China may prefer TikTok to be banned than fall into US hands

CNN

By Laura He, CNN

Nearly three years after the Trump administration threatened to ban TikTok if its Chinese owner didn’t sell the company to American investors, the video app is once again facing an existential threat.

TikTok CEO Shou Zi Chew will appear later Thursday before US lawmakers, many of whom want the app banned in the United States because of the risk they say it presents to national security. The clamor for a sale is growing louder again.

But an outright divestment isn’t in the cards, according to analysts and legal experts, not least because the Chinese government views TikTok’s technology as sensitive and has taken steps since 2020 to ensure it can veto any sale by its Beijing-based owner, ByteDance.

At issue is who owns the keys to TikTok’s algorithms and the vast troves of data collected from the 150 million people in the United States who use the app each month.

The Chinese government considers some advanced technology, including content recommendation algorithms, to be critical to its national interest. In December, Chinese officials proposed tightening the rules that govern the sale of that technology to foreign buyers.

“Beijing will have no say in the US decision to mandate the sale of TikTok, but it will retain the ultimate approval authority over such a sale,” said Brock Silvers, chief investment officer for Kaiyuan Capital.

“It also seems extremely unlikely that Beijing will accept any deal that removes TikTok’s algorithm[s] from its direct control and regulatory authority,” he said.

TikTok’s algorithms, which keep users glued to the app, are believed to be key to its success. The algorithms give recommendations based on users’ behavior, thus pushing videos they actually like and want to watch.

Chinese regulators first added algorithms to the restricted list of technologies in August 2020, when the Trump administration threatened to ban TikTok unless it was sold.

Back then, Chinese state media published a commentary by a professor of trade at the University of International Business and Economics who said the updated rules meant ByteDance would need a license from Beijing to sell its technology.

“Some cutting-edge technologies might impact national security and public welfare, and need to be included in [export control] management,” Cui Fan told Xinhua.

The intended sale of TikTok in 2020 to Oracle and Walmart hit a snag after Beijing added algorithms to its export control list. The Biden administration eventually rescinded the Trump-era executive order targeting TikTok, but replaced it with a broader directive focused on investigating technology linked to foreign adversaries, including China.

Regulatory attention

Now, the company is once again caught up in a geopolitical struggle between Washington and Beijing.

“The TikTok hearings in the United States mark the beginnings of a regulatory meat-grinder facing all [Chinese] tech companies,” said Alex Capri, a research fellow at the Hinrich Foundation.

A senior official from the Chinese regulator of digital and traditional media visited Bytedance’s offices last week. He urged the company to improve the use of “recommendation algorithms” to spread “positive energy” and strengthen the review of online content, according to a statement from the regulator posted on its website.

The visit highlights Beijing’s resolve to keep its most powerful internet companies on a tight leash. It also has more direct levers to pull.

In April 2021, a Chinese government entity acquired a “golden share” of 1% in a Beijing subsidiary of ByteDance, according to business data platform Qichacha. The subsidiary controls operating licenses for Douyin, TikTok’s sister app in China, and Toutiao, a news aggregation app.

“TikTok’s algorithms make it truly unique in terms of data harvesting and strategic analytics, therefore, I don’t see Beijing allowing it to fall into the hands of US interests,” said Capri.

“Unless they can somehow still access TikTok’s data through other means and methods, including ongoing cyber intrusion and other forms of back-door access.”

Beijing tightening its grip

Chinese regulators have been gradually tightening their control over algorithm technology more generally.

Starting in March 2022, an unprecedented regulation came into effect requiring internet companies to register recommendation algorithms with the Cyberspace Administration, the powerful internet regulator that reports to President Xi Jinping.

At the beginning of 2023, rules governing “deep synthesis algorithms” also took effect. They will restrict the use of AI-powered image, audio and text-generation software. Such technologies underpin popular apps such as ChatGPT.

These regulatory developments suggest that TikTok’s recommendation algorithms will be subject to China’s export controls, said Winston Ma, an adjunct professor at New York University School of Law.

‘Existential crisis’

TikTok has been erecting technical and organizational barriers that it says will keep user data safe from unauthorized access.

Under the plans, known as Project Texas, the US government and third-party companies such as Oracle would also have some degree of oversight of TikTok’s data practices. TikTok is working on a similar plan for the European Union known as Project Clover.

But that hasn’t reassured US officials, likely because no matter what TikTok does internally, China would still theoretically have leverage over TikTok’s Chinese owners. (Similar measures taken by Huawei didn’t prevent it from being kicked out of Western 5G markets.)

And the concerns would remain even if TikTok is sold to an American buyer, Capri said.

“A change of TikTok’s ownership solves nothing,” he said. “The real issue is general data security and who ultimately has access to that data, by whatever means, regardless of legal ownership.”

The true test, he said, is whether user data can be effectively ring-fenced and privacy and security can be achieved through data segregation, encryption and other means.

As for a solution, Silvers expects both sides to try to “finesse a compromise” where US concerns are addressed, but Beijing still retains control over TikTok.

But, he believes Beijing would ultimately prefer for TikTok leave the US market rather than surrender its algorithm.

“If any Chinese company is to have any chance of surviving increased scrutiny from Western governments, they will have to entrust their data to third party security firms and endure rigorous third party audits and government intrusion, in addition to transferring ownership,” Capri said.

“This is really an existential crisis for Chinese firms operating in the West.”

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CNN’s Brian Fung contributed to this article.