Chinese internet companies are puzzling over an ex-official’s suggestion that they should pay a tax when trading their users’ personal data – a levy that if implemented would represent another regulatory risk and possible drain on their bottom lines.

Former Chongqing mayor Huang Qifan suggested the “data tax” in a speech he gave in a Shanghai forum on October 24. After the Nikkei quoted him airing the idea on Monday, shares in internet giants including Tencent and Alibaba slumped for three consecutive days.

Commentators have since rushed to speculate that the possible imposition of a “data tax” could be used to finance Chinese President Xi Jinping’s “common prosperity” drive, which aims to address the nation’s wealth gap. They said such a tax could also be used to push antitrust measures so that internet firms would no longer dominate big-data markets.

It’s not clear the data tax will be imposed and if so how it would impact big internet firms. But the management of online data is clearly on the forefront of Beijing’s regulatory sights.

On November 3, 2020, the Shanghai Stock Exchange announced a halt to Ant Group’s massive initial public offering plan in the United States, which if it had gone ahead would have been the world’s richest ever. It was said Beijing was worried that some of the company’s big data resources would be shared with US regulators.

On July 2, the Cyberspace Administration of China (CAC), the country’s cyber watchdog, said it was investigating homegrown ride-hailing platform Didi Chuxing over cybersecurity concerns, after the company raised more than US$4.4 billion in an IPO in New York on June 30.

Chinese regulators have since reportedly asked Didi Global Inc.’s top executives to devise a plan to delist from American bourses, an unprecedented request that’s likely to revive fears about Beijing’s intentions for its giant tech industry, according to a Bloomberg report.

The China Securities Regulatory Commission is reportedly going to amend its rules to require firms structured using the so-called VIE model to seek approval before getting listed in Hong Kong or the US.

Also in early July, Zhang Yiming, the founder of ByteDance, which owns Tik Tok, was said to have met with Beijing officials over data security issues. While foreign media said ByteDance would solve the problem and go public in Hong Kong in early 2022, the company declined to make any comment.

On October 18, General Secretary of the Communist Party of China (CPC) Xi said at the 34th group study session of the Central Committee’s politburo that it was a strategic choice for China to develop a digital economy to seize new opportunities in the new round of technological revolution and industrial transformation.

He said the development of the digital economy can help accelerate market integrations, enhance industry upgrades and increase China’s global competitiveness.

“It is necessary to achieve breakthroughs in key and core technologies … make use of the advantages of our country’s socialist and ‘whole-nation’ systems and enormous markets,” Xi said. “We should realize a high level of self-reliance and self-improvement as soon as possible and firmly control the autonomy of the development of the digital economy in our own hands.”

Xi added that it was important to regulate the development of the digital economy by improving the market access system, protecting the legal rights of the sector’s employees and consumers, and preventing some digital platforms from monopolizing the markets or disorderly expanding their reach. The leader also said it was necessary to strengthen tax supervision and inspection.

Lyu Jian, president of Nanjing University and a professor in computer science, attended this group study session and answered questions from the floor. In the following two weeks after this group study session, party members at local governments held their own study sessions to go over and promote Xi’s speech and spirit.

On October 24, Huang Qifan, who had suggested imposing a nationwide property tax a decade ago, said at the Shanghai Bund Financial Summit that companies should pay a “data tax” if they traded any of its users’ data.

“Data is a new fundamental resource for a nation and has a major and profound influence on economic development, social governance and people’s livelihood,” Huang said. “This means that any illegal collection, transmission and use of data may hurt a nation’s core interests.

“Data has the characteristic of a public good. Its jurisdiction and transaction rights should belong to the state while all data activities should follow national data security regulations,” Huang said.

He said the central government could set up a center to manage all local data activities and allow several key cities to set up data transaction bourses. He said all these data transactions should be traceable with the use of artificial intelligence and blockchain technologies.

“Platforms that own a large amount of personal data should return 20-30% of the revenue they obtained from data transactions to the ‘data producers’,” said Huang.

He said it was unfair that “data producers,” which refer to consumers, gave their personal data to internet platforms to create products and make profits but they could not benefit at all in the process.

It has remained unclear whether Huang’s suggestions are backed by the central government. Some mainland academics said small internet companies would support the launch of a “data tax” as it could help break the monopoly of internet giants.

Huang’s speech was quoted by Nikkei in an article titled Is China considering a data tax on big tech? Signs point to yes” on Monday.

Huang made his speech at the Bund Financial Summit, which was highly symbolic as it was the conference that Alibaba founder Jack Ma had spoken at last year.

In late October 2020, Ma made a joke at the Bund Financial Summit, saying that “China’s financial system has no systemic risks as it has no system at all.” After this, Ant Group’s IPO in the US was halted while Ma also disappeared from public view until he resurfaced in Hong Kong and Spain last month.

Amid the “data tax” report, Tencent’s shares dropped 4.8% in the first three days of this week to close at HK$472.2 (US$60.6) on Wednesday. Alibaba’s shares lost 5.7% in the same period to close at HK$132 on Wednesday. Xiaomi Corp, which collects personal data through its devices, saw its shares down 8.8% to HK$19.24 in the three days.

Lee Cheuk-fung, the chief operating officer at Nerico Brothers, a Hong Kong-based brokerage firm, said the imposition of a “data tax” could lead to double taxation as internet companies had already contributed to society by paying business or profit tax.

Lee said an additional tax would definitely hurt companies’ profitability, as well as their share prices.

Kenny Tang, chairman of the Hong Kong Institute of Financial Analysts and Professional Commentators, said large companies in the new economy obtained a huge amount of data and enjoyed a competitive edge in the markets, squeezing the market shares of traditional companies.

Tang said Chinese internet giants would probably face more tightening rules in the short run while their valuations would continue to be under pressure.

In fact, Alibaba’s shares have declined 56% from their peak of HK$309.92 in October 2020. Tencent’s shares have decreased 38% from their historic high of HK$766.5 in late January, while Meitu’s shares have dropped 59% from their peak of HK$4.11 in February.

On Wednesday, mainland media Yicani.com reported that Tencent was ordered by regulators to submit its new apps or updates for inspections before they could be released to the markets. Reports said a number of Tencent’s apps had recently violated certain rules.

by Jeff Pao in Asia Times, Nov 25, 2021

‘Data tax’ could be next blow to Chinese tech giants