Beijing pushes for a direct hand in China's big tech firms

Government regulators have discussed stakes in Tencent, Weibo and an Alibaba subsidiary

The Chinese government is pushing some of its biggest tech companies—including Tencent, Weibo and a unit of Alibaba—to offer the state a stake in them and a direct role in corporate decisions.

Wary of the increasing power of private businesses, internet regulators have discussed taking 1% stakes with social-media powers Tencent Holdings Ltd. and Weibo Corp. and with Youku Tudou, a YouTube-like video platform owned by e-commerce titan Alibaba Group Holding Ltd., according to people close to the companies.

While the authoritarian government already exerts heavy sway over businesses through regulation, a management role would give Beijing a direct hand in innovative companies that service hundreds of millions of Chinese.

The biggest of these companies have expanded beyond their original niches into finance, health care and transportation, collecting data that give them unparalleled insights into people’s lives. Some companies privately say they are wary of the move.

The new steps come as pressure on China’s tech companies is rising. Regulators last month fined social-media platforms owned by Tencent, Weibo and Baidu for hosting pornography, fake news and other banned content. After the Communist Party newspaper People’s Daily attacked Tencent’s top game, “Honor of Kings,” for being too addictive for younger Chinese, the company’s share price fell 4% in one day, wiping $14 billion off its market value.

An initial rollout of what the government calls “special management shares” started with two internet media startups. Regulators and the People’s Daily website are taking stakes of less than 2% in mobile news platform Yidian Zixun and Beijing Tiexue Tech Co., operator of a patriotic news site.

In exchange, the investors get to appoint a government official to the companies’ boards and have a say over their operations, people familiar with the deals said.

Internet regulator Cyberspace Administration, a chief force in the government’s management share plans and a stakeholder in Yidian Zixun, referred queries to the Propaganda Department, the Communist Party’s press office, which didn’t respond to a request for comment. Nor did two other internet regulators.

Yidian Zixun and Beijing Tiexue declined to comment. Tencent, Weibo and Alibaba didn’t respond to requests for comment.

The Communist Party expropriated private businesses in the 1950s. Though the ban on private ownership was lifted in the 1980s, the relationship between businesses and Beijing remains fraught. Still, the party gave private enterprises some space to prosper as the leadership believed they needed economic growth to justify their legitimacy. Then Xi Jinping took power five years ago.

President Xi has fostered a more forceful role for the party in society, and the government has intervened in markets and businesses.

Beijing this summer clamped down on large private conglomerates pushing a wave of aggressive deal making overseas, leading to the detention of at least one Chinese tycoon and causing some companies to scrap deals and sell assets.

A document released by China’s leadership last month to encourage entrepreneurship instructs entrepreneurs to put patriotism first and follow the party’s guidance. At Mr. Xi’s urging, a campaign is under way to set up party units in private companies.

Tech has flourished in China over the past decades, in part, industry executives say, because the sector was new and seen as too risky by state companies and the government, which, in a way, shielded it from too much government regulation and crackdowns.

As their companies’ reach has grown, tech entrepreneurs have worked to retain room to maneuver while maintaining Beijing’s favor.

Alibaba founder Jack Ma, one of China’s richest men, is setting up a foundation with a goal of raising 100 billion yuan ($15.2 billion) from fellow entrepreneurs to create opportunities for the poor—a priority for President Xi.

“It’s like spending 100 million yuan to buy a talisman,” says a businessman who knows Mr. Ma.

Alibaba declined to comment on the foundation.

The usually press-shy co-founder of Tencent, Pony Ma, also took up a government cause this year, advocating for southern China’s greater economic integration with Hong Kong, the former British colony where a protest movement has challenged Beijing’s rule.

Alibaba, Tencent and search engine company Baidu Inc., along with others, agreed this summer to invest $11.7 billion in wireless carrier China Unicom, furthering a government goal of bringing private-sector money into state companies.

Beijing began floating the idea of special management shares in the spring of 2016, circulating a draft proposal suggesting a 1% government stake in exchange for board representation. Some companies thought the plan would fizzle, in part because of the potential for shareholder lawsuits and the high cost of shares. A 1% stake in Hong Kong-listed Tencent, for example, would cost over $4 billion. Others privately worried that bringing the government onboard would jeopardize their relative independence and affect innovation.

“This is the thing that keeps Pony up at night,” says a Tencent executive about Mr. Ma, the company’s chief executive.

People.cn, the website of People’s Daily, is paying 7.2 million yuan for a 1.5% stake in Beijing Tiexue, operator of the nationalistic military portal and forum site Tiexue.net, according to regulatory filings. People.cn will appoint a board member to Tiexue.cn and will review all content on the site, a service for which Tiexue.cn will pay, according to the filings.

“Every company will have to do it eventually, so the earlier you get in, the more competitive advantage you’ll gain,” says a person familiar with the deal. The person says the arrangement should help Beijing Tiexue secure “all kinds of licenses.”

News app Yidian Zixun, which is owned by New York-listed Phoenix New Media and smartphone makers Xiaomi Corp. and Oppo Electronics Corp., agreed to government investment to secure licenses for video content, according to people familiar with the matter.

Beijing city’s internet regulator and an investment fund jointly started by the Finance Ministry and Cyberspace Administration paid 70 million yuan for a 1% stake, according to one of the people. A midlevel official from the Beijing internet regulator now works as a special board member out of Yidian Zixun’s Beijing office with veto rights over the platform’s editorial decisions, according to the person.

These deals will likely provide a template for future deals, says a person who sits on the boards of several media companies and was consulted by the government on the management share plan.

Small startups will get direct investment from state-owned firms, while larger deals will be done by government-backed funds. For the biggest companies, he says, it is possible that they will “donate” shares to the government or government funds.

CHINA'S RICHEST

China’s new digital barons are rising. One of its most ambitious global deal makers is falling. And a property mogul who likes to borrow heavily is on top. Xu Jiayin — an entrepreneur behind China Evergrande Group — has become the country’s richest person, according to a survey released on Thursday by The Hurun Report. He replaced Wang Jianlin, a property and entertainment power broker. China’s tech tycoons — Pony Ma of Tencent and Jack Ma of Alibaba — were the second- and third in the survey. The results show an economy fueled by consumption and a voracious appetite for real estate.

Source: The Wall Street Journal