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China wants Internet giants to get investment approval, fundraising sources

A sign above an office of the Cyberspace Administration of China (CAC) is seen in Beijing, China on July 8, 2021. REUTERS / Thomas Peter

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HONG KONG / BEIJING, Jan. 19 (Reuters) - China's cyberspace regulator has drawn up new guidelines that will require the country's major Internet companies to obtain its approval before making any investments or fundraising, sources familiar with the matter said on Wednesday.

The proposed requirements from the Cyberspace Administration of China (CAC) will apply to any platform company with more than 100 million users or with more than 10 billion yuan ($ 1.58 billion) in revenue, they said.

Any Internet company involved in sectors mentioned on the negative list issued by China's National Development and Reform Commission (NDRC) last year must also apply for approval, the sources said.

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Some ISPs have already been briefed, they added, and the draft rules are still subject to change.

The sources declined to be identified as the information was not yet public. The CAC did not immediately respond to a Reuters request for comment.

The proposed rules will intensify oversight by China's increasingly confident regulators, who over the past year have restrained former free-riding internet giants in areas from contracting to their handling of user data.

It was not immediately clear what types of investments or fundraising could be affected. A senior leader in the technology industry said there was concern about whether it would be applied to private market investment, such as private funding rounds before the IPO.

China has routinely updated a negative list banning foreign investment in sectors such as compulsory educational institutions, news organizations and rare earth minerals. Late last year, the NDRC required companies in such sectors to obtain approvals from regulators before they could list their shares outside the mainland.

Chen Weiheng, partner and head of the US law firm Wilson Sonsini's Greater China practice, said the reported CAC "internal practice guide", if confirmed, could have a significant impact on the Internet investment landscape and "even end the era of major Internet platform operators. to build an ecosystem through investment. "

"The development seems to be driven by the regulatory considerations of continued antitrust concerns in the Internet area and the need to oversee the investment activities of large listed Internet companies ... it would be a logically consistent move with the former antitrust and VIE-related legislative action. "

Chinese technology giants such as Alibaba Group (9988.HK), Tencent Holdings (0700.HK), Meituan (3690.HK) and ByteDance have over the years created large empires by acquiring or investing in smaller players, practices that Chinese regulators now criticize as monopolistic and unfair to their users.

Some of these firms have been subjected to a wide range of penalties over the past year, including fines for not reporting past trades and for monopolistic behavior. From 15 February, China will also require companies with data on more than 1 million users to undergo a security review before listing their shares abroad.

Tencent was Asia's third most active investor in the fourth quarter with investments in 39 companies, after Sequoia Capital China and Hillhouse Capital Group, according to data from CBInsights. Xiaomi invested in 31 companies in the fourth quarter.

China's venture funding was $ 90.1 billion in 2021, a 52% year-over-year increase, the data showed.

A private equity investor who declined to be identified said the draft rules could cause large internet companies to slow down their investments, leaving more room for smaller, independent start-ups to survive and thrive.

It could also affect valuations because these corporate giants were less sensitive to valuation, but more about gaining a strategic advantage over their competitors, he said.

"With the gradual exit from these strategic corporate investors, there will be less competition in the industry."

($ 1 = 6.3483 Chinese yuan)

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Reporting by Xie Yu in Hong Kong, Yingzhi Yang in Beijing and Zhang Yan in Shanghai; Additional reporting by Kane Wu and Selena Li in Hong Kong; Written by Brenda Goh; Edited by Jacqueline Wong, Rashmi Aich and Kim Coghill

Our standards: Thomson Reuters Trust Principles.


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