Corporate Compliance In China: What does 2021 tell us about 2022?
2021 saw heightened regulatory tightening in China with regulators conducting taskforce actions with a more pro-active attitude than ever on various industries. Corporations and some business sectors experienced varying degrees of pressure, and a few companies even reached the verge of bankruptcy due to regulatory changes.
In this paper, we take a look at some of the key Chinese regulatory actions of 2021, and how they could impact the business moving forward.
In 2021, two new regulations caught the attention of companies in several industries, particularly those involved in special internet platforms and social media. On June 10, 2021, China passed the Data Security Law, a fundamental law on digital information. The Personal Information Protection Law was passed on August 20, 2021, and was implemented on November 1, 2021. The Law aims to protect personal data via prohibition of big data discriminatory pricing (BDDP), collection of excessive information, and clarifies the responsibilities and obligations of internet enterprises.
On October 17, 2021, the Ministry of Industry and Information Technology (MIIT) remarked that they will continue to promote the special rectification action to focus on four aspects and eight types of problems, marking continuation of tightening watch over data handling by internet enterprises.
MIIT launched a special rectification campaign in the Internet industry in July 2021.
In the same month, shortly after IPO in the US, Chinese ride-hailing company Didi was probed by the Cyberspace Administration of China (“CAC”) and the State Administration for Market Regulation (“SAMR”) after raising suspicion over its storage and exportation of data related to national security, as well as monopolistic collection and usage of data. The probe caused Didi to suspend its App, and seven ministries and commissions were jointly assigned to conduct a network security review. In late November, Didi was notified by the regulators to arrange de-listing from NYSE, citing concerns over potential leakage of sensitive information. Since then, new user registration on Didi has been disabled.
Related to Didi, a number of US-listed Chinese companies were also inspected by the authorities, and new user registration has been all disabled as of today, due to data security concerns.
With growing concerns over the usage of big data, especially related to social habits and public opinion, companies involved in the gathering and management of such data, as well as social media, should expect continued and even increased pressure from government regulators in 2022. Increased prudence is advised when dealing with such kind of companies, especially those that are listed abroad. It is crucial to assess the type of information obtained and used by these companies, the way they handle or manage them, and the risks associated with these.
The Chinese Antitrust Law was introduced back in 2008, but in 2021, there was an obvious renewed strategy to apply it to specific sectors in different phases. Sectors that are traditionally concentrated such as the digital sector, have been subjected to additional challenges, in line with the government’s strategy to curb economic imbalances and promote the socialist ideal of common prosperity.
On November 18, 2021, the National Anti-Monopoly Bureau was officially established to strengthen the anti-monopoly regulatory power and control.
In March 2021, the General Administration of Market Regulation (GAMR) issued administrative penalty decisions for 10 cases of illegal operator concentration, and fined 12 different companies. On November 20, 2021, citing the Anti-Monopoly Law, the GAMR again opened investigations into 43 cases of illegal operator concentration without declaration. Internet companies such as Alibaba, Baidu, Tencent, JD, Meituan, etc. were affected.
From targeting the internet companies in March, the regulators shifted their focus to finance companies by November. Non-banking firms engaged in online payments and loans, and the finance sector as a whole, were largely affected.
Regardless of the industry, companies in a relative dominant market position, as well as those looking for M&A operations in 2022, should expect an increased engagement from the antitrust authorities this year.
Another key example of central regulatory changes affecting a whole industry was the online education sector incident in the middle of 2021.
In late May 2021, the 19th Meeting of the Central Committee for Comprehensive Reform, which reviewed and approved the Opinions on Further Reducing the Burden of Homework and Off-Campus Training for Students at the Compulsory Education Stage, was held. The policy was later more widely known as the “Double Reduction Policy (双渐政策).” The Opinions led the Ministry of Education and other relevant departments to implement stricter approval of out-of-school training institutions. No academic training institutions were allowed to go public for financing. Under the Double Reduction Policy, as many of the key players in the sector are publicly listed companies, their stocks in Hong Kong and US exchanges collapsed. Companies such as TAL and EDU lost over 90% in stock price from their all-time-highs.
The Double Reduction Policy continued to impact the entire sector following disastrous stock market responses, and most companies previously engaged in online education, which used to be a booming business sector, are now either in complete transformation or facing bankruptcy. Top players seek to transform and package new products to expand into high school education and vocational education business, for instance. The nature of New Oriental (EDU)'s newly established campus is a private non-enterprise unit, which is a non-profit social organization.
The implementation of the Double Reduction Policy is part of the national education policy, demographic policy, and education reform.
It is worth noting that before the Double Reduction Policy, relevant departments already issued warnings against the lack of compliance in online education industry. The online education industry was once a highly competitive and booming field. In the course of its rapid expansion, issues such as illegal fees, false advertising, forced consumption, qualification falsification, etc. became rampant due to the lack of supervision for a certain period. These drew criticism and attention from society.
In April 2021, Beijing Market Supervision twice ordered penalties against online education institutions for pricing violations and false advertising. Six institutions were penalized, including EDU, TAL, Yuan FD (猿辅导), Zuoyebang (作业帮), Gaosi (高思), and Gotu Group (高途集团).
To prevent the exploitation of regulatory loop-holes, relevant departments have not relaxed their supervision of the sector. For example, on January 7, 2022, the Ministry of Education issued a notice on the deployment of Double Reduction Policy consolidation work during the winter holidays.
Here, again, as much as this seems like an isolated issue targeting an underregulated sector, it does show the potential dangers that could also happen to other industries, even those unrelated to education. Any industry connected to a large number of people, especially those of the younger generations e.g. gaming industry, will have greater risks than others.
US Regulatory Pressure
Aside from the increased regulatory scrutiny in China, pressures from its key trading partners also largely impact foreign businesses operating in the country.
In October 2020, the Swiss-based Good Cotton Institute (BCI) published allegations of ongoing forced labor and other human rights violations in China's Xinjiang Uyghur Autonomous Region (XUAR) on its official website. It announced the indefinite cancellation of guarantee certification for all Xinjiang cotton companies, putting Xinjiang cotton products on a blacklist for international trade. And, in January 2021, US CBP issued a region-wide Withhold Release Order against cotton and tomato products produced in Xinjiang based on forced labor concerns.
BCI member companies including H&M, Nike, Uniqlo, and Zara announced that they would stop purchasing Chinese Xinjiang cotton or employing Xinjiang related labor.
The H&M Group went on to issue a due diligence statement regarding cotton from Xinjiang, expressing concern about reports of forced labor and religious discrimination against ethnic minorities in Xinjiang. The statement caused highly negative sentiment from Chinese netizens as the act was deemed to contain anti-Chinese political connotations, and H&M was then boycotted in China and several Chinese artists announced the termination of their cooperation with the brand.
Other brands, such as Nike, Uniqlo and adidas, saw as well as sharp drop on web sales connected to their stance on the issue, with adidas alone loosing 78% of its revenues on China’s largest e-commerce platform, as well as a number of artists traditionally connected to their brand, for the benefit of local sportswear companies such as Li Ning and Anta.
US pressure on Uyghur related issues persists into 2022. On December 23, 2021, President Joe Biden signed into law the Uyghur Forced Labor Prevention Act, which bars the importation into the US of products made from forced labor in the Xinjiang region of China. The dilemma between US policy and Chinese market sentiments and reaction, as well as compliance challenge faced by multinational companies will likely go beyond just the cotton or tomato industry.
Interest in ending forced labor practices gathered bi-partisan support since the Trump administration. The Uyghur Human Rights Policy Act was first enacted under the Trump administration in June 2020, and in September 2020, the U.S. House of Representatives first passed the H.R. 6210, the Uyghur Forced Labor Prevention Act. Biden administration is well-known for the positive tone it takes over human rights advocacy work, and bipartisan support on XUAR region related issues continued after the Bide Administration took over. Reinforcement of policy targeting forced labor issues is therefore, to a considerable extent, foreseeable. Policy research support and timely updates of related events can send out precaution against risks entailed by the signing of new laws.
The Uyghur Forced Labor Prevention Act shifts the burden of proof from US CPB to importers, and casts not only presumption of forced labor upon goods produced in Xinjiang, but also extends the presumption to goods produced by governmental persons working for "poverty alleviation" or "pairing-assistance" programs in China. In-depth supply chain due diligence is therefore highly recommended to avoid disturbing steady function of supply chain.
With the increased commercial and geopolitical tensions between China and the US, we may expect the sanctions and reversed burden of proof to be extended to other products not necessarily related to Xinjiang, but under the name of Military-Civil Fusion or Export Administration.