Jul 10, 2016

China Targets Online Advertising Practices With New Regulations

China Targets Online Advertising Practices With New Regulations

China’s government tries to get a grip on a wide range ofonline practices from email to video


Updated July 8, 2016 1:28 p.m. ET

BEIJING—Newregulations on online advertising are casting a wide net, affecting businessesfrom e-commerce to social media, as China’s government tries to get a hold of afast-moving segment of the internet.

Therules, issued Friday by the State Administration for Industry and Commerce, areChina’s most comprehensive to date, broadly defining online and electronicadvertising as including email ads, paid-search results and embedded links,images and videos “with the purpose of promoting goods or services.”

Theregulations, which take effect in September, lay out guidelines to guardagainst false or misleading practices. They also prohibit online ads forprescription medication and tobacco, while requiring prior government approvalfor ads for medical supplies, pesticides, veterinary medicine and other healthproducts.

“Beforethis, there was no law that defined exactly what an internet ad was, and theregulations were a bit piecemeal,” said EugeneLow, a partner at the Hong Kongoffice of law firm Hogan Lovells.

Though drafted last July, the regulations come amidquickened efforts to regulate advertising practices online following the publicuproar over the death in April of a college student with a rare form cancer.The student died after trying a treatment he found advertised on Chineseinternet search giant Baidu Inc.’s platform. The ensuingcriticism took aim at the murky online environment for health information.

Includedin the new regulations is a requirement that all paid advertising be clearlyidentified in search results—a policy issued by China’s internet regulator lastmonth in the immediate aftermath of the student’s death. Regulators in theweeks since the death have also required that Baidu and other search companieslimit ad results to 30% of each search-results page.

Thestakes are high, as China’s huge online population provides a lucrative andgrowing market for advertising. Research firm eMarketer predicts digital adspending will reach $40.4 billion in China this year, up from $24 billion twoyears ago.

With such a broad definition of online advertising, thenew rules will affect search, e-commerce and social-networking sites, wherepaid ads and marketing emails are generally accepted practices, advertisingexperts said. Alibaba GroupHolding Ltd.’s Taobao Marketplace, forexample, will likely fall under the regulations, along with sites like internetportal Sohu.com and 58.com, a Craiglist-like site in China.

Alibabasaid it is reviewing the new policies. Sohu.com declined to comment and 58.comdidn’t respond to a request for comment.

Someanalysts said the regulations were overdue given the rapid evolution ofinternet business, though they questioned whether the rules might be overlybroad. “Consumers will have a much cleaner environment on the internet now,”said Tian Hou, founder of research and advisory firmT.H. Capital. She said that policies regarding email ads seemed “a bitoverdone.”

Ms. Housaid the new policies most likely won’t diminish businesses’ bottom linesbecause pay-for-click ads often run on a bidding system for a limited amount ofspace. Other analysts, however, said taxes for businesses may increase becausethe new rules clearly define paid-search results as advertisements.

In aquestion and-answer statement posted on the website of the regulator, theofficial in charge of advertising practices said the rules were importantbecause “illegal activities happen again and again and demand specificmeasures.”

The official,Zhang Guohua, added that the laws will be revised as the industry develops. Thelaws apply to all forms of platforms, he said, including, for example,individuals on social media site Weibo who have many followers and may releasea promotion on their own individual feed.

—Liyan Qi and Fanfan Wang contributed to this article




T.H. Capital is an independent research and investment advisory firm specializing in China. We offer real-time, on-the-ground, bottom-up research across a wide spectrum from macro and industry analysis to company specific projects, from China ADRs to international names that have meaningful exposure to the China market. We deliver relevant, comprehensive and data driven research adding immense value to clients.

5E, Tower D, Central International Trade Center, 6 Jianguomenwai Avenue, Beijing 100022, China



Do you enjoy pursuing original research in any aspect of the financial markets and have the ability to present research in a refreshing and captivating manner?