China’s New Algorithm Regulations Challenge Tech Companies

China’s efforts to strictly regulate the tech sector continue to move forward. On 1 March 2022, new regulations will come into force governing the use of algorithms by companies. Abusive and manipulative use of algorithms, such as price manipulation, should thus be made much more difficult and personal user data protected. The central subject matter is recommendation algorithms, which are used by companies to target specific users. However, it is precisely these that are crucial to the business of many technology companies – from recommending products to users in e-commerce apps to recommendations in social media.

Specifically, this means that technology companies need to give their users the ability to select, change or even delete the keywords and attributes applied to them. This will allow them to determine the use of algorithmic recommendations themselves or even opt out. The “basic principles, purpose and main operating mechanism” of companies’ algorithmic recommendation services must be disclosed and visible to users and thus also to competition.

Recommendation algorithms are not infrequently among the most crucial and relevant trade secrets of technology companies, which will come under pressure from the new rule. Apart from the extremely difficult technical implementation, it is to be expected that many markets will reposition themselves. After all, if companies whose sales depend significantly on recommendation algorithms do not adapt quickly enough, they will be forced out of the market.

It is still unclear in what form the authorities will enforce the law and to what extent these regulations will affect the business of tech giants like Alibaba or Tencent. Another rule is due to come into force on 15 February as part of the strict regulation of the tech sector. It focuses on cybersecurity vetting at home and abroad and requires Chinese tech companies with personal data of more than 1 million users to undergo security vetting before being allowed to list on foreign exchanges.

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