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China's New Power Play : More Control of Tech -2-

06/11/2021 | 10:15pm EDT

Lawyers and analysts say China's rules could ultimately serve many purposes, including slowing foreign companies' technological progress. An inability to send certain data back to the U.S. could hurt Tesla's ability to use artificial intelligence algorithms to analyze such data to improve its cars.

"It's reducing a proprietary advantage companies like Tesla have," says Lester Ross, a Beijing-based lawyer at WilmerHale, who advises American firms operating in China.

Internal debate

In the past, the government often demanded data from private firms, and could sometimes enforce its wishes, especially for hunting down criminal suspects and silencing dissent. Chinese companies have pushed back on previous proposals to open up and centralize their statistics, such as those on customers' borrowing habits and payment histories.

Over the years, senior officials including Premier Li Keqiang have sometimes argued for giving the private sector more autonomy in collecting and handling user data, people familiar with Beijing's internal deliberations say. The idea was to encourage firms to keep innovating and to accommodate their growth, including overseas.

On the other side are officials from China's security apparatus and financial regulatory agencies, who thought tech firms were becoming too big and not doing enough to support state objectives. Resisting requests to share more data, China's tech giants cited a lack of relevant regulations.

Increasingly, China's president, Mr. Xi, leaned toward voices advocating greater digital control. He now labels big data as another essential element of China's economy, on par with land, labor and capital.

"Whoever controls data will have the initiative," he has said in private meetings, according to the people familiar with internal discussions.

The government grew more aggressive after a now-infamous speech by tech billionaire Jack Ma last October, in which he angered regulators by criticizing them for smothering innovation. Mr. Xi halted the IPO of Ant Group, in which Mr. Ma is the controlling shareholder, soon after.

Chinese regulators believe Ant and other financial-technology players, including Tencent, have monopolized user data to get unfair advantages over banking institutions, while also making it harder for the state to monitor credit risk.

Ant built its own credit-risk system as it expanded into consumer lending, in part using spending and bill-paying data from its Alipay app, used by more than one billion consumers. Ant wound up with a sizable position in China's financial sector, traditionally dominated by China's state-owned banks. It works with banks to fund the loans, but hasn't had to bear much of the default risk.

New regulations proposed late last year by the central bank and China's top banking regulator are calling on firms like Ant and Tencent to transmit credit statistics into either a centralized system run by the central bank or a credit-rating agency controlled by the government.

"From the point of view of the state, anti-data monopoly must be strengthened," said Li Lihui, a former president of state-owned Bank of China Ltd. and now a member of China's legislature. He said he expects China to establish a "centralized and unified public database" to underpin its digital economy.

Ant and Tencent declined to comment. During the company's earnings call in March, Tencent's president, Martin Lau, said, "We'll be completely compliant with whatever regulations that will become in place."

Another initiative under way involves some Chinese cities testing so-called unified data centers for private-sector firms to share data with authorities.

Shenzhen, where Tencent is based, is planning to build one that would centralize the storage, sharing and supervision of data collected by government entities as well as companies in finance, education, telecommunications and other areas.

The city hasn't provided detailed information on its plans for using the information, which it broadly defines as "public data." A Shenzhen official confirmed the initiative but declined to comment further.

"Public data is a new type of state-owned asset, and its data rights belong to the state," said a draft regulation released by Shenzhen's government last year.

Write to Lingling Wei at lingling.wei@wsj.com

(END) Dow Jones Newswires

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