New Chinese rules could complicate a sale of TikTok’s US business

Aug 31, 2020, 5:35 AM
BEIJING, CHINA - AUGUST 25: People walk past the ByteDance headquarters building on August 25, 2020 in Beijing, China. (Photo by VCGG)
(Photo by VCGG)

    (CNN) — China appears to have complicated efforts to sell TikTok to an American company by introducing new rules that could allow Beijing to veto any potential deal.

The twist in the TikTok saga stems from notices published by the Chinese government on Friday, when officials revised rules that govern the sale of certain kinds of technology to foreign buyers. The updated list includes data processing, speech and text recognition — the kind of tech that experts say is used by the popular short-form video app.

The announcement marked the first time those rules have been revised since 2008. China’s Ministry of Commerce and Ministry of Science and Technology said the changes were meant to “formalize the management of technology export” and “protect national security.”

The notices did not name TikTok or its Beijing-based owner ByteDance, but experts have pointed out that the rule change would likely require ByteDance to obtain government permission before it could sell TikTok to a foreign company.

State-run news agency Xinhua, for example, this weekend cited trade expert Cui Fan as saying that the revisions would cover a sale of TikTok.

ByteDance should “seriously and carefully consider whether it is necessary to suspend substantive negotiations” on a potential deal given the new rules, Cui, a professor at the University of International Business and Economics, told Xinhua.

ByteDance General Counsel Erich Andersen said in a statement that the company is studying the new regulations.

“As with any cross-border transaction, we will follow the applicable laws, which in this case include those of the US and China,” he added.

Talk of a sale began as President Donald Trump issued executive orders this month threatening to ban the app unless ByteDance sells its US operations in the coming weeks. Trump and other US politicians have said the app poses a threat to national security. TikTok has denied the allegation and sued the Trump administration over one of the orders, calling it “heavily politicized.”

The app already has a handful of prospective buyers, including Microsoft and Walmart, which have said they are pursuing a joint bid. The tech firm Oracle is reportedly interested as well.

Pressure on TikTok right now is immense. Last week, CEO Kevin Mayer resigned after less than four months on the job, citing the “sharply changed” political environment.

China’s changes to its export control rules are a way for the country “to exert some leverage over the situation,” according to Anupam Chander, a law professor at Georgetown University.

“It will cause any bidder to pause and wonder how to proceed,” he added.

Microsoft and Walmart declined to comment on the new regulations from China. Oracle did not immediately respond to a request outside of working hours.

China has repeatedly pushed back against the Trump administration’s treatment of TikTok, calling it “blatant bullying” in the name of national security.

The latest move could be posturing by Beijing, said Elena Chachko, lecturer on law at Harvard Law School, who added that the government may be engaging in “a tit-for-tat dynamic.”

But China is also “making clear that the United States doesn’t have full control over the future of US TikTok operations and a potential TikTok sale,” she added.

The wildly popular app is known for its endless scroll of dancing videos, lip syncing routines and comedy sketches. But there is also valuable technology of global importance that drives the light-hearted content, according to Nathaniel Rushforth, a cybersecurity and data compliance specialist and lawyer with Da Wo Law Firm in Shanghai.

“While we’re talking about an app that’s for cat videos and dancing, there is some interesting underlying technology that any country would want to protect,” he said, such as the advanced artificial intelligence algorithms that help make TikTok’s feed so addictive.

“Beijing wants to protect its ascending status in global technology,” said Shirley Yu, visiting fellow at the London School of Economics and founder of an eponymous company that assesses strategy, business, and political risk for companies working in China.

If the United States succeeds in forcing TikTok to sell key tech to an American company, “China would be concerned that, as its technology companies continue to ascend, more Chinese companies … might be targeted by the United States in a similar way,” she said.

China’s desire to protect homegrown technology, however, is not going to prevent the Trump administration from banning TikTok. It could also make it really difficult for ByteDance to sell the app.

If the technology underlying TikTok cannot be sold, nobody is going to want to buy it in the United States, Rushforth said.

“ByteDance and TikTok are really between a rock and a hard place now,” he added.

— Steven Jiang and Selina Wang contributed to this report.

™ & © 2020 Cable News Network, Inc., a WarnerMedia Company. All rights reserved.

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New Chinese rules could complicate a sale of TikTok’s US business