HONG KONG/TAIPEI -- Taiwan authorities are closing a regulatory loophole to block Tencent Holdings and Baidu from offering video streaming services on the self-governing island, the latest sign that rising geopolitical tensions are weighing on the global ambitions of Chinese internet giants.
Chinese players are already banned from offering video streaming in Taiwan, but Tencent and Baidu's popular iQiyi platform have managed to avoid those restrictions by partnering with local companies. The Ministry of Economic Affairs, however, announced on Tuesday night that it is tightening its regulations to prevent local businesses from distributing video content produced by mainland Chinese companies, effective Sept. 3.
The clampdown, which has been in discussion for years, is part of a broader move by the Taiwanese government to ramp up scrutiny of mainland Chinese companies. It also points to an increasingly fraught business environment for Chinese internet players seeking opportunities on the island, which broke with mainland China after a civil war in the 1940s.
In recent weeks, Taiwanese politicians have been drafting new rules to prevent Chinese companies from circumventing regulations against investing in restricted industries such as semiconductors. They are also considering redefining Hong Kong investments as Chinese investments following the controversial National Security Law imposed in July by Beijing on the former British colony.
Tencent and iQiyi did not immediately respond to Nikkei's request for comment.
The new rule comes at a time when Tencent and other Chinese companies are already under geopolitical pressure in international markets. Earlier this month, U.S. President Donald Trump issued an executive order targeting Tencent's hugely popular messaging app WeChat on national security grounds. A separate order issued the same day took aim at TikTok, the streaming app owned by ByteDance. India has also banned WeChat, TikTok and many other Chinese apps since June, citing national security concerns.
Offerings from iQiyi and Tencent are popular with Taiwanese viewers, however, and the decision to block their content has met with public pushback.
"If watching the content on iQiyi carries the risk of being brainwashed, what about watching Chinese dramas on YouTube Premium?" said Connie Liu, a product manager in Taipei whose subscription to iQiyi's streaming service runs until 2022. "I think the government should draft new rules to regulate Chinese [streaming] platform operators rather than just kick them out of Taiwan," she said.
Zoie Hu, a manager at a Taipei-based art theater, echoed that sentiment.
Hu said she is aware that iQiyi operated in a legal gray area, but she decided to subscribe to its streaming services anyway because it provides a user-friendly interface and the latest entertainment hits.
"If the rationale behind the government's move is a fear of Chinese pop culture influencing the younger generations in Taiwan, you should seriously rethink why Taiwan's pop culture does not have the edge anymore," Hu said.
The new regulation is subject to public review and scheduled to take effect on Sept. 3. But even if the rule comes into force as planned, analysts say it is unlikely to affect iQiyi and Tencent's business outlook.
With a population of some 23 million people, "Taiwan is a very small market," said Martin Bao, an analyst specializing in Chinese internet companies at ICBC International. "Whether or not the two companies can continue operating in Taiwan is not really important for Tencent or iQiyi," Bao said, adding that the symbolic value of the ban is greater than its financial impact.
Neither Tencent nor iQiyi provides revenue breakdown for their international sales. Social network revenue, which includes income from streaming services, contributed roughly 26.7 billion yuan ($3.9 billion), or 23% of Tencent's total revenue during the second quarter, according to the latest filing by the Hong Kong-listed company. Meanwhile iQiyi logged revenue of 7.6 billion yuan.
Shares of Nasdaq-listed iQiyi closed down 0.73% on Tuesday U.S. time at $19.13. Tencent's shares slid 0.59% to HK$509 in Wednesday afternoon trading.