China Tech News: Beijing & Bytedance, Amazon in China

China Tech Roundup: Recent Developments

Welcome to this week’s digest of events impacting the Chinese tech sector, and their global implications, brought to you by TechCrunch.

Government Stake in ByteDance Raises Concerns

Investor apprehension is growing following reports that the Chinese government has acquired a stake in ByteDance, the parent company of TikTok. This move positions the government as a shareholder in one of the most significant privately-owned internet companies globally.

Amazon's Actions Impact Chinese Sellers

Amazon’s ongoing efforts to regulate Chinese sellers are having a substantial effect. Many traders located in southern China are being forced to cease operations as a direct result of these measures.

New Data Protection Law Implemented

China has recently enacted a comprehensive data protection law. This legislation, designed to safeguard personal information, is scheduled to become enforceable in November.

The new law is expected to significantly alter how companies handle user data within China.

It represents a major step towards establishing a more robust framework for data privacy in the country.

State Involvement in Chinese Tech Companies

The Chinese government is actively pursuing a strategy to increase its influence over the nation’s leading internet companies. Recent reports indicate that a domestic branch of ByteDance divested a 1% ownership share to an entity affiliated with the government back in April. This transaction was officially documented on Tianyancha, a publicly accessible database of corporate records, and also appears in the official enterprise registration index.

This development wasn't sudden; discussions regarding the possibility of the government acquiring minority stakes in private technology firms began as early as 2017. The Wall Street Journal previously reported that internet regulators considered taking 1% stakes in major companies such as Tencent, the operator of WeChat, Weibo, and Youku.

In April 2020, WangTouTongDa, a subsidiary of China Internet Investment Fund – which is ultimately controlled by China’s primary internet regulatory body – acquired a 1% stake in Weibo for 10 million yuan. This acquisition was disclosed in Weibo’s filings with the U.S. securities regulator, though the relationship between WangTouTongDa and the state was not explicitly mentioned.

A comparable situation unfolded with ByteDance, which sold a 1% stake to three separate entities linked to key regulatory bodies: China Internet Investment Fund; China Media Group, overseen by the Communist Party’s propaganda division; and the investment division of the Beijing municipal government.

Following Beijing’s actions concerning ByteDance, U.S. Senator Marco Rubio, a Republican, called upon President Joe Biden to prohibit TikTok within the United States.

The extent of control Beijing will wield over ByteDance through this minority stake remains unclear. However, disclosures made by Weibo to its investors offer potential insights.

It is crucial to understand that the government’s stakes are held in the domestic operating entities of both Weibo and ByteDance. Chinese internet companies frequently utilize offshore entities to receive the financial benefits generated by their operations within mainland China, governed by contractual agreements. This structure is known as a variable interest entity (VIE). While VIEs enable Chinese firms to access international funding despite restrictions on foreign investment in China, they are facing increased scrutiny from Beijing.

Weibo’s filing revealed that WangTouTongda, its state-owned investor, will have the right to appoint a director to the three-member board of its Chinese entity and exercise veto power over specific issues related to content and future financial activities.

ByteDance is likely to have a similar arrangement with its government investor. Notably, the government did not acquire a stake in TikTok itself, which operates as a subsidiary of a separate offshore entity registered in the Cayman Islands, as The Information highlighted. This may offer some level of comfort to U.S. regulators, although concerns regarding Beijing’s influence over Chinese companies operating internationally are unlikely to dissipate.

Indeed, the Biden administration, in June, superseded the Trump-era executive orders aimed at banning ByteDance and WeChat with a more nuanced policy. This new policy directs the Commerce Department to evaluate applications connected to “jurisdictions of foreign adversaries” that could present national security risks.

TikTok has consistently refuted allegations that it shares user data with Beijing. ByteDance currently ranks as the fourth-largest lobbying spender in the U.S. this year, trailing only Amazon, Facebook, and Alphabet. Beijing’s investment will undoubtedly necessitate increased lobbying expenditures.

Challenges Faced by Amazon Sellers

Previously, in May, it was reported that Amazon had closed down several large-scale seller accounts originating from China. These closures were a result of breaches of the platform’s regulations, specifically concerning the use of fabricated customer reviews and incentivized positive feedback.

This enforcement action triggered considerable anxiety among China’s online export community, and it has become apparent that this wasn’t an isolated event, but rather an ongoing effort by Amazon. While the precise number of impacted Chinese businesses remains undisclosed, sources like Marketplace Pulse estimate that “hundreds” of prominent Chinese sellers were suspended by early July.

Impact of Amazon's Actions

Accounts found to be in violation are subject to suspension, leading to the withholding of their inventory and the freezing of associated funds by Amazon. Consequently, numerous companies located in Shenzhen – a major hub for Amazon sellers globally – have been forced to implement significant workforce reductions in recent months.

Tragically, the owner of a substantial seller based in Shenzhen reportedly died by suicide as a direct result of these circumstances, as shared by someone familiar with the situation.

Shifting Priorities on the Platform

Sellers who have managed to avoid suspension view Amazon’s actions as inevitable. A common sentiment among exporters is that Amazon is now prioritizing product quality and innovative design over low-cost, generic items that rely on manipulative ranking tactics.

The focus is shifting towards rewarding sellers who offer genuine value, rather than those who attempt to game the system.

Response from the Chinese Government

The Chinese government has acknowledged these events. During a July press conference, a representative from the Ministry of Commerce likened the situation to Chinese exporters being placed in an unfamiliar and challenging environment.

Li Xingqian, Director of Foreign Trade at the Commerce Ministry, stated that “differences in laws, culture and business practices around the world” are creating risks for Chinese companies expanding internationally.

The Ministry pledged to assist businesses in enhancing their risk management capabilities and ensuring adherence to international trade standards. Furthermore, the official urged Amazon to recognize and respect the contributions of all sellers on its platform.

Looking Ahead

Amazon’s continued enforcement suggests a long-term commitment to maintaining a fair and trustworthy marketplace. This will likely necessitate adjustments from Chinese exporters to prioritize compliance and product innovation.

Data Privacy Regulations in China

This week, China enacted a comprehensive data protection law. This legislation imposes significant restrictions on the methods tech firms employ to gather user data.

However, it is anticipated that these new regulations will not affect the extent of state-sponsored surveillance activities.

The law, initially proposed in the previous year, is scheduled to become operational on November 1st.

Further details regarding the specifics of these rules can be found here:

Key Aspects of the New Law

The core objective of this legislation is to enhance the protection of personal information within China. It aims to give individuals greater control over their data.

Tech companies will now be required to obtain explicit consent from users before collecting and processing their personal information. This represents a substantial shift in current practices.

Data minimization is another key principle. Organizations are only permitted to collect data that is directly relevant and necessary for specified purposes.

Impact and Exemptions

While the law introduces stringent rules for the private sector, it notably includes exemptions for government entities. This suggests that state surveillance programs will continue largely unaffected.

The regulation is expected to have a considerable impact on the operations of both domestic and international tech companies operating within China.

Companies may need to overhaul their data collection and processing procedures to ensure compliance with the new requirements.

Further Information

Detailed information about the law’s provisions and implications is available through the provided link.

Understanding these changes is crucial for any organization handling personal data of individuals located in China.