Beijing’s onslaught against Chinese Big Tech continued on Oct. 8 with an announcement that the State Administration for Market Regulation (SAMR) has imposed a fine of RMB 3.4 billion ($534 million) on Chinese food delivery giant Meituan for monopolistic behavior. The fine comes six months after SAMR, the country’s top antitrust watchdog, launched an investigation into the company for its alleged use of “er xuan yi” or “choose one out of two”—a forced exclusivity practice whereby Meituan blocked restaurants from offering takeout delivery on other platforms.
The investigation found that Meituan punished merchants who refused to comply with its exclusivity arrangements by charging high commission rates and giving them less exposure on the app. In addition to the penalty, SAMR ordered Meituan to refund exclusive partnership deposits to merchants on the platform and file self-examination compliance reports to SAMR for the next three years.
Forced exclusivity arrangements have been at the center of Beijing’s recent regulatory actions against technology companies. On April 10, SAMR issued a record-breaking fine of RMB 18.2 billion ($2.8 billion) on Alibaba for preventing the merchants on its shopping sites from selling on other platforms. In response, Alibaba vowed to end the practice of forced exclusivity and to spend billions to lower merchant costs. Meituan’s fine is much smaller than the $1 billion penalty observers had expected, though market share and investor confidence will likely take a large hit. The penalty is equivalent to 3 percent of the company’s RMB 114.7 billion revenue generated in 2020 compared to Alibaba’s fine of 4 percent of annual revenue.
Meituan has been hit hard in recent months by China’s efforts to increase competition and crack down on unfair practices in the internet space. On March 12, the regulatory agency fined Meituan along with 11 other Chinese companies for 10 investment deals in the internet sector that were in violation of China’s Anti-Monopoly Law. In early July 2021, SAMR fined five tech companies, again including Meituan, for more than 22 investment deals that were not declared to investors in violation of market concentration practices. Meituan has also come under fire for its treatment of contract delivery drivers.
The penalty is the latest development in President Xi Jinping’s campaign to reshape how business works in China as he looks to solidify his plans for a third term in office ahead of the 20th Party Congress in 2022. China’s tech tycoons are taking heed of Xi’s vision. In April 2021, top Chinese tech firms like ride-hailing app Didi Chuxing and Alibiba’s supermarket chain HEMA issued pledges to comply with anti-competition requirements laid out in a meeting convened by SAMR. Major tech companies voiced their support for Xi’s “common prosperity” policy at China’s annual World Internet Conference, held Sept. 26-28.
Tech chiefs have also sought to demonstrate their commitment to Beijing’s “common prosperity” drive—and perhaps deflect growing skepticism among consumers about their immense wealth and power—by donating ever larger sums to charity. Tencent and Alibaba have both poured billions into Xi’s vision of spreading wealth more equitably throughout the country. Since SAMR announced its probe into Meituan, the company’s founder, Wang Xing, has donated Meituan shares worth $2.3 billion to his philanthropic foundation, with most of the funds going to state priorities such as education and scientific research.
Chinese and U.S. regulators share many of the same concerns regarding the dominance of the tech industry, unfair labor practices rampant in the gig economy, and growing inequality. Some of China’s new rules governing privacy and the regulation of social media algorithms even bear similarities at first glance to proposals from progressive critics of Big Tech in the U.S. However, there is an increasingly vast disparity between the American and Chinese approaches to grappling with the immense power that private tech companies have amassed.
For decades, Beijing emulated Silicon Valley’s model of innovation, spurring the rise of a number of Chinese unicorns and Elon Musk-like entrepreneurs such as Jack Ma. But over the past year, China has begun experimenting with a new model. In the U.S., the Biden administration has signaled its intention to crack down on anti-competitive practices in Big Tech. But while Washington is responding to pressure to improve accountability in the industry and strengthen consumer protections, Beijing’s distinctive motive attempts to solidify political control to ensure that no private company will grow too large or stray from the ruling Chinese Communist Party’s goals. The countermeasures taken by Chinese regulators against tech giants such as Tencent and Alibaba may be little more radical than those embraced by Western critics of Facebook, Google and Amazon, but what makes Beijing’s antitrust offensive exceptional in addition to its motives is its swiftness, decisiveness and scale.
China Announces New AI and Algorithm Standards
Chinese regulators issued two major announcements in late September regarding the governance of algorithms and artificial intelligence (AI). On Sept. 25, a committee organized by China’s Ministry of Science and Technology published a long-awaited AI Code of Ethics, outlining six basic principles to ensure user autonomy, privacy and human control of AI. While the committee previously issued high-level AI governance principles in 2019, this is the first detailed specification of AI ethics from the Chinese government. Four days later, the Cyberspace Administration of China (CAC) announced a three-year plan to rein in “internet information service algorithms,” particularly those produced by consumer-facing companies such as ByteDance and Baidu. The plan calls on companies and government entities to develop algorithm governance rules that promote transparency, security and “core values of socialism.”
These notices are among a series of AI and algorithm regulations issued by Chinese regulators over the past month. In late August, China’s National Press and Publication Administration imposed stricter limits on how much time per week Chinese minors can spend playing video games. That same week, CAC announced a ban targeting online celebrity fan culture. CAC’s latest directive imposes a timeline on a previously issued plan to rein in recommendation algorithms by establishing public algorithm inspectors.
Experts are mixed on whether these measures will be effective. Skeptics, including Samm Sacks, senior fellow at Yale’s Paul Tsai China Center, described CAC’s three-year timeline as “ambitious.” Others cast doubt on whether the government can effectively compete with the private sector to recruit developers to serve as public inspectors. At the same time, Paul Triolo of the Eurasia Group argues that it is worth emphasizing the signal these actions send to the broader public. By enacting “the world’s strongest data protection regime, at least on paper,” regulators are broadcasting that “regulatory lag will not happen in the data and AI algorithm space in China.”
CAC’s recent flurry of regulatory action can also be viewed as an outgrowth of long-standing interagency turf battles. China’s internet governance has historically been characterized by infighting between dozens of regulatory agencies with overlapping jurisdiction. CAC was established in its current format in 2014 as an interagency coordinating body on cybersecurity. It initially struggled for influence against the powerful Ministry of Industry and Information Technology (MIIT) and Ministry of Public Security (MPS). In 2018, after CAC’s parent group was elevated to a permanent commission, CAC subsumed functions from MIIT and received new leadership under Zhuang Rongwen, a Xi acolyte. Since then, CAC has flexed its regulatory muscle in a number of prominent actions, including its leading role in Didi Chuxing’s initial public offering debacle and its involvement in the censorship of pro-LGBT WeChat accounts.
These regulatory moves were also made in the context of a larger competition between Chinese and American regulators to set the global “rules of the road” for AI. On Oct. 4, U.S. lawmakers raised concerns that China’s AI technology exports serve as a vehicle to export Chinese standards and norms worldwide, with potential repercussions for American competitiveness and national security. China is a major exporter of AI-based surveillance systems, exporting technology for facial recognition, smart policing, and surveillance cameras to more than 60 countries in 2019. China has long sought to shape global technology norms through appointments at influential U.N. technology standards-setting organizations and white papers promoting AI standardization.
The EU and U.S. are beginning to push back against China by offering alternative frameworks. On Sept. 28, Commerce Secretary Gina Raimondo warned that the U.S. and EU should not cede ground to China in setting global trade and technology norms. The following day, at the inaugural Trade and Technology Council (TTC) in Pittsburgh, the transatlantic partners agreed to collaborate on AI privacy protections. Their joint statement recognized the EU’s draft Artificial Intelligence Act and noted the U.S. National Institute of Standards and Technology’s draft AI risk management framework.
Governments considering enacting their own algorithm regulations may consider China’s algorithm regulation as a canary in the coalmine. As Trivium’s Kendra Schaefer observed, “[I]f [Chinese tech companies] can succeed despite regulation on algorithmic process, there is very little excuse for … foreign governments not to do the same …. If they fail ... that bolsters the argument [that] you can’t implement algorithmic regulation without detrimental effects to innovation.”
China Hosts World Internet Conference in Wuzhen
China kicked off the 2021 World Internet Conference on Sept. 26 in the coastal town of Wuzhen. The annual summit, now in its eighth year, serves as a platform for Chinese government agencies to discuss internet governance issues with entrepreneurs from around the world, including prominent American figures like Apple’s Tim Cook and Google’s Sundar Pichai. This year’s conference converged on President Xi’s theme of “digital civilization,” emphasizing global cooperation on issues of cybersecurity and the internet’s role in fighting the coronavirus.
While past conferences involved free-flowing discussions from Chinese tech CEOs and offsite parties, this year’s proceedings were comparatively muted. Many top Chinese tech CEOs were absent, and executives in attendance stuck to tightly scripted speeches. Alibaba and Ant Group, both targets of China’s sweeping tech crackdown, highlighted their social responsibility efforts and pledged support for the government’s goal of “common prosperity.”
Participation from large American technology firms has decreased in recent years as trade competition between the U.S. and China increased. However, Elon Musk made a notable appearance at this year’s conference. Addressing the crowd virtually, Musk praised China’s data protection laws and promised that Tesla would comply with China’s data localization requirements. China is Tesla’s second-largest market after the United States, accounting for a fifth of the company’s revenues. Musk has sought to repair Tesla’s relationship with Chinese regulators after facing regulatory scrutiny arising out of complaints about brake failures, privacy violations and past recalls.
The CIA Creates New Mission Centers Focused on China and Technological Threats
The CIA announced on Oct. 7 the creation of two mission centers—one focused on China and another dedicated to transnational and technological threats. The launch of the new units is part of a series of organizational changes intended to sharpen the agency’s focus on key national security challenges. CIA Director William Burns said in a statement that the China Mission Center (CMC) “will further strengthen our collective work on the most important geopolitical threat we face in the 21st century, an increasingly adversarial Chinese government.”
The CMC will hold weekly, director-level meetings aimed at better coordinating the CIA’s China strategy. It will now be the only remaining single-country mission center at the agency, underscoring the Biden administration’s focus on Beijing as a top national security concern. The move reflects the priorities that Burns laid out during his Senate confirmation hearing in February, in which he stated that China’s “adversarial, predatory leadership” is the biggest threat to the U.S. and vowed to bring an “intensified focus” on competition with Beijing.
While President Biden has made it clear that the U.S. is not seeking a “new Cold War” against China, his administration is nevertheless seeking to counter China’s influence. In February, Biden announced the formation of a task force at the Pentagon that will assess and respond to the military challenge China poses. A bipartisan report issued by the House Intelligence Committee in 2020 urged intelligence agencies to immediately “realign” resources to the strategic threat from China or risk Washington ceding its leadership role on the global stage.
Luckin Coffee Reaches $187.5 Million Settlement Deal
Luckin Coffee has settled a U.S. class action lawsuit, resolving some U.S. investors’ claims against the bankrupt Chinese coffee company and coffeehouse chain. Luckin admitted in April 2020 to intentionally fabricating $310 million in sales, then seeking to conceal the fraud by inflating its expenses by more than $190 million.
The term sheet provides that the settlement amount will be calculated based on a global settlement amount of $187.5 million. In September 2020, China’s SAMR imposed a fine of RMB 61 million ($9 million) on Luckin and a group of affiliated companies for creating unfair competition by engaging in sales fraud. Luckin also agreed in December 2020 to pay a $180 million penalty to the U.S. Securities and Exchange Commission to settle accounting fraud charges.
Luckin pitched itself in 2017 as a tech company that could disrupt the traditional brick-and-mortar coffeehouse market in China that was dominated by multinational corporations like Starbucks. The fraud scandal not only renewed calls in the U.S. for increased oversight of U.S.-listed companies based in China but also spurred domestic companies to demand auditing of operational metric data to strengthen market confidence and accountability in China’s tech sector.
The settlement plan is still subject to approval from courts in the U.S. and Cayman Islands, according to a Sept. 21 statement from the company.
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Microsoft’s President Brad Smith reflects on Microsoft’s failed bid to acquire TikTok and the future of U.S.-China tech relations.
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Nan Li and John D. Van Fleet consider how foreign media fail to understand China’s fintech regulators.
In the Brookings Institution’s TechStream, Robert Williams grapples with cyber policy contradictions among the U.S., EU and China in the wake of the recent inaugural meeting of the EU-U.S. Trade and Technology Council.
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Martijn Rasser and Megan Lamberth of Politico argue that the Biden administration needs to increase funding for the Commerce Department to effectively counter China.