18 August 2019

Domestic players to gain in China internet ‘clean-up’

Internet companies should brace for a tougher Chinese regulatory environment as Communist Party chief Xi Jinping oversees initiatives by the newly established central internet security office to “clean up” the nation’s virtual world. As part of the efforts, the government will set high entry barriers to foreign players, which will be good news for domestic leaders like Tencent Holdings (00700.HK), Alibaba Group and Baidu Inc (BIDU.US), as well as local network equipment makers.

State news agency Xinhua reported on Feb. 27 that Xi will head the central internet security and informatization leading group, as he believes it is a major strategic area having a bearing on the country’s security and development as well as people’s life and work. The group will lead and coordinate internet security and informatization work in different sectors, as well as draft national strategies, development plans and major policies in the field.

The government will also implement new measures and allocate sufficient resources to support local internet companies in becoming strong players globally.

Against this backdrop, authorities have accorded top priority to incubating local firms, while indirectly closing the door to foreign internet firms. Amid Beijing’s growing concern over cyber-spying by foreign agencies, foreign internet players will find it difficult to operate in the mainland market unless they agree to censor sensitive information by going through the so-called Great Firewall of China and adhere to the rules set by the government.

The strengthened focus on cyber security will benefit Chinese telecoms and network equipment makers, apart from local internet firms. As authorities opt for domestically produced hardware and curb foreign-made equipment in core networks, local players will see more orders. The recent antitrust investigation into US-based mobile phone chipmaker Qualcomm Inc. can be seen as one more piece of evidence that Beijing is taking a closer look at technology security issues. Cisco Systems’ chief executive John Chambers has also said his firm is facing difficulties in China sales.

Even among Chinese firms, internet players focusing on offering news and discussion forums, and microblog platform operators such as Inc (NTSE.US) and Sina Corp (SINA.US), could end up as losers under Beijing’s tighter policy.

Given the current reality, almost all local internet companies are trying to avoid sensitive political news and discussions in a bid to stay out of trouble. That is the reason why leading industry players are now focusing on games and mobile commerce offerings.

Operators have started using tools such as keyword filtering to clean out sensitive content from their web and social media platforms. But more efforts may be needed to monitor users’ comments. That said, any overly-stringent censorship could lead to a decline in user traffic and affect advertising revenues. Thus, in the end, companies will have to walk a fine line between toeing Beijing’s line and allowing reasonable freedom of expression for users.

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EJ Insight writer

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