Caixin Insight: China’s Tech Giants Reminded They Can’t Be Internet Bullies

CPI debate

China’s consumer price index rose just 0.5% year-on-year in October. That was the weakest pace in 11 years and the first time in 42 months the growth fell below 1%, as the impact of African swine fever faded out. The reading was slightly lower than the median estimate of 0.7% growth in a Caixin survey (link in Chinese) of economists. This drew an interesting range of reactions by economists, who reached no consensus on whether it indicated China was at risk of deflation:

• Liang Zhonghua, chief macro analyst at the Research Institute of Zhongtai Securities, wrote in a note that the CPI is expected to turn negative in November, and monetary easing has had difficulty producing upward price pressures, mainly due to the impact of the coronavirus pandemic on consumers’ income.

• Shen Jianguang, chief economist at JD Digits, said that if you define deflation as CPI falling below zero, it is very likely that there will be deflation early next year. But he also pointed out that China is unlikely to have a prolonged period of deflation.

• However, Nomura chief China economist Lu Ting said the falling CPI inflation does not mean China is experiencing disinflation or deflation, as the drop has been mainly driven by pork prices.

• While Julian Evans-Pritchard, senior China economist with Capital Economics, said that CPI looks set to drop back further in the near-term as pork supply continues to recover, but consumer prices might gain upward support in the coming months, given a rebound in consumer spending and ongoing infrastructure-led stimulus.

Platform operators reminded they are not above the law

Following last week’s surprise Ant Group IPO suspension, Beijing is moving to rein in China’s powerful tech giants with new antitrust guidelines (link in Chinese) for the platform economy. The State Administration for Market Regulation, Central Internet Information Office and the State Administration of Taxation also held a meeting Nov. 6 to castigate some of China’s biggest platform operators, and remind them to

• operate in accordance with laws and regulations

• have the courage to shoulder social responsibilities

• strengthen self-discipline and management

• not abuse advantageous market positions to restrict competition

Regulators also warned in the meeting that

• platform companies cannot force businesses into “choosing sides”

• after the “Double 11” shopping event, the government will investigate and prosecute number of legal violations and crack down on compliance

The new guidelines serve as an update to the anti-monopoly law, which has not had a comprehensive revision since 2008, bringing regulation into the internet era as platforms increasingly dominate the digital economy.

We don’t have room in this newsletter to cover all the details of the new policy, but one notable aspect is that it explicitly brings variable-interest entity (VIE) structures within the scope of regulation, eliminating something of a regulatory blind spot.

There was previously a tacit understanding that companies would not declare transactions involving VIE structures, but the new guidelines explicitly disallow that. Furthermore, the penalty for failing to declare has been raised dramatically from 500,000 yuan to 10% of sales. Jiang Huikuang, a partner at Zhonglun Law Firm, told Caixin that could be calculated according to the consolidated amount at the group level, subjecting companies found guilty to astronomical fines.

If a platform operator is found to be behaving monopolistically, it will face fines, potential forced separation of business units and other penalties. Some scholars believe strengthening and better targeting regulation can avoid the necessity of splitting companies apart, though.

Xu Ke, director of the Center for Digital Economy and legal innovation at the Beijing University of International Business and Economics, said that because platforms have strong network externalities, they are bound to grow large, and regulators should not split them up, but let them grow and become internationally competitive. Regulators could try to do more to curb over-concentration and unfair market competition, rather than force a break-up, Xu argues.

Regardless, what is clear is that China’s tech giants are likely about to be knocked down a peg and reminded that they do not exist outside the law.

Banking regulator loosens consumer finance rules

In the ongoing quest to make the financial system better serve the real economy, the China Banking and Insurance Regulatory Commission (CBIRC) recently loosened rules governing consumer finance and auto finance companies in an attempt to further bolster lending. The measures include:

• allowing them to apply to local CBIRC branches to drop their loan-loss provisions to as low as 130% of the value of their bad loans, from the previous floor of 150%

• expanding their financing channels, by allowing them to

• issue tier-two capital bonds on the interbank market for capital supplementation purposes

• undertake regular loan asset ownership transfer operations with the Banking Sector Loan Asset Registration Circulation Centre

Xue Hongyan, an internet finance expert at the Suning Institute of Finance, said that cutting the required minimum loan-loss provision level for consumer finance companies could encourage them to lend more by reducing their regulatory compliance costs and boosting profits.

Su Xiaorui, senior researcher with the Madai Research Institute, added that providing them with more channels to supplement their capital would have a similar effect by improving their ability to withstand risk.

The support comes as regulators tighten control over the country’s more than 200 online microlenders. Xue suggested that the two moves are related, and the consumer finance loosening could offset online microlender tightening. Relaxing supervision over consumer finance companies which focus more on middle- and high-income groups could help promote consumption, while tightening regulations on microlenders which mainly lend money to the less well-off can help hold rapid growth of household debts in check.