China plans to ban overseas IPOs for tech companies with data security risks

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China has launched a multi-pronged attack on its tech companies, threatening to restrict their ability to register with the United States, seeking to tighten regulation of their use of algorithms, and sidelining their cloud computing businesses in a big city.

In another move amid a wave of tech regulations announced in recent months, Beijing has also cracked down on what it has described as a “chaotic” celebrity fan culture, placing further restrictions on a content already tightly controlled in China.

The moves are cutting the wings of Chinese tech giants like Alibaba Group and Tencent Holdings even further and have pissed off investors, hammering Chinese stocks traded at home and abroad, Reuters reports.

Chinese tech companies have raised billions of dollars in overseas listings, particularly in the United States, as Beijing has pursued a more laissez-faire approach to the industry for years.

Now China is developing rules that prohibit internet companies whose data is considered to pose a potential security risk from registering abroad, a person familiar with the matter said.

The new rules would also emphasize the legal liability of underwriters in overseas listings and require more in-depth disclosure of holdings for those with a so-called variable interest entity (VIE) structure.

The VIE structure, widely used by tech companies, was created two decades ago to bypass rules restricting foreign investment in sensitive sectors such as media and telecommunications.

It gives companies more flexibility to raise capital overseas through Initial Public Offerings (IPOs), while bypassing the scrutiny and lengthy scrutiny faced by locally incorporated companies.

Cloud borders

As China’s tech sector has grown in size and importance, Beijing is increasingly wary of its influence and the mountains of data it controls.

Highlighting this concern, Tianjin, a city of 14 million people south of Beijing, called on companies controlled by the municipality to migrate data from clouds managed by private operators like Alibaba and Tencent to a system managed by state by September 2022, a document dated August 12 showed.

Shares of Alibaba, China’s largest cloud service provider, closed 4% lower in Hong Kong on Friday. Its US-listed shares fell more than 3 percent in pre-market trading in New York.

Alibaba Cloud, whose revenues remain modest compared to its parent company’s extensive e-commerce business, has heavily promoted its cloud services. Last year, he said he plans to spend $ 28 billion over three years on next-generation data centers.

Chinese tech stocks have seen tens of billions of dollars wiped off their stock valuations since Beijing began cracking down on the sector in November 2020 with the abrupt halt of Ant Group’s IPO, touted as the largest sale of shares to the world. Since then, the tech sector has fallen by almost 20%.

China’s Cyberspace Administration said on Friday it was also stepping up oversight of algorithms used by tech companies, telling them to act fairly and not to use model algorithms that trick users into spending money. in a way that could disrupt public order.

The guidelines include a proposal to allow users to turn off algorithm recommendation services, giving consumers greater say in an Internet domain that has also been targeted by authorities in the United States and Europe.

“This policy marks a moment when China’s technology regulation is not just keeping pace with data regulations in the European Union, but surpassing them,” said Kendra Schaefer, head of policy research technology at Beijing-based consulting firm Trivium China.

China has also cracked down on what it described as a “chaotic” celebrity fan culture, banning platforms from posting popularity lists and regulating the sale of fan merchandise.

Online celebrity fan clubs have spread to China. The Paper newspaper predicted that China’s “idol economy” could be worth 140 billion yuan ($ 21.59 billion) by 2022.

The clubs have been criticized for their influence on minors and for causing social unrest in China, which already has strict rules on content, from video games to movies and music. Beijing censors anything it believes violates core socialist values.


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