China

Are suspensions on new users a big deal for Chinese tech?

It makes headlines, but the now-routine practice has little practical impact on most giants.

Phone with DiDi app

New user registration suspension can be impactful for growing companies, but not apps that have reached near-ubiquity.

Photo: Costfoto/Barcroft Media via Getty Images

In July, at least five popular Chinese apps suspended new user registrations in compliance with regulatory demands. Among them was China's car-hailing behemoth DiDi Chuxing, after an investigation into the company's cybersecurity that was announced two days after its U.S. IPO. Also included was Tencent-owned WeChat, which voluntarily suspended new user registrations on July 27 as it upgraded its security, likely in response to concerns from the powerful Ministry of Industry and Information Technology.

Were these pauses a big deal? Investors seem to think so; they make headlines, and shares of parent company Tencent fell almost 9% on the Hong Kong Stock Exchange the day it announced its pause. DiDi's IPO has turned into a fiasco, and the suspension of new user registrations occurred soon after the IPO, signaling authorities' displeasure with the public offering generally; as of Wednesday, DiDi's share had plunged 46% from its highest point following its market debut.

Yet the long-term impact of a suspension on new regulations is actually quite limited for big firms like WeChat, which have achieved near ubiquity.

"WeChat in particular only added 30 million [new users] or maybe less last year. [It] might be even slower this year," Rui Ma, a China tech investor and analyst who hosts the podcast and newsletter Tech Buzz China, told Protocol. "So being out of service for less than 5% of the year is really not a big [deal] at all."

New user suspensions are, in fact, a routine internet enforcement action in China. For the most part, they occur when regulators order an app to "rectify" a practice, be it sensitive or inappropriate content or data infrastructure that isn't up to par. LinkedIn, for instance, paused new user registration in March to make sure its content and service "comply with local laws and regulations." Toutiao, ByteDance's sensational content aggregator, has paused new user registrations since last September, according to Reuters.

By contrast, the measure can be devastating for earlier-stage companies that need to tell investors their growth stories. "They don't have profits to speak of," said Michel Norris, head of China Consumer & Tech Research at AgencyChina, a global marketing agency. "So they are traded on a multiple of revenue, and then they also receive what is sometimes called an imagination premium by how many new users they are adding. Of course, investors are looking at future potential, and having fast user growth evidences strong future potential."

Politically-savvy companies like Tencent and Alibaba at the center of Beijing's widening antitrust regulatory crackdown have largely been compliant with enforcement actions. If smaller tech companies were smart, Eurasia Group tech expert Xiaomeng Lu said, they might follow suit in the coming months to rectify practices that could raise an eyebrow on their own, putting a stop on new user registrations.

"But I'm not very confident that they all have the political awareness needed to operate in today's regulatory environment," Lu said, adding that companies like Meituan have ignored regulatory shifts even after becoming an antitrust target. "We might see another fiasco like the one DiDi is experiencing down the road."

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