Algorithms: The Newest Target of China's Tech Regulations

China’s increasingly powerful regulatory authority for cybersecurity has published far-reaching draft rules on the use of algorithms – with some drastic restrictions for companies.

Chinese authorities plan to restrict the use of algorithms by businesses to sell products to consumers. The country’s largest tech companies, which include e-commerce giant Alibaba as well as Tiktok owner Bytedance, have built their multi-billion dollar businesses on algorithms. These algorithms provide content that customers seem to be interested in based on their previous views and search behavior, and are likely to be willing to invest money in. Restricting the use of algorithms is therefore very likely not in the interests of the respective provider and could also set a precedent for other countries.

On Friday, the cybersecurity regulator published extensive draft rules to regulate use these so-called recommendation algorithms. Part of the proposal provides that users are given the opportunity to switch off algorithms independently. The proposal can be commented on until September 26th. An implementation date is not yet known.

Recommendation algorithms consist of code that is fed with specific information about users in order to produce perfectly tailored results. However, the code of the algorithm is not published. Regulators could now require companies to disclose the code in order to test the algorithms. That could give tremendous power to regulators in China. “I’m sure that companies have problems with data protection rights and that the code is tied to proprietary information,” suspects Kendra Schaefer, partner at the Beijing-based consulting firm Trivium China, in an interview with CNBC.

The latest rules could force companies to change their business models. While many of China’s tech giants don’t make money directly from the algorithms, they are an important part of attracting consumers to products they end up paying for. “It depends on a number of factors, such as the level of enforcement and market reactions. How many users would disable the recommendation algorithm if it resulted in a suboptimal user experience? ”Says Ziyang Fan, head of digital commerce at the World Economic Forum. Once China’s algorithm law goes into effect, the world will be watching closely how companies react and what regulation means for the future.