China Data Security Clampdown: Latest Updates & Analysis

China's Tech Landscape: A Regulatory Shift

Welcome to TechCrunch’s China Roundup, providing a summary of recent developments in the Chinese tech sector and their global implications.

Significant changes are occurring in Beijing’s approach to regulating and accessing the substantial amounts of user data held by its major technology companies.

New Cybersecurity Regulations and Didi

Further specifics regarding China’s updated cybersecurity regulations have emerged recently.

Didi, the leading ride-sharing platform in China and a company backed by SoftBank, has been at the center of the Chinese government’s increased focus on data security.

Implications for US Investors

This week’s focus is on the impact of this evolving regulatory environment on Chinese tech companies seeking investment from the United States.

The government’s actions signal a heightened commitment to data protection measures.

These new rules are reshaping the operational environment for tech firms within China.

The changing landscape necessitates a reevaluation of strategies for companies aiming to attract US investors.

Cybersecurity is now a paramount concern for Beijing when it comes to the data collected by its tech giants.

The case of Didi serves as a prominent example of the government’s willingness to enforce these new regulations.

Understanding these shifts is crucial for investors considering opportunities in the Chinese tech market.

Data Sovereignty

Recent discussions surrounding China’s cybersecurity regulations were ignited by the situation involving Didi. Following its $4 billion IPO in New York, the ride-hailing company faced an investigation initiated by China’s Cybersecurity Review Office on July 2nd. Subsequently, on July 4th, the same agency mandated the removal of the Didi app – utilized by almost 500 million users annually – due to concerns over “illegal collection of user data.”

The Cybersecurity Review Office functions as a division within the Cyberspace Administration of China, the nation’s primary internet regulatory body. While established several years prior, its specific responsibilities were clarified in April 2020 with the introduction of China’s internet security review regulations.

Didi represents the initial case targeted by the department’s enforcement efforts. A circulated memo from an “expert meeting,” reviewed by TechCrunch, indicated that the ride-hailing service failed to adequately demonstrate secure data practices to Beijing before its New York IPO. A key apprehension was the potential for Didi’s data to be examined by U.S. regulatory bodies if not safeguarded by Chinese legislation. However, a Didi representative asserted that all Chinese user data is stored locally and that transferring data to the U.S. is “absolutely not possible.”

The Cybersecurity Review Office quickly expanded its scrutiny to other entities potentially jeopardizing the data security of Chinese users. On July 5th, both SoftBank-backed Full Truck Alliance, a truck-sharing platform, and Boss Zhipin, a recruiting website – both recently launched on U.S. exchanges – were subjected to the same review process as Didi.

These investigations were merely the initial steps. On July 10th, the Cybersecurity Review Office released a draft of revised data security review rules initially enacted the previous year. A significant alteration stipulates that any organization with a user base exceeding one million individuals must undergo security assessments before pursuing an overseas IPO.

Mirroring the U.S. government’s anxieties regarding Chinese companies accessing American user data – exemplified by the case of TikTok – China is now prioritizing the onshore retention and protection of its citizens’ data from U.S. authorities. Companies operating within China, including international corporations, are required to adhere to these regulations. Major players such as Apple and Tesla have committed to, and have begun, storing Chinese user data within the country.

The updated data rule undoubtedly presents challenges for Chinese companies seeking international listings. ByteDance, the parent company of TikTok, reportedly postponed its U.S. listing plans indefinitely while addressing data security concerns, as reported by The Wall Street Journal. However, what about established companies like Alibaba, already trading on Wall Street for years? Furthermore, do these revised rules extend to companies listing in Hong Kong, which is becoming increasingly integrated with mainland China?

Recent Developments in the Tech Sector

• Potential Shift in Strategy for Tencent and Alibaba. Reports from The Wall Street Journal indicate that the two major companies are exploring the possibility of interoperability. This could result in users being able to utilize Alipay for transactions within the WeChat application, a feature currently unavailable. China’s regulatory bodies have recently increased scrutiny of large technology companies, imposing penalties for anticompetitive practices.
• TikTok Achieves Significant Download Milestone. Sensor Tower data reveals that TikTok has surpassed 3 billion downloads across both the App Store and Google Play. This positions TikTok as the sole non-Facebook owned application to reach this benchmark on these platforms. It is the fifth app overall to achieve this, following WhatsApp, Messenger, Facebook, and Instagram. The platform has also generated substantial revenue for ByteDance, exceeding $2.5 billion in consumer spending globally.
• Tencent Increases Investment in Meituan. Tencent has bolstered its ownership stake in food delivery leader Meituan, now holding 17.2% of the company. This investment, totaling $400 million, will enable Meituan to further develop advanced technologies. These include initiatives like autonomous delivery vehicles and drones, mirroring efforts by other tech companies to automate logistics.
• Continued Growth in the Smart Vehicle Market. The development of smart and autonomous vehicles remains a prominent trend in China’s tech landscape. Banma, a joint venture between Alibaba and SAIC Motor focused on connected car technology, recently secured $460 million in funding. The company states its technology currently supports a user base of three million. Banma initially raised capital in 2018, achieving a valuation exceeding $1 billion.

The evolving relationship between Tencent and Alibaba signals a potential change in the competitive dynamics of the Chinese tech market.

TikTok’s impressive download numbers demonstrate its continued popularity and global reach.

Tencent’s increased investment in Meituan highlights the importance of innovation in the food delivery sector.

The ongoing investment in Banma underscores the significant interest in and development of smart vehicle technologies.

These developments reflect the dynamic nature of the technology industry in China.

Regulatory pressures continue to shape the strategies of major tech firms.

The pursuit of cutting-edge technologies remains a key focus for these companies.