China faces the challenge of keeping its Big Tech in check just like the U.S. does – CNBC

Jack Ma, CEO of Chinese e-commerce giant Alibaba, speaks during his visit at the Vivatech startups and innovation fair, in Paris on May 16, 2019.

Philippe Lopez | AFP | Getty Images

GUANGZHOU, China China's technology giants are firmly in the crosshairs of the country's regulators who are trying to figure out how to create a set of antitrust rules that can keep these firms in check.

Experts say Beijing will need to ensure that its drive for new regulations balances its push to become a global technological leader.

Like in the U.S., China's tech sector has expanded via a largely unencumbered path. In some areas, regulators have already stepped in and are now stepping up those efforts.

"Like Washington, Beijing has a love-hate relationship with its tech champions," Kendra Schaefer, a partner at Trivium China consultancy which has offices in Beijing and London, told CNBC.

"On the one hand, these companies represent China's successful modernization and growing global competitiveness.On the other hand, Beijing has long struggled with how to fit big tech into the socialist market economy."

Earlier this week, Chinas bureau for regulating monopolies released draft rules that define, for the first time, what constitutes anti-competitive behavior.

The draft regulation by the StateAdministration for Market Regulation covers areas including pricing, payment methods, and use of data to target shoppers. It's the most wide-sweeping attempt to regulate what Beijing sees as monopolistic behavior by the country's tech giants that have grown significantly in the last few years.

The agency is seeking public feedback on the draft rules until Nov. 30.

In China, the services offered by the top tech companies are essential for daily living.

For example, Tencent's WeChat messaging app is used by over a billion people per month. And it's not just a messaging app users can pay for items via WeChat Pay, book flights and trains and shop online, without leaving the app. Tencent is also strong in the gaming sector.

Meanwhile, Ant Group's Alipay is also used by over 700 monthly active users. A third of Ant Group is owned by e-commerce giant Alibaba. But Alibaba is also a cloud computing company as well.

On Wednesday, Chinese tech stocks plunged on news of the draft antitrust rules, given the fact that these internet giants could all fall under the regulation, depending on how it is enforced.

Beijing has looked to tackle aspects of such businesses in the past.

For example, in early 2018, regulators froze the approvals of new video games over fears they contained too much violence and could lead kids to having eye problems. Games need a green light from the regulators to be released and monetized in China. Tencent was particularly hard-hit by that move.

More recently, what would have been Ant Group's world record-setting initial public offering (IPO) in Shanghai and Hong Kong, was suspended. The Shanghai Stock Exchange said Ant had reported "significant issues such as the changes in financial technology regulatory environment." Just days before, theChinese central bank and regulators issued new draft rules for online micro-lending, which could affect Ant Group.

But the new antitrust laws, which are arguably more wide-sweeping, may not be easy to implement.

"I would point out how difficult it has been for regulators in the West, where anti-trust law has a very long history, to figure out how to create laws which will limit their monopoly power," Brian Bandsma, portfolio manager at asset management firm Vontobel Quality Growth, told CNBC.

"Chinese regulators face the same challenge. These businesses are difficult to define and control through traditional legal definitions," Bandsma said.

Yes, the perception appears to be that when Beijing decides to take regulatory action, it will come fast and companies will have to comply.

Late last month, Alibaba founderJack Ma made some comments that appeared critical of China's financial regulator. That was seen as something that stoked regulators into suspending Ant Group's IPO. And some observers say it could also be a factor behind the latest antitrust rules.

"The fact that it is coming on the heels of what Jack Ma said about the financial service regulator, I don't believe is a coincidence," Sam Radwan, CEO of management consultancy Enhance International, told CNBC.

Alibaba, Tencent, Meituan, JD.com and Pinduoduo are all companies that could be affected by the new rules, according to a recent note by Morgan Stanley.

"It will depend on how these guidelines are enforced or whether there is further legislation or regulation in the pipeline," Paul Triolo, head of the geo-technology practice at Eurasia Group, told CNBC by email.

But dealing with regulation is not new for China's technology giants in a market where rules can come into effect unexpectedly and very swiftly.

For example, Tencent has dealt with various regulations on the gaming industry. Chinese fintech company Lufax, which recently listed in New York, was once a peer-to-peer lending giant in China. Buttougher Chinese regulations on the sector forced the company to scale back on that business. In 2019, Lufax exited peer-to-peer lending and has since pivoted to other businesses.

"These companies are also fairly adept at pivoting quickly to incorporate shifting regulatory demands into their business strategies," Trivium China's Schaefer said.

While the U.S. has not yet agreed on what regulation of its large technology firms will look like, the view is that China can move quickly in this area, which may explain the knee-jerk reaction in Chinese technology stocks.

"Yes, the perception appears to be that when Beijing decides to take regulatory action, it will come fast and companies will have to comply," Triolo said. "The latest moves are a kind of warning shot, and like we have seen in Silicon Valley, companies will respond to new rules, and try to preempt others by taking proactive action to address regulators concerns."

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China faces the challenge of keeping its Big Tech in check just like the U.S. does - CNBC