Specific law will help guide digital economy

Promoting the development of the digital economy has become an important part of China’s overall economic policy. Yet the monopoly of internet companies, which are the main drivers of the digital economy, and their disorderly capital expansion have reached such alarming levels that they can no longer be ignored.

Thanks to the mountains of data, especially personal information, they have mined, large internet companies, after having expanded their market shares, are turning into monopolies. This will inevitably lead to increasing distorted competition, which in turn will cause great harm to both society and the economy.

The mobile internet penetration rate of China’s internet giants is already more than 90 percent. And needless to say, the internet giants use their dominant market position and data and tech advantages to indulge in unfair competition, seriously harming the business interests of not only small and medium-sized enterprises but also consumers.

In recent years, internet companies have undergone frequent mergers and acquisitions. Those small and medium-sized internet companies that have high creative potential are squeezed out of the market or acquired by the market giants. The current fierce competition in the internet market is essentially the capital wrestling of several internet giants.

Besides, taking advantage of the COVID-19 epidemic, the internet giants have ventured into community commodity retail and adopted the traditional money-burning competition model to seize shares in the grassroots vegetable markets, putting added pressure on grocers.

Such kind of internet oligopoly is not conducive to promoting small and medium-sized enterprises in the internet domain and protecting consumer interests. Also, the disorderly capital expansion of internet giants into low-end industries is not conducive to facilitating innovations in key technology fields; in fact, it will undermine the internet giants’ capacity to boost the real economy.

Due to a lack of effective financial supervision in the capital market, large internet companies have entered the financial sector through consumer loans, monetary funds and other means, leading to the proliferation of shadow-banking activities.

A large number of users and astronomical amounts of money have seemingly transformed the internet giants into “too big to fail” enterprises. But if their debt crosses a certain level, it could turn into a systemic financial risk which could have a domino effect and trigger a financial crisis similar to the 2008 subprime mortgage crisis in the US, which eventually led to the global financial crisis.

Therefore, while encouraging the development of the digital economy, the government should also strengthen the supervision on internet companies, check their monopolistic behavior, stop their disorderly capital expansion, and help the digital economy to develop in the right direction so it can help deepen China’s supply-side structural reform.

The government should also expeditiously revise the Anti-Monopoly Law and set the standards for identifying and punishing monopolistic behavior in the online sector. The Law Against Unfair Competition, Anti-Monopoly Law and the E-commerce Law are the legal bases for promoting orderly competition in the internet sector. But since traditional market yardsticks cannot be applied to the digital economy, government departments accelerated the process of drafting regulations to determine whether an internet company has indulged in monopolistic behavior.

And on Nov 10, the State Administration for Market Regulation issued a draft anti-monopoly guide for the digital economy to solicit public opinions. The draft guide includes new examination standards to determine whether an internet company enjoys a dominant position in the market, and analyze the concentration of undertakings, and the proposal to increase the penalties for the illegal acts of online companies.

According to the draft, the concentration of undertakings involving the structure of variable interest entities falls within the scope of anti-trust investigation, which the Anti-Monopoly Law enforcement agency of the State Council is authorized to conduct to determine if a party participating in the concentration of undertakings is a startup or an emerging platform, or whether the party has adopted a free or low-price model resulting in low turnovers that are below the threshold that needs to be reported.

The upper-ceiling fines recently fixed by the market regulator in line with the Anti-Monopoly Law for the three merger and acquisition deals involving Alibaba, China Literature and Hive Box indicate the trend of law enforcement when it comes to internet enterprises.

The government should also strengthen supervision on internet financing to ensure companies’ orderly capital expansion. By 2015, the government had realized the risks of internet finance, and the guide it introduced to promote the healthy development of internet financing stressed that internet financing is part of the overall financial sector, and that strengthening supervision on internet financing is necessary for facilitating the healthy development of the sector.

Subsequently, the China Banking and Insurance Regulatory Commission implemented interim measures for managing the activities of online lending information intermediaries, signaling the beginning of supervision of online lending.

And in September, the People’s Bank of China introduced trial measures for the supervision and administration of financial holding companies, and to strengthen the supervision and administration of nonfinancial enterprises and other financial holding companies, as well as to reduce systemic financial risks.

Interim measures for the supervision of online small loan business have also been introduced, setting clear requirements on the amount of external financing and loans, the purpose of loans, and the rules for issuing joint loans.

These measures will help better regulate the disorderly expansion of internet capital. Yet the government also needs to introduce more specific policies to monitor and supervise the online financial sector, upgrade the laws, and strengthen law enforcement.

Yu Shuhong is professor and Ban Xiaohui is associate professor at Wuhan University Institute of International Law. The views don’t necessarily reflect those of China Daily.