Chinese Regulators Going After Algorithms, Big Tech’s Secret Sauce

Most companies bank on their secret sauce setting them apart from the competition and bringing about customer loyalty. For technology giants, that secret sauce comes in the form of algorithms, proprietary information that, until now, was even protected in China.

But as Chinese regulators continue finding new ways to crack down on how big tech firms operate in the country, recommendation algorithms and how companies use them are now being targeted, CNBC reported on Thursday (Jan. 7).

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The rules were first introduced last year and are slated to go into effect on March 1. The mandates state that a company can’t use algorithm recommendations if any Chinese laws are broken. If recommendation services offer news, the company must be licensed. Users must be informed about the purpose of recommendations and be given the chance to opt-out.

“These changes reflect some of the biggest concerns across Chinese society today — content control online, the aging population crisis, transparency of big tech companies, anti-competitive behavior — and seek to get out in front of a future where algorithms are used to corrode social unity or exacerbate market problems,” Kendra Schaefer, Beijing-based partner at Trivium China consultancy, told CNBC.

Read more: China Regulators Tell Wall Street Execs New Rules Won’t Stifle Tech

Companies found in violation of the rules can be hit with fines from ¥10,000 yuan to ¥100,000 yuan (roughly between $1,570 and $15,740). Enforcement, however, could prove to be difficult. To find violations, regulators might have to look under the hood of the algorithms and examine the code.

“Algorithms are a company’s deepest-held secret, their most valuable asset, and letting the government dig around in there would be a problem,” Schaefer said.

“How much access to the code does the CAC get? And even if they got access to the code, can they really ensure that that kind of stuff isn’t happening?” she said, referring to the Cyberspace Administration of China.

Trying to examine the code behind algorithms will be something new for regulators, a challenge that could require more tech-savvy talent than any watchdog agency has ever had to tap.

“Given these rules are quite extensive and technical in parts, it’d be a learning process for both the enforcement agencies and the companies, who will bear the main responsibilities in complying with these rules,” Ziyang Fan, head of digital trade at the World Economic Forum, told CNBC.