China Notifies Firms of Tougher Investment Rules for Big Tech

SINGAPORE—China has notified some companies of new rules that would require the country’s biggest internet firms to seek approval for investment deals, a mechanism that is likely to curb domestic technology giants from growing even bigger through acquisitions, according to people familiar with the issue.

The country’s top internet regulator, the Cyberspace Administration of China, recently told some companies that it would establish a new mechanism that requires internet companies to obtain formal approval for investment deals if they have 100 million users or more or have posted revenue in the previous year of at least 10 billion yuan, equivalent to $1.57 billion, the people said.

The regulator notified some companies of the rules this week, some of the people said. The rules are still under review and could change, people familiar with the matter said.

The move to establish new requirements comes after a year of clampdowns on the country’s internet sector and could lead to increased regulatory scrutiny into such deals and even block internet companies from making certain investments, the people said.

The new rules being planned would affect China’s biggest technology companies, including Tencent Holdings Ltd. , Alibaba Group Holding Ltd. and ByteDance Ltd., each of whose products boast more than one billion active users.

The Cyberspace Administration of China, on its official account on social media WeChat, said that it hasn’t publicly announced any new rules. Tencent and Alibaba didn’t respond to requests for comment.

A spokesperson for Beijing-based ByteDance, which operates the hit short-video mobile platform TikTok, said Wednesday that the company was dismantling the strategic investment team, which serves as its corporate venture-capital arm.

Chinese tech stocks popular among U.S. investors have tumbled amid the country’s regulatory crackdown on technology firms. WSJ explains some of the new risks investors face when buying shares of companies like Didi or Tencent. Photo Composite: Michelle Inez Simon

People familiar with the matter said that the decision was made in response to the new rules and that dozens of employees within the team were being either transferred to other positions or laid off.

Asked whether the decision came in response to the new rules being planned, the spokesperson said it was made earlier this year to “strengthen the coordination between strategic research and the business.”

For decades, many Chinese technology companies have grown bigger through acquiring startups that could provide the technology pieces they are missing—a similar strategy used by some American counterparts.

In recent years, Chinese leaders—who have criticized “the disorderly expansion of capital” in the country—have increased scrutiny into the country’s internet sector, which they see as too big and powerful. Among their concerns were the companies’ grip on data of billions of people, which officials believed could lead to manipulation of public opinion or pose cybersecurity risks.

Beijing has been beefing up antitrust regulations and enforcement. Last year, China set up a new antimonopoly bureau and the legislature proposed tougher amendments to the country’s antitrust law. Regulators hit Alibaba with a record $2.8 billion antitrust fine.

Regulators also repeatedly fined various tech companies over investment deals. Beijing said the companies didn’t properly report past acquisitions and fined them each 500,000 yuan, equivalent to about $77,000.

In July, China’s antitrust regulator blocked Tencent’s bid to combine the country’s two biggest game-streaming platforms, its first public intervention to halt a merger in the technology sector.

Meanwhile on Wednesday, China’s top economic planner issued guidelines on the internet industry, requiring that investments by internet-platform companies into financial firms be strictly regulated.

In recent months, some tech giants have been unwinding their corporate investments.

In December, Tencent shed most of its stake in Inc., one of the largest Chinese e-commerce companies, a move analysts said might have been a response to risks posed by an aggressive regulatory stance by China’s government. Tencent declined to comment then.

Tencent also cut its stake in Southeast Asian internet company Sea Ltd. earlier this month.

In September, Alibaba sold its stakes in a state-owned broadcaster. The move followed a Chinese government’s request to Alibaba to dispose of its media assets amid concerns about the technology giant’s sway over public opinion in the country, as reported by The Wall Street Journal.

The latest rules would also require big tech companies to obtain approval from cybersecurity regulators before an initial public offering, whether that is in or outside of China, the people said.

The planned change follows a revision of a cybersecurity review in July that companies holding personal data from at least one million users must apply for such a review ahead of foreign listings.

Corrections & Amplifications
The Cyberspace Administration of China recently told some companies that it would establish a new mechanism that requires certain internet companies to obtain formal approval for investment deals. An earlier version of this article incorrectly said that the CAC had recently established the mechanism. (Corrected on Jan. 19)

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