China’s Internet Clampdown Hits Alibaba But Spares Tencent

Chinese e-commerce giant Alibaba appears to be bearing the brunt of the impact from the country’s toughening regulatory environment, with analysts predicting that it may be compelled to lower the fees it charges the merchants on its platforms.

Shares of the Hangzhou-based company ended the week down 11.4% in Hong Kong, while Tencent finished lower by 3.3%. Beijing unveiled a set of anti-trust rules on Tuesday that could give regulators wide-ranging powers to rein in the market influence of internet titans. The announcement sent shares tumbling, with Chinese tech companies losing almost $290 billion in market value over two frenetic days of trading.

The draft regulations, for example, stipulate that platform operators can’t force merchants to agree to exclusive contracts, subsidize products to sell below cost or use an algorithm to offer different pricing to different customer groups. It doesn’t mention Alibaba by name, or accuse the e-commerce titan of any wrongdoing, but the company cofounded by billionaire Jack Ma will be under more pressure, says Shawn Yang, a Shenzhen-based managing director of research firm Blue Lotus Capital Advisors.

“This set of draft rules won’t affect media or gaming companies as much, but it will have the biggest impact on Alibaba,” he says.

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This is because companies in sectors such as e-commerce and internet finance are naturally going after so-called “network-effects,” and use their dominant positions to charge higher fees to its merchants and customers.

“After the release of the rules, Alibaba may have to be more friendly with the merchants on its platforms,” Yang says, adding that it may lower fees such as advertising charges and commission rates.

The Chinese e-commerce giant relies on such fees–which it calls customer management–for 45% of sales in the September quarter, when it reported a 30% jump in revenue to $22.8 billion from a year ago. It generated a record $75 billion of sales from this year’s Singles’ Day shopping bonanza that lasted from Nov. 1 to Nov. 11, but the stellar results have failed to fuel a recovery in its share price.

An Alibaba spokesperson didn’t respond to e-mailed requests for comment. In the meantime, the company’s arch rival Tencent is seeking to assure investors that it can ride out the current regulatory storm. Tencent President Martin Lau said during a Thursday call with analysts that its strategy fits with the regulatory framework of the proposed anti-trust rules. The gaming giant reported strong earnings on Thursday that beat market expectations.

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Lau also took the chance to stress that Tencent’s fintech business, which includes digital payments, online loans and wealth management, is in full compliance with regulations. Last week, authorities abruptly halted the $35 billion initial public offering of Alibaba’s fintech affiliate Ant Group, while proposing tougher rules on online lenders.

“We have been growing our fintech business at a measured speed,” Lau said.

But all big internet companies should be extra careful, says Zhu Wei, an associate professor at China University of Political Science and Law and deputy director of the university’s Research Center of Communication Law. There will be more follow-up policies of the proposed anti-trust rules, and the release of this draft plan signals a shift in the thinking of regulators, he says.

“China in the past had been using favorable policies to encourage the scale and development of internet companies, but now it is time for more regulated development,” Zhu says. “We will see more follow-ups…this is just the beginning.”

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