China’s tech sector may see fewer regulatory surprises — not zero, says S&P Global Ratings

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

“If anything, we expect more regulatory actions well into the foreseeable future, particularly around data security and content moderation. But the scope for surprises should be significantly diminished and they shouldn’t result in significant operational challenges, as occurred in 2021,” said S&P Global Ratings, in a report.

“China’s internet sector has emerged from its regulatory shakeup. Policymakers are signaling support and seem done with big legal changes or sweeping actions,” said the report entitled “China’s internet regulations: Fewer surprises, not zero surprises.”

“The period of big surprises is likely in the rear-view mirror. Yet changes made will not be unmade.”

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

China’s crackdown on its large tech companies started in 2020, which saw the government imposing new regulations on tech. Ant Group, the financial arm of Alibaba, was pursuing a $37 billion IPO at that time, but was forced to suspend 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 into improper antitrust, anti-monopoly, and consumer protection practices among others.

“In our view, companies will adjust their business practices to align with stricter enforcement of anti-competitive rules. Many of the regulatory actions were geared toward such behavior,” said S&P. 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. in 2016.

“As a result, large internet companies will likely curtail their mergers and acquisitions activity, particular of potential competitors and innovative start-ups that could one day disrupt their market,” said S&P.

The U.S. credit rating agency said in order to ensure their operations are not disrupted by stricter enforcement of anti-monopoly laws, Chinese tech 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’s splitting of its business into six separate units, each unit with the ability to raise external funding and pursue listings, was seen by analysts as a sign that China may be relaxing its scrutiny on its domestic tech companies.

S&P said there may be “added benefit” of addressing some of the government’s concerns by loosening the control over some business units.

“The regulatory headwinds that we had in the past two years … that’s now becoming from a headwind to a tailwind,” said George Efstathopoulos, portfolio manager at Fidelity International, on CNBC’s “Street Signs Asia” on March 29.

Chinese leaders also committed to support the “healthy” development of the sector and public listings for tech companies during the Chinese People’s Political Consultative Conference in May last year.

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

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

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