The Chinese crackdown on tech giants is gaining momentum. Authorities in the country are now planning to introduce new laws to restrict how tech companies use algorithms to attract potential customers.

The move is expected to be a big blow for Chinese businesses -- and it can also set a global precedent on curbing the growing power of multinational tech companies.

The move to curtail the power of algorithms is part of the Chinese Communist Party’s new agenda to control China’s elite, especially those from the technology industry -- whether they are individuals like Jack Ma or companies like Tencent. Chinese companies have had to face increasing regulatory action, mostly in the form of a crackdown on alleged anti-competitive practices. As a result of the crackdown, Chinese tech stocks have been performing poorly on various stock markets.

"Companies are going to have a lot to say about this because this has the potential to restructure business models," Kendra Schaefer, Beijing-based partner at Trivium China consultancy, told CNBC.

Also read: Explained: Why is China clamping down on its tech industry

Under the sweeping new rules, whose drafts are available for discussion until September 26, companies will be prohibited from setting up algorithms that entice users to spend more money or to become “addicted.” Companies will also need to provide users with the option of “opting out” of the algorithm suggested recommendations for goods and services. Additionally, companies will not be able to carry out “unreasonable” pricing differences through their algorithms.

But the law may face significant issues when it comes to actual enforcement. The algorithms that are being used by companies do not exist in any discrete form but are often complex pieces of coded programs, often using multiple languages and parameters. In order to ascertain a violation of the regulations, Chinese authorities would need to scour through the lines of codes, which can sometimes stretch into hundreds of thousands of lines.

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"First of all you need the technical capacity to do this. ... You also need the bureaucratic process to do it. All that has to be sorted and it has not been yet," Schaefer added.

If and when Chinese authorities do set up the adequate capacity to check the code, one major issue would still remain -- intellectual property infringement. Algorithms used by companies are often part of their intellectual property and the increased intrusiveness from government authorities may further the divide between Chinese companies and the CCP.

The new rules would also force companies to change the code behind their algorithms, something that can quickly rack up in costs and time. Algorithms are used by companies to not only drive user engagement on their platforms but also for targeted marketing where users are matched to products or services that they would most likely purchase in order to get better RoI from marketing campaigns.

"The jury is still out on the implications for operations and profits,” said Ziyang Fan, head of digital trade at the World Economic Forum.

The law is just one of the newest set of regulations, laws and policies unleashed by the Chinese state in order to further regulate practices of companies and citizens within the country. Other recent changes include a restriction of gaming time for children, banning men who are not seen as “masculine enough,” restriction of reality TV, and a campaign against celebrity worship.

However, China’s law against algorithms will have a far-reaching impact than most of its other new regulations. Tech companies and nations around the globe would be carefully watching to see the outcome of these laws.

"This is going to set a global example," Schaefer said. "Tech companies overseas are going to see how Chinese tech companies do or do not profit given these restrictions on algorithms. If they change business models, if they can succeed despite regulation on algorithmic process, there is very little excuse for ... foreign governments not to do the same.

(Edited by : Shoma Bhattacharjee)

First Published:Sept 3, 2021 6:41 PM IST