China’s tech sector may see ‘fewer surprises’ in regulation: S&P report

The worst may be over for China’s internet sector – but that doesn’t mean there won’t be more regulations from the Chinese authorities, S&P Global Ratings said in a new report.

“If anything, we expect more regulatory action well into the foreseeable future, particularly around data security and content moderation. However, the scope for surprises should be significantly reduced and they should not result in significant operational challenges, as occurred in 2021,” S&P Global Ratings said, in a Report.

“China’s Internet sector has emerged from its regulatory upheaval. Politicians are signaling support and appear to be fine with major legal changes or sweeping measures,” said the report, titled “China’s Internet Regulations: Fewer Surprises, Not Zero Surprises.”

“The period of big surprises is likely in the rearview mirror. Still, changes made will not be unchanged.”

Social media companies may also need to spend more on content moderation to ensure they don’t run into regulatory problems, the rating agency said.

China’s crackdown on its major tech companies began in 2020, which saw the government introduce new regulations on technology. Ant Group, the financial arm of Alibabahunting a $37 billion IPO at the time, but had to cancel the public listing days before its launch.

Other tech giants such as Tencent, Meituan, Baidu, JD.com, Didi Chuxing were not spared either. China launched probes to inappropriate antitrust, antitrust and consumer protection practices, among others.

“In our view, companies will adjust their business practices to accommodate stricter application of anti-competitive rules. Many of the regulatory actions targeted such behavior,” S&P said. The report noted that Tencent was fined and ordered to give up exclusive music licensing rights in July 2021 for its acquisition of China Music Corp. 2016.

“As a result, large Internet companies are likely to limit their M&A activity, especially for potential competitors and innovative start-ups that could one day disrupt their market,” S&P said.

The US credit rating agency said that to ensure their operations are not disrupted by stricter enforcement of antitrust laws, Chinese technology companies will need to “invest in their core businesses and perhaps selectively in new businesses.”

But the worst is over, several analysts have also said.

Alibaba is breaking up of its operations into six separate units, with each unit having the ability to raise external financing and conduct IPOs, was seen by analysts as a sign that China may ease its scrutiny of its domestic technology companies.

S&P said there could be “further benefits” from addressing some of the government’s concerns by loosening control over some business units.

“The regulatory headwind that we’ve had for the last two years … which is now turning from a headwind into a tailwind,” George Efstathopoulos, portfolio manager at Fidelity International, said on CNBC’s “Street Signs Asia” on March 29.

Chinese leaders too committed to supporting a “healthy” development of the sector and public listings of tech companies during the Chinese People’s Political Consultative Conference last May.

“Fewer negative regulatory surprises have arisen since then,” S&P noted.

“We stick to our view that the Chinese government is striving to strike a balance between growth, social stability and security,” the rating agency said in its report.

China’s gaming regulator had restarted approvals of online games, including titles belonging to Tencent and NetEase, in April 2022 after a months-long freeze. The regulator suspended the online gambling license in August 2021, with state media calling it a “spiritual opium” that harms the mental growth of minors.