China is poised to take “preferred shares” in local units of Alibaba and Tencent as Beijing formalizes a bigger role in overseeing the country’s powerful tech groups.
The Chinese government has responded to a faltering economy by waiving the stiff fines and penalties that have characterized its campaign to reinstate the country’s biggest tech groups, but which have also scared off foreign investors.
As the brutal crackdown has waned, the government is increasingly taking small stakes in the local operations of big tech companies, as it recently did with the owner of TikTok ByteDance.
This provides the Communist Party with a mechanism to remain deeply involved in its activities, especially the content it broadcasts to millions of Chinese.
Equity interests, typically involving a 1% share of key internet group entities, are akin to “preferred shares” because they come with special rights over certain business decisions.
In China, holdings are known as “special management shares” and since 2015 they have become a common tool used by the state to exert influence over private information and content companies.
That was the goal of China’s internet regulator when it took a stake in a Ali Baba unit last week, according to two people involved in the case. An entity under the public investment fund set up by the Cyberspace Administration of China (CAC) acquired a 1% share of an Alibaba subsidiary in Guangzhou on Jan. 4, according to Chinese business records.
CAC took the stake to strengthen control over the content of e-commerce giant Youku’s video streaming unit and web browser UCWeb, the sources said. As part of the deal, the unit also appointed a new board member, Zhou Mo. The CAC has a mid-level official with the same name.
It is unclear what rights the government will get in many agreements. In 2016, China’s media regulator advised state groups to take special management shares to demand at least a 1% stake, a board seat and the right to review content.
Details of the government’s plan to take preferred shares in Tencent remain under discussion, but will involve a stake in one of the group’s main operating subsidiaries in China, said three separate people briefed on the matter at Tencent.
“The state is not going away, this is the trend for the future,” said one of the people.
Another person close to Tencent said the group was pushing for a government entity at its Shenzhen headquarters to take the shares, instead of appealing to the Beijing-based public investment fund that took the stakes in the companies. units of Alibaba, ByteDance and Weibo, The Chinese version of Twitter.
Chinese authorities used various state groups to take possessions. Executives of Nasdaq-listed streaming service Bilibili are pushing for a public entity in Shanghai to take a stake in one of its subsidiaries, two people briefed on the matter said. When the government took a 1% stake in short filmmaker Kuaishou’s main onshore company last year, it turned to Beijing’s public radio and television station.
Documents seen by the Financial Times detail how the preferred stock deal worked at ByteDance. They show how the government tightened its grip on parent company TikTok’s main Chinese entity in April 2021. A CAC-linked fund joined two other state groups in paying Rmb2mn for a 1% stake in the unit, called Beijing ByteDance Technology.
The state groups took the shares through an entity called WangTouZhongwen (Beijing) Technology, which won the right to appoint one of Beijing ByteDance’s three directors. Communist Party official Wu Shugang was appointed to the board. Wu headed the CAC division overseeing online commentary for several years and, as part of his job, visited businesses across China to lead study sessions on the party and President Xi Jinping.
Ten years ago, he drew attention for saying, “I have only one wish – that one day I can cut off the dog’s head” from liberal Chinese with Western values, in a tweet on his personal Weibo account. “Let Chinese traitors who preach so-called ‘human rights and freedom’ go to hell!!” he added.
As director of ByteDance’s main China unit, Wu has a say in its “business strategy and investment plans,” any mergers or acquisitions, profit splits, and a vote on the group’s top three executives. as well as on their compensation, the company charter shows.
While Beijing ByteDance’s other two directors may outvote Wu on some issues, the company’s bylaws show that Wu was given authority to control content on ByteDance’s media platforms in China. These platforms included news aggregator app Jinri Toutiao and TikTok’s sister app Douyin, with Wu having the right to appoint the group’s chief censor, known in Chinese internet groups as the “Editor chief”.
The appointment or removal of the editor-in-chief requires the approval of the [WangTouZhongwen’s] director”, the company by the laws of the State. The documents show that Wu was also granted the right to chair a “content security committee” set up within Beijing ByteDance, or appoint the chair of the committee. Board meetings should be held at least quarterly or whenever Wu proposes them.
Last year, executives at TikTok’s parent company changed the name of the Beijing unit to Douyin Information Service, dropping “ByteDance” from its title in a bid to distance operations in China and Wu of its global products, two people briefed on the matter said.
ByteDance said the unit held licenses for Douyin and Toutiao and had “no ownership, visibility or contribution to ByteDance’s global operations”.
Tencent and Kuaishou declined to comment. Alibaba, Bilibili and Weibo did not respond to multiple requests for comment. CAC did not respond to a faxed request for comment.
Additional reporting by Nian Liu in Beijing
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