HONG KONG -- China's regulators for the first time have issued a draft of detailed guidelines to combat anti-competitive practices of big technology companies. In a 22-page document released last week, the State Administration for Market Regulation stated that some tactics deployed by internet companies to gain users could be outlawed when the proposed rules take effect.
The introduction of the guidelines comes on the heels of the abrupt suspension of Ant Group's mega initial public offering, as authorities tighten rules for fintech companies. Alibaba Group Holding, which stands to be affected by the new guidelines, owns one-third of Ant. The development also triggered one of the tech sector's biggest sell-offs this year, as investors rushed to secure gains ahead of the potential blow from new regulations.
As investors and online customers scramble to evaluate the cost of the new rules on China's booming internet economy, here have five things to know about the government's anti-monopoly guidelines:
What exactly are the proposed rules?
The guidelines were announced by the regulator on Nov. 10 -- one day ahead of Alibaba's annual Singles Day mega-retail event -- and target platforms operated by China's internet companies. Practices such as selling goods below cost, price discrimination based on customer data analytics and exclusive sales agreements would be in violation of the proposed regulations.
According to the document, the guidelines were drafted "to prevent and stop monopolistic practices on internet platforms, reduce the costs of compliance and law enforcement, protect fair market competition, as well as safeguard the interest of consumers."
Analysts say some of the practices are widespread and often crucial for the companies' rapid growth. For example, ride-hailing companies such as Didi Chuxing and Dida Chuxing, and food delivery platforms Meituan and Ele.me have offered generous subsidies to customers in an effort to gain market share.
Alibaba was sued in 2017 by its smaller rival JD.com for allegedly requiring vendors listed on its platforms to sign exclusive cooperation agreements that would prevent them from selling goods on other e-commerce platforms. A judgment has not yet been made.
Why is the announcement important?
The introduction of the anti-competitive draft guidelines marks a drastic change in Chinese regulators' attitude toward China's fast-growing internet companies. For more than a decade, Beijing has taken a relatively hands-off approach in regulating tech companies, which have helped fuel China's unparalleled digital economy as well as nurture some of the country's largest companies.
Investors see the guidelines as a strong policy signal that Beijing will introduce more measures that could put the brake on the internet companies' fast growth.
"The shift in the political stance, along with all these new regulatory guidelines are sure to hit the profitability of China's internet giants," analysts at Gavekal Dragonomics wrote in a report. They said the internet companies rely on scale economics for growth, and restricting activities such as offering subsidies strikes at the heart of their business model. "The business practices of internet companies will clearly have to adjust," they wrote.
How will internet companies be affected?
The immediate impact has been on their stock market performances. In the following two days after the announcement, share prices of Alibaba, Tencent Holdings, JD.com and Meituan tumbled between 11% and 19%, although as of Monday they all were up to various degrees from their lows last week.
Despite the initial sell-off across the sector, some companies could be affected more than others. Morningstar analyst Dan Baker believes Alibaba will see a more negative impact as the dominant player in China's e-commerce industry, with a market share of 77%. "After the antitrust rules, Alibaba's capability to offer exclusive merchants on its platforms would be diminished," he wrote in a report.
That is likely to benefit smaller platforms, particularly JD.com. But the rules are far from enough to shake the leadership of internet giants, Baker said. "Smaller players are too small to significantly shake up the landscape," he wrote.
By contrast, Tencent seems to be less exposed to the new antimonopoly rules. During a conference call on Thursday -- two days after the guidelines were announced -- Tencent President Martin Lau said its online game businesses, which hold dominance in China and attributes to roughly one-third of its overall revenue, are essentially individual products and should be less affected by the new regulations.
Why is China taking this action?
The services provided by internet companies have reached hundreds of millions of users and penetrated almost every aspect of life in China. For many Chinese people, it is hard to imagine a day without using WeChat, a messaging app developed by Tencent, and Taobao, Alibaba's flagship e-commerce platform.
Over the years, internet companies also have increasingly expanded into new areas such as finance and entertainment. Many traditional players in those sectors have complained that they have been treated unfairly in regard to competition because the newcomers -- internet companies -- are subject to fewer industry rules.
For example, online loans offered by internet companies are not subject to banking regulations, which require lenders to meet certain loan-to-deposit ratio requirements to be able to conduct a lending business. Authorities also have become more anxious about internet companies' growing reach and their ability to dominate the market with the help of technology, with Ant being a prime example.
The same kind of anxieties are also shared by regulators in Western countries. Big tech names including Google's parent company Alphabet, Apple, Facebook and Amazon.com have all experienced different levels of anti-competitive investigations in the U.S. and Europe.
In March, Google was fined 1.49 billion euros ($1.76 billion) by the European Commission for abusing its market dominance in online advertising. Last year, Amazon was fined 4 million euros in France because some clauses in its contracts were determined to be unfair to smaller local companies using the platform.
What will investors and the tech industry be watching for next?
The draft guidelines are still in the consultation period, and will be open for public comments until Nov. 30. The internet companies are expected to adjust some of their practices that could be seen as anti-competitive before the guidelines take effect, but it is not clear when the new regulations will be implemented.
Observers will be closely watching how strictly the regulations will be enforced. Analysts believe that regulators will take a gradual approach as it is not Beijing's intention to bring down the entire internet sector.
"The government is proud of the success of these firms, and views them as national champions," the Gavekal Dragonomics report said. "That status means the government will happily support their development, as long as they are complying with government priorities."