Monopoly Regulators to Probe Tencent’s DouYu-Huya Merger and Punish China Literature and Alibaba

Workers rearrange fake rice plants near

Chinese regulators said on Monday that they would probe the proposed merger of game live-streaming companies DouYu and Huya, in relation to the deal’s possible violation of monopoly laws.

The same day, it emerged that Alibaba had been fined for not properly reporting an increased share stake in retail chain Intime. The regulator also fined the Tencent-backed China Literature for not reporting its 2018 purchase of TV production house New Classics Media for monopoly scrutiny.

The moves were all announced by the State Administration of Market Regulation which used a 2008 anti-monopoly law to fine each company a maximum of RMB500,000 ($76,500).

While the sums are tiny compared with the deal sizes or Tencent and Alibaba’s gargantuan market capitalizations, the punishments are clearly intended to send a signal

It is believed that the cases announced Monday are the first time that anti-monopoly laws have been used in the internet-tech sector in China. “The fines … are a signal to society that anti-monopoly supervision in the internet field will be strengthened,” the SAMR said in a statement. It further explained that companies should not wait and see if their deals require scrutiny on competition grounds, but instead should report themselves for vetting.

The $6 billion merger between China’s two largest games live streaming companies Huya and DouYu, both of which have U.S. share listings, was initiated by social media, games and streaming giant Tencent in October. Upon completion, Tencent plans to sell its own game live streaming business Penguin eSports to the new company, effecting a three-way consolidation of the sector.

The merged company would be a giant with some 300 million monthly active users, before overlapping subscriptions are eliminated, and could account for 80% of the Chinese market. Tencent would have 67.5% voting control of the enlarged company.

The Hong Kong-traded shares of Tencent fell 2.9% on Monday to HK$571, while the shares of Alibaba (which have their primary listing in New York, but are also traded in Hong Kong) fell by 2.6% to HK$251.6. China Literature shares fell by 4.4% to HK$55.85.

Huya and DouYu are both traded on U.S. exchanges which were closed during China’s daytime. Pre-market trading suggested that both stocks could open with a 1-2% decline.

More scrutiny of the tech sector in China is on the way. In the past month, the SAMR issued draft regulations aimed at curbing some common business practises in matters of pricing, payment methods, and use of data to target shoppers. That has the potential to directly hit the tech giants which now stretch from social media to payment systems and into real-world sectors such as retail and delivery.

China’s market regulators may be getting their cue from the very highest levels of government which appears to mistrust private enterprise and in particular to fear the growing power of tech companies – even though they are already surrounded by regulations and actively co-operate with the Communist government on matters such as censorship and production of slates of patriotic films.

Under President Xi Jinping, recent years have seen Party officials installed within a growing number of private companies. In other cases the banking system, which is predominantly state-controlled, has used the availability of credit to steer company activities and investment.

It has been reported in local media that Xi personally gave instruction for the $26 billion Shanghai and Hong Kong IPO of Alibaba spinoff Ant Group to be halted last month. Authorities appear to want  greater oversight of the emerging fintech sector and to ensure that digital currencies are controlled by the state, not the private sector.

Other commentators have said that Communist Party leadership has grown in confidence this year, as a result of its strong state-led management of the coronavirus situation. It sees China has achieved a V-shaped economic recovery and contrasts that with the ongoing chaos in other countries.

In September, Chinese private companies were told to use education and other methods to “continually enhance the political consensus of private business people under the leadership of the Party.” A politburo meeting last week, chaired by Xi said that anti-monopoly efforts would be expanded.