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Is China’s app market turning cold?

For the longest time, China has been known for its rapidly growing app market. However, the wide-ranging regulatory crackdowns by Chinese authorities have created hurdles for the top internet platform companies, resulting in a recent decline in app numbers.

The number of apps available to Chinese smartphone users has fallen by 38.5% over the past three years, SCMP reported, after reviewing data by the Ministry of Industry and Information Technology (MIIT). Moreover, the biggest declines were registered this year, as authorities clamped down on internet platform firms and introduced new data and privacy laws. As of October, China’s app market saw a net loss of another 670,000 apps this year, after a decline of 220,000 in 2020 and a fall of 850,000 in 2019.

The decline in app numbers over the years signals the increasing crackdown on big tech companies from sectors ranging from gaming to education, ride-hailing as well as food delivery. China’s internet clean-up campaign has especially revolved around domestic tech titans who have been accused of engaging in anticompetitive practices, irregular collection of personal information as well as misuse of user data. In the meanwhile, regulators have fined tech behemoths for billions of dollars, citing ‘suspected monopolistic practices.

The government has not only started banning mobile apps this year but reportedly has put a freeze on new app releases this year, dramatically leading to the market share reduction of Chinese apps.

Besides this, another reason for the stagnancy is that the app market is maturing in China, with monopolies like WeChat, Tencent Holdings, dominating the market in terms of the share of Chinese users.

China’s ongoing squeeze on apps

In a fresh move towards internet governance, China’s top market regulator announced that it will classify internet platforms with different scales, based on their user scale, business type and capacity.

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Furthermore, to establish an oversight framework for its technology sector, the State Administration for Market Regulation proposed new rules in November, that would increase online advertising oversight. “Internet advertising must meet the requirements for the establishment of socialist spiritual civilization and the promotion of an excellent traditional culture of the Chinese nation”, the statement read. This follows another announcement of rules restricting gaming time for players in November.

In September, China’s cybersecurity regulator released rules for regulating the use of algorithms by companies to sell products to consumers. Aimed at tightening the laws around antitrust and competition on the internet, the market regulator in August issued draft rules covering a wide range of areas from prohibitions on the way companies can use data to stamping out fake product reviews.

According to Dale Nicholls portfolio manager of Fidelity China Special Situations PLC,  many of these crackdowns are addressing problems that confront countries globally.

“Big tech and related challenges around anti-trust and data security and privacy are examples, as are the challenges around income inequality. While in many cases we can trace the path of regulation, unlike in most other countries, Beijing’s implementation can be swift, which often roils markets.”

Working around the rules

As the government’s broad regulatory push is still in full swing, some of China’s tech darlings are trying to work as per the rules. According to Michelle Qi Head of Equity, Eastspring Investments, China, business models and regulations would need to adjust as the sector matures and data security becomes increasingly important, in the internet sector.

“Companies also reacted promptly, and high-cap Internet platforms such as Tencent, Meituan and Pinduoduo (PDD) unanimously endorsed such a cause by launching multi-billion dollar general prosperity funds or realigned their corporate strategy to strengthen their social responsibility”, said Wendy Chen, Senior Investment Analyst in GAM Investments.

After coming under intense pressure, Mobile transportation platform Didi Global’s IPO announced plans to take its shares off the New York Stock Exchange (NYSE) in early December.  The company plans to move its listing to Hong Kong. “Following careful research, the company will immediately start delisting on the New York stock exchange and start preparations for listing in Hong Kong.” The IPO of the Chinese ride-hailing giant was the biggest US listing by a Chinese company since Alibaba’s debut in 2014.

In another update, media reports stated last week that Chinese regulators have reviewed nine apps by Tencent Holdings and finally gave approval to publish app updates. The company’s apps were earlier accused of monopolistic behaviour and infringed users’ rights.

At the same time, many brands with a solid footing in the Chinese market are planning to branch out business strategies in other sectors. Companies like Tencent, Alibaba, and Baidu are venturing into the enterprise software and hard techs like chips and the cloud, Bloomberg reported. Meanwhile, ByteDance Ltd. and Kuaishou Technology have streamlined operations and focussed on core businesses.

Some China-based tech companies are considering growing their international business, much earlier in their lifecycles, Ben Harburg, managing partner at venture capital firm MSA Capital told CNBC. Technology companies like Alibaba, Tencent, Xiaomi, Sheen as well as ByteDance’s video app TikTok have been successful in expanding their overseas businesses.

In a different move, ByteDance is betting big on e-commerce in China. Last week, the world’s most valuable start-up created a stand-alone shopping app in China, betting to take on the competition with Alibaba, Pinduoduo and JD.com. The app is banking over the rising trend of Gen Z consumers, who buy products depending on tips from online influencers.

Besides domestic behemoths, China is also cracking down on foreign content. Looking at these restrictions as a permanent problem, some of the world’s largest companies have given up on China already.

Apple has removed a popular Quran app from the App Store in China, one of the firm’s biggest markets. The app had approximately a million users in China. The company took the decision of app removal in October, after receiving directives from regulators, mentioning the app,” includes content that requires additional documentation from Chinese authorities.”

Another company drawing regulatory scrutiny was Amazon’s audiobook and podcast service app called Audible, which got removed from the App Store, earlier in October.

Meanwhile, in a surprise move, Linkedin relaunched its Chinese version app – InCareer – last week in China, two months after Microsoft announced the removal of the app, due to permit issues and challenging rules in the country.

Expressing views about portfolio positioning, Dale Nicholls from Fidelity said, “After the significant recent correction in technology-related names, the risk/reward payoff is now tipping much more in our favour in these companies.”

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