and working online while efforts to contain the coronavirus.
In the three months to September, Alibaba said sales rose 30% year over year to 155.1 billion yuan ($ 23.4 billion).
The company said shoppers spent 498.2 billion yuan ($ 75.1 billion) on their platforms during the Singles Day Shopping Festival from Nov. 1-11. The final sales hit hit $ 38.4 billion in 24 hours last year after Alibaba extended its sales period for the first time this year to help boost sales from EU-affected dealers Coronavirus pandemic.
The annual Singles’ Day Shopping Festival, the world’s largest annual shopping spree, offers customers discounts on a variety of items, from fresh produce to luxury items. Retailers ranging from small online stores to international brands like Apple, Nike and L’Oreal participate in the festival by lowering the prices of their products.
The informal vacation, which began in the 1990s, has become the largest period for retail spending in the world.
