In mid-March, two weeks after China’s new algorithm regulation came into effect, many of the most popular Chinese apps, including WeChat, Douyin, Weibo, and Taobao, changed their app settings to allow users to turn off algorithm-based recommendation services, complying with the new rule. 

Announced last November and brought into effect on March 1, the new regulation, called Provisions on the Administration of Algorithm-Generated Recommendations for Internet Information Services, was jointly issued by four Chinese government agencies: the Cyberspace Administration of China (CAC), the Ministry of Industry and Information Technology (MIIT), the Ministry of Public Security, and the State Administration for Market Regulation (SAMR).  

The regulation deals with the very mechanisms governing the provision of online content – algorithm-powered recommendations that lie at the core of the business model of many of the country’s popular internet services, from social media applications to e-commerce sites, delivery apps, and video platforms.

The regulation is also the world’s first attempt by a national regulator to control the possible abuse of algorithmic decisions. It asks companies to notify consumers about the usage of algorithms, provide an opt-out choice, and protect vulnerable groups, such as minors and seniors.

To better assess the relevance of the new rules for the future of the country’s digital economy, its relation to other regulations in and outside of China, and its possible impact on China’s tech industry, I talked to a number of specialists in digital policy. 

More regulations on digital economy worldwide

“It is really impressive to see how fast China adopted or revised key legislation to address certain challenges bound to the digital economy,” said Elena Scaramuzzi, Head of Global Research at Brussels-based independent regulatory research company Cullen International. 

Scaramuzzi added that China isn’t alone in regulating digital enterprises and behaviors, other countries and regions are looking to do the same, including the EU, Australia, South Korea, Japan, Singapore, and the UK.

There have been considerable efforts to regulate the data economy across the world. A noteworthy example from the EU, said Scaramuzzi, is the European Commission’s proposal to regulate the use of AI, presented in April 2021. “If approved, the new EU rules would introduce bans on AI practices which pose certain risks, such as AI systems that use subliminal techniques to distort a person’s behavior. According to our recently published research on the global policy trends in AI, half of the surveyed economies (Brazil, China, the EU, Germany, the UK, and some US states) have  rules today requiring transparency, explainability, and contestability of certain AI-based decisions.”  

Scaramuzzi also pointed out that China’s algorithm regulation does not come in a silo. “The regulation refers to several laws of China, including among others the Personal Information Protection Law (PIPL),” she said.

The new algorithm rules borrow the principles of transparency from PIPL as well as user consent by establishing that algorithm-enabled service providers should disclose to the public the algorithm’s basic logic, purpose, and mechanisms, and allow users to switch off such services, introducing a de-facto opt-out system. They also deal with competition issues, with clauses banning, for instance, the use of algorithms to restrict other service providers or to conduct price discrimination. 

The broad scope of the new rules – encompassing different angles – was also remarked upon by an industry practitioner I consulted, representing a large Chinese tech group. The person asked not to be named as they don’t have their company’s approval to speak to the media, but they further highlighted the moralistic angle present in the rules. “One can best understand the algorithm rules and China’s latest interventions in the field of privacy, data security, online gaming, and ed-tech by looking at all this under the prism of the common prosperity drive.” Common prosperity is a political-economic campaign launched by the Chinese government in mid last year to lessen widening social inequality. 

This social values-focused approach, unique to the Chinese way of regulating the digital economy, can be found in the wordings of the algorithm regulation: asking all algorithm-recommended service providers to “adhere to mainstream values, actively spread positive energy, and promote the positive and good application of algorithms.”

Chinese regulators have indeed appeared to be increasingly sensitive and responsive to public controversies and complaints by consumers in this field. The mistreatment of gig workers by delivery platforms – which has previously triggered widespread criticism – is for instance explicitly addressed in the new algorithm rules. So too is the harm caused to minors by algorithms designed to stimulate addictions or overconsumption. 

Display transparency in algorithms

The noteworthiness of the rules goes beyond their broad scope and moralistic intent. In a comment to the Stanford University-funded DigiChina projectRogier Creemers, University Lecturer of Modern China Studies at the University of Leiden, noted how “the new regulations attempt to impose a regulatory system classified by type of application and level of impact for algorithms.” In essence, the law introduces a sort of “transparency index” for algorithms; service providers capable of influencing public opinion or social mobilization will need to disclose information such as the types and the scope of applications of their algorithms, as well as their self-assessment reports. 

To achieve that level of transparency, Chinese regulators asked companies to register their algorithms with a state system, launching a new online portal on the same day the regulations came into effect.

When it comes to regulating the digital economy, it is interesting to note the similarities in approaches across different jurisdictions. 

“The new Chinese regulation indicates a point of contact with the European approach to data regulation, one that is based on the principle of transparency and disclosure to the interested parties,” said Francesco Pizzetti, Professor of Constitutional Law at Turin University and Former President of the Italian Data Protection Authority. 

“Chinese regulators seem to have recognized the need for users to be informed about the operating rules of the digital services they use on a daily basis. This is particularly important given the historical change we are witnessing towards an overarching digital society, in which automated programs channel the information we receive.”

Algorithm rules’ impact on Chinese tech industry

It may be too soon to forecast the regulation’s impact on China’s tech companies and more generally on the growth of China’s internet sector, which has already been under heavy regulatory pressure in the past year. 

Chinese tech companies are facing headwinds on multiple fronts: tightened domestic regulatory scrutiny, a slowing economy, concerns over the possible delisting of US-listed Chinese stocks from foreign markets, and the delicate position Chinese tech groups find themselves in amid Russia’s war in Ukraine. This regulation is likely to add more concerns to their plate. 

Angela Huyue Zhang, director of the Center for Chinese Law at the University of Hong Kong, said in an op-ed for Nikkei that she fears China’s attempt to regulate algorithms might hinder the growth of its most creative internet companies, such as ByteDance, the parent of Douyin and its international version TikTok, which both rely on sophisticated recommendation engines.

One can get a flavor of what might happen with the introduction of the opt-out option of recommender systems by looking at the case of Apple in Western markets. When Apple offered iPhone users the option to switch off tracking, 84% of users took it, putting a dent in the ads revenue of apps like Facebook and Instagram.

“If a similarly large share of Chinese consumers opted out of personalization, collecting and using personal data would become much more costly for both platforms and merchants,” Zhang told Project Syndicate in a February interview, adding that the overall trend of tightened data regulation might not only affect China’s consumer internet business but also derail China’s ambition to become an AI superpower.

However, not all share the same view. The unnamed tech industry practitioner I quoted earlier thinks there is room for optimism. 

“The new regulatory move will oblige tech companies to engineer a cultural change inside the organization so as to make sure that privacy is embedded, consumers are protected, trust in digital services, and sustainability of business models are ensured. While there might be disruption in the short-term, with platforms having to adjust their internal processes, in the long-term it will be beneficial for the healthy growth of China’s internet ecosystem,” the person said. 

While it might be too early to assess the actual effects of the new regulation, it will certainly be closely watched by both the tech industry community and the international legislators’ circle. As hinted at by Professor Pizzetti, the opportunity in front of us lies in the future establishment of shared regulations that can enable the free circulation of data in the digital world.

Claudia Vernotti

Claudia Vernotti is co-Founder and Director of ChinaEU – a Brussels-based organization fostering dialogue and business opportunities between Europe and China in the digital sector.