Regulators Become Mediators As Internet Firms Encroach

Regulators in new role as judges for industry clashes

China’s regulators have become involved in mediating a growing number of business disputes, reflecting the recent rise of a new generation of multibillion-dollar private sector companies that are rapidly growing beyond their traditional roots. In most cases, companies that began as Internet firms and high-tech manufacturers have encroached into a wide range of new areas like banking, TV and telecoms services, raising the hackles of big state-owned firms that previously dominated those sectors.

To date regulators have done a good job of acting as impartial mediators, seeking solutions that are fair and promote the healthy development of relevant sectors. Those regulators must be vigilant to continue maintaining a neutral stance in such matters, and not succumb to pressure to protect big state-owned firms that are worried about being overtaken by these younger, more entrepreneurial rivals.

The ongoing encroachment of private companies into traditional sectors was in the headlines again twice last week, in cases involving the media and retail sectors that for decades were dominated by state-owned companies. The start of these public-private sector clashes dates back nearly 2 years ago to a high profile dispute in the telecoms services sector, for years controlled by 3 large state-owned carriers.

That dispute saw the largest of those carriers, China Mobile (HKEx: 941; NYSE: CHL), complain about the popular mobile instant messaging service WeChat, which is owned by private sector Internet giant Tencent (HKEx: 700) and now boasts more than 400 million users. China Mobile said WeChat was an unlicensed telecoms carrier because it offered services that competed with China Mobile’s own lucrative SMS text messaging business. (previous post)

China Mobile wanted to force Tencent into a revenue-sharing agreement, and used its connections to get the telecoms regulator, the Ministry of Industry and Information Technology, involved to mediate the issue. But in the end the MIIT decided the matter was a purely commercial one and told China Mobile to negotiate directly with Tencent.

Another similar clash began about a year ago, when e-commerce leader Alibaba, another one of China’s largest private companies, teamed up with a licensed brokerage to offer Yu’ebao, a product that competed with traditional bank accounts. Yu’ebao was governed by brokerage regulations that were less strict than those for traditional banks, allowing Alibaba to offer better returns.

Unhappy about being undercut, the banks complained to the China Banking Regulatory Commission (CBRC) and People’s Bank of China, the 2 agencies that oversee China’s financial services industries. Both regulators declined to follow the banks’ wishes by banning Alibaba and a host of other private-sector firms from the business.

Instead, the regulators are reportedly in the process of trying to create a more level playing field by requiring Alibaba and other private sector firms to set aside reserves and take other steps to protect investors. (previous post) All banks must currently observe such rules, which are aimed at helping them survive an economic downturn or financial difficulties.

Most recently, TV and retailing have emerged at the center of separate new disputes requiring intervention by the relevant regulators. The TV case centers on an aggressive field of private-sector companies like Youku Tudou (NYSE: YOKU) and LeTV (Shenzhen: 300104), which started out as online video sharing sites but increasingly offered products that compete directly with traditional TV stations.

Traditional TV operators complained about the encroachment, as they watched their advertisers defect in droves to these newer more versatile players. In response, the regulator, the General Administration of Press and Publication, Radio, Film and Television (GAPPRFT), has rolled out a steady stream of new rules, including reports last week on limits to what formats and distribution models the new players can use. (previous post)

Also last week, the Ministry of Commerce was reportedly in talks with 10 of China’s largest e-commerce companies to renegotiate a controversial unconditional return policy introduced this year for online purchases. (previous post) In that case, the e-commerce leaders complained the law, which was supported by traditional retailers, was unfairly raising their costs and opened the way for fraud by consumers.

Each of these instances is different and complex, but all share the common theme of pitting aggressive new private sector players against established state-run companies that traditionally had no such competition. Response by the different regulators has been relatively even-handed so far, aimed at creating level playing fields where public and private-sector firms can compete equally. But the pressure to protect state-run firms could grow if some of those companies start to fail, and the regulators should take extra care to maintain their neutrality if and when that happens.

Bottom line: China’s regulators will be called to mediate a growing number of disputes as private firms encroach on traditional sectors dominated by state-run firms, but must stay vigilant to maintain an neutral posture.

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