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China tech

Alibaba and Tencent hit by fines as China curbs tech giants' power

Probe launched into Huya/Douyu deal as Beijing sends antimonopoly message

China's State Administration of Market Regulation on Monday fined Alibaba Group Holding in relation to its earlier acquisition of Intime Retail.     © AP

HONG KONG -- A Chinese regulator has announced fines and probes in connection with a string of deals by Alibaba Group Holding and Tencent Holdings as Beijing moves ahead with curbs on the power of the country's internet giants.

The State Administration for Market Regulation is investigating the merger of Huya Inc and DouYu International, two Tencent-backed online gaming streaming platforms, according to a statement published by the regulator on Monday.

The two companies agreed to merge in October in a deal apparently brokered by Tencent, a major shareholder of both. The two platforms collectively control more than 80% of China's online game streaming market, according to a 2020 industry report by iResearch.

The regulator also fined Tencent 500,000 yuan for failing to seek regulatory approval when subsidiary China Literature acquired Chinese media and entertainment company New Classics Media in 2018. 

E-commerce group Alibaba was fined the same amount in connection with its investments in Intime Retail, a department store chain, between 2014 to 2018.

Logistics company SF Express was also fined the same amount in relation to the acquisition of a rival in the self-service pick-up locker business.

The SAMR said Tencent, Alibaba and SF Express failed to notify authorities about their acquisitions, as required by China's antimonopoly law in China.

This is the first time that Chinese authorities have punished major internet companies on antimonopoly grounds. "Although the amount of the fines is not huge, the three cases can send an antimonopoly signal to internet companies and the society," said the regulator in its announcement of the penalties.

The regulator said it was not seeking to reverse the completed deals because it concluded the acquisitions did not limit competition.

Last month, the regulator announced draft guidelines to rein in anti-competitive practices by internet companies. Practices such as selling goods below cost, price discrimination based on customer data analytics, and exclusive sales agreements would also be in violation of the proposed regulations.

Scott Yu, a lawyer who specializes in antitrust matters with Chinese law firm Zhonglun in Beijing, said previously internet companies were able to skirt any need to declare acquisitions that might add to their monopoly power by using a variable interest entity, an ownership structure where an investor can have a controlling interest without a majority of voting rights.

While VIEs are commonly used by companies in mergers and overseas initial public offerings, the structure is not recognized by the Chinese authorities.

China's market regulator had largely turned a blind eye to such deals to support the continued growth of the internet economy. Now it wants everyone to report to it about the deals.

Said SAMR, "The regulator has stated clearly that operators with VIE structures are also subject to.... the antimonopoly law."

Yu warned that the companies could soon face much higher fines as lawmakers are revising antimonopoly laws.

"If the revised law is passed next year, the maximum fine could be lifted to 10% of the company's revenue," Yu said.

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