Chinese Tech Giant Tencent and its Relationship with the Chinese Government

SUMMARY

China’s Tencent Games is the developer of the mobile version of PlayerUnknown’s Battlegrounds, a vastly popular game that Wapack Labs has identified as being used to create botnets for conducting industrial fraud. This report examines the relationship between Tencent and the Chinese government to explore the question of whether Tencent is a witting participant in this activity or being used by malicious actors in the government.

Tencent dominates the Chinese online world. Tencent’s texting app WeChat has more than 1 billion monthly users. Tencent Games owns the biggest game in the world with 200 million monthly players. In 2017, Tencent became the world’s fifth largest firm with a stock valuation of $500 billion.

While the Chinese government has historically taken a hands-off approach to online entities, a shift in government attitude toward Tencent and others technology started in 2017. First, Tencent’s very popular online game Honor of Kings was criticized in People’s Daily as “poison” and a “drug,” noting its addictive effect on China’s youth. Tencent’s response was to set up a system that limits daily game time for all players under 18.

Starting in March 2018, the Chinese government put a freeze on the approval of new games, including all Tencent products. Tencent suffered a stock plunge that wiped out more than $135 billion off its market value. Many have interpreted this as the Chinese government sending Tencent and others the message: “You think you are big? Well, we the Party are bigger.”

The Chinese government also interferes in Tencent operations through censorship of WeChat content. In 2017, 41 keyword combinations related to a crackdown on human rights activists were censored on WeChat without users knowing. Another study in late 2017 identified censored keywords related to the 19th Party Congress. Tencent has also been penalized for not policing its online content thoroughly enough, including fines and the shutdown of social media accounts.

In sum, Tencent appears to be an independent entity subjected to growing control and interference by the government. No open source information was found to suggest that Tencent is a front for the government or a controlled medium through which the government can conduct malicious activity online.

BACKGROUND

Wapack Labs IR-2019-014-002, PlayerUnknown’s Battlegrounds and Industrial Level Fraud, published 14 January 2019, identified this popular game developed by PUBG Corporation as a large-scale proxy participant in major fraud. Large botnets have been created through compromise of PUBG gamers’ software, and compromised devices were being used as proxies to connect with endpoints for the purposes of industrial fraud, including mass registration, credential stuffing attacks, or other fraudulent transactions. Wapack Labs has yet to identify the specific malware component that is responsible for recruiting PUBG gamers into various botnets, but it is clear that the PUBG network has been abused for fraudulent purposes.

While PUBG was developed and originally distributed by PUBG Corporation, a South Korean game company, China’s Tencent Games struck an agreement to become its distributor in China and subsequently developed both a mobile version of the game and an emulator called Tencent Gaming Buddy for adapting the mobile version for play on PC’s. These versions became so popular that by mid-2018 the vast majority of daily players were using the Tencent versions. IR 2019-014-002 reported that there were many anecdotal reports of surreptitious malware installations by Tencent from PUBG mobile players, specifically by users of the Tencent Gaming Buddy emulator.

As identified in our report, the glaring intelligence gap at this point is whether Tencent is knowingly facilitating this activity. Given the extensive history of malicious online activity by Chinese government entities and the suspicion that the Chinese government could coerce cooperation from any China-based company, the question of the relationship of Tencent with the Chinese government was examined from open sources. The results of this examination appear in this report.

THE CREATION OF TENCENT

Tencent is the world's largest gaming company and one of the world's most valuable technology companies, social media companies, venture capital firms, and investment corporations. Tencent dominates the Chinese online world like no US company does in the West. Tencent online services are used by more than two-thirds of the Chinese population.

Tencent Holdings, Ltd. (腾讯控股有限公司) was founded in 1998 by Ma Huateng, also known as “Pony” Ma. “Tencent” is a phonetic approximation of the first two characters of the company name, “腾讯” (“tengxun,” meaning “soaring information”). Pony Ma’s nickname is apparently based on the meaning of his family name Ma, which is “horse.”

Tencent’s first product was a clone of an Israeli instant messaging service that they adapted for Chinese users. The company went public in June 2004, and it was in that year that Pony Ma offered Martin Lau (full Chinese name: Lau Chi Ping) a job at Tencent. In 2006, Ma promoted Lau to president and put him in charge of day-to-day operations.

Tencent describes itself as having two principal business operations: social platforms and digital content. Tencent developed the social communication platforms ‘WeChat’ (in Chinese, Weixin) and ‘QQ’, and also provides digital content including comics, videos, games and animation, music, literature, films and news, as well as financial technology and mobile payment systems.[1] Tencent is a major innovator of online services; China’s People’s Daily reports that Tencent has applied for over 25,000 patents and has had 8,000 granted to date.[2] Tencent's headquarters is located in the Southern Hi-Tech Park District in Nanshan District, Shenzhen, not far from Hong Kong.

Bloomberg reported an estimate in mid-2017 that “Chinese users were spending 1.7 billion hours a day on Tencent apps, more than they spent on all other apps combined.”[3] In late 2017, Tencent passed Facebook to become the fifth largest firm in the world by market cap, and was the first Chinese company with over $500 billion in stock market valuation.[4]

Tencent is still led by Pony Ma as its CEO and by Martin Lau, Stanford-educated and formerly at Goldman Sachs, as president. In 2017, Pony Ma was identified as the richest man in China and Asia when Forbes estimated his net worth at $37 billion.[5]

WECHAT

The two biggest components of Tencent’s business operations are WeChat and Tencent Games. In 2010, programmer Allen Zhang, the founder of a startup acquired by Tencent, came up with the design for WeChat as a social network tailored for smartphones. The service was released in January 2011 and was an immediate success. It had 100 million users in 2012 and 300 million by 2013. WeChat now has more than 1 billion monthly active users and averages about 38 billion messages per day.[6]

The success of WeChat appears to be due to the full range of online services that it provides. With WeChat, users can play games, pay bills, find local hangouts, book doctor appointments, file police reports, hail taxis, hold video conferences, and access bank services. Chinese government agencies even have official WeChat accounts to directly communicate with citizens. It is also reaching out beyond China’s borders. WeChat has recently announced a partnership with TD Ameritrade to provide US retail investors with a platform for Chinese market information.[7]

TENCENT GAMES

Tencent is the world’s largest gaming company, completely dominating mobile gaming in China and increasingly gaining a foothold in other markets. Tencent owns Honor of Kings, the biggest game in the world, now making $4 billion a year with 200 million monthly players. Tencent owns the US based Riot Games, owner of the League of Legends franchise, and it has bought into Epic and Activision Blizzard, the origins of popular games like Call of Duty and World of Warcraft. It paid over $8 billion to buy the Finnish company Supercell, maker of Clash of Clans and Clash Royale.[8] In 2017, Tencent cut a cooperative deal with PUBG Corporation and obtained exclusive rights to operate ''PlayerUnknown's Battlegrounds'' in China.

Gaming represented 59% of Tencent’s revenue early 2015, but only 32% by the third quarter of 2018. Tencent was instead growing revenue from online advertising, social networks and other features.[9]

OTHER SERVICES

Over the last 15 years, Tencent has expanded and diversified to an incredible extent through its own development and the purchase of other companies. The breadth of its presence online is indicated by the various services described on the corporation’s website, including:

Tencent Music dominates the online music business in China with more than 700 million active users and 120 million paying subscribers.

Tencent Map provides users with digital map content, navigation and location-based services, and is used 350 million times a day.

Tencent News is China’s leading mobile news app.

Tencent Video is a leading online video interactive platform in China.

Tencent Cloud is a public cloud platform for corporate and individual users, providing cloud servers, cloud databases, and cloud storage.

QQ.com is China's leading online portal, with real-time news coverage and information services.

QQ Browser provides users with quick access to the Internet.

QQ Mail provides real-time pop up notifications, a blog reader, and audio and video messages.

QQ Wallet is a mobile payment product incorporating multiple payment methods such as bank card payment, QR code payment and NFC payment

WeChat Pay is an additional payment solution within the WeChat environment, enabling quick payment transactions on mobile phones.

Interest Tribe is the largest interest-based social networking platform in China.

Penguin e-Sports is Tencent’s largest mobile e-sports live streaming platform.

Pitu is professional-grade image processing software.

China Reading Limited is a quality literature online reading platform for hundreds of millions of Chinese users.

Tencent Comic is now China’s largest original online animation platform.

Tencent Mobile Manager is mobile security and management software available on Android, iOS, and Windows.

Tencent PC Manager is China’s first online security software that incorporates both computer management and protection from viruses.

Tencent AI Lab, established in Shenzhen in 2016, is a leading AI research and engineering lab of Tencent. Tencent AI Lab focuses on both fundamental research and practical applications of artificial intelligence.

Tencent YouTu Lab is Tencent’s top machine learning R&D team. The lab mainly focuses on machine learning, pattern recognition, and cognitive technology.[10]

GOVERNMENT RELATIONS

The Chinese government has historically taken a hands-off approach to the businesses of major online entities in China. Jamie McEwan, at the London firm Enders Analysis, characterized the relationship this way, “They have a relationship of mutual benefit with the Chinese state. They have been allowed to grow and massively diversify their businesses without the level of scrutiny or competition you might see in western countries.”[11] In fact, government blocking of foreign news and social media services has facilitated the development of Tencent and other Chinese tech giants. WeChat, for example, is aided by government blocks on competing services such as Facebook Messenger and the popular WhatsApp, also owned by Facebook.[12]

Recently however, the government attitude toward Tencent and some other large corporations has been more negative. Analysis by Axios suggested that in some cases the trigger for government concern may have been that the companies just became too big. Tencent, Alibaba and Baidu have all been forced to accept Party representation on their boards because of their size. Alternatively, Axios said, the trigger could be that they began to operate in strategic sectors of interest to the government. Alibaba and Tencent are beginning to expand into finance, for example, thus attracting Party attention.[13]

The shift in government attitude toward Tencent and other online entities can be illustrated by several incidents that started primarily in 2017. These events are detailed below.

GOVERNMENT CRITICISM OF TENCENT GAMES

In 2017, the government began exerting pressure on Tencent through criticism of the social effects of too much online gaming. In July, Tencent’s very popular online game Honor of Kings was criticized in the government news outlet People’s Daily as “poison” and a “drug,” noting its addictive effect on China’s youth.[14] People’s Daily accused the game of injecting “negative energy” into Chinese society. The result was that Tencent’s market value shrank by $14 billion, with its stock price falling 4 percent.[15]

People’s Daily continued to publish commentary pointing out the potential damage from addiction but also from a cultural standpoint, “If we deliberately narrate history in a playful or mocking manner [in Honor of Kings], it is equal to abandoning historical cultural tradition, a cutting off the bloodline of our national culture, which will result in the loss of our cultural direction and goals.”[16] People’s Daily also reported that a Chinese teenager had suffered a stroke after playing the game for 40 hours nonstop, and that another had stolen his parents’ money to buy expensive in-game equipment.[17] Even Liberation Army Daily published an article about soldiers addicted to Honor of Kings, warning the Army to take immediate action to address this problem.[18]

Tencent’s response was an announcement that limited game time to one hour per day for those under the age of 12 and to two hours per day for those between the ages of 12 and 18. Users under the age of 12 could no longer play the game after 9pm.[19] However, this Tencent anti-addiction system was reportedly cracked very quickly, allowing minors to illegally buy an adult’s ID for about two dollars and thus circumvent the controls.[20]

The pressure was increased in mid-2018 when Tencent again came under criticism from China’s Ministry of Education for causing online addiction and eye problems among China’s young gaming community.[21] Tencent subsequently announced that, “to safeguard the healthy activity of non-adults, we will make ID verification the standard across our entire line of games.”[22]

In September 2018, Tencent added further controls, meaning users would now have to register their real names to be able to play Honor of Kings. When they do, the names would be checked against a police database that would identify underage players and restrict them to the hours of play appropriate for their age.[23] Tencent said that in 2019 these controls will be extended to all of its online games.[24]

GAME LICENSING FREEZE

Starting in March 2018, a de facto freeze was placed on the approval of new games by the Chinese government, a move that hit Tencent’s profits hard. Tencent’s president, Martin Lau, blamed bureaucratic reshuffling in China’s government as the cause of difficulties in getting licensing for new games. “A lot of games have not been approved,” said Lau, and that the government was aware that “the restructuring is now affecting the industry as a whole.”[25]

The result of this freeze was that by August 2018, Bloomberg reported that Tencent had suffered a record stock plunge wiping out more than $135 billion off its market value.[26] This crash appeared to be mostly due to the Chinese government block on approval of the games Fortnite, Dragon Hunter, and Player Unknown Battlegrounds (PUBG).[27]

Despite Lau’s public explanation, analysis by the San Francisco firm Pillar Legal put the blame not on bureaucracy snafus but the Chinese government’s need to exert greater control, “The Party has been very, very focused on maintaining control over the Internet, and all the regulations for the Internet happen to catch games. Even though games are arguably not as risky or controversial from a party security perspective as, say, books, movies or news, it falls into the same exact regulatory framework.”[28] Other analysts agree that the freeze on game licensing was intended to send a message to the industry. Chinese online giants present a challenge to the government because they are rich and influential. As industry analyst Duncan Clark has interpreted things, the government message was, “You think you are big? Well, we the Party are bigger.”[29]

In December 2018, the government finally lifted the block and announced it would approve the set of games Tencent wanted to release. This resulted in an immediate rise 3.6 percent in the price of Tencent shares.[30]

GOVERNMENT ACCESS TO WECHAT CONTENT

The degree of current government interference in Tencent operations and those of other tech giants can be seen in how the state’s censorship regime is applied to them. Under Chinese law, Chinese social media platforms have an obligation to police the content of private messages. Extensive evidence has been found of censorship of WeChat content through the blocking of sensitive terms. This regime applies to all of China’s online content.

A survey conducted in 2016 by Amnesty International ranked WeChat at the bottom of the 11 most popular messaging apps in the world in terms of protection of user privacy.[31] In January 2017, WeChat was detected filtering and censoring content related to a Tibetan event in India, blocking messages containing the words “Tibetan,” “Dalai Lama,” and the name of the event, “Kalachakra.”[32]

Another incident, the “709 Crackdown,” gives further evidence of how WeChat is impacted by this censorship regime. Starting on 9 July 2015 (hence, the “709 Crackdown,” for the date), over 250 Chinese rights lawyers and other activists have been detained in China. In January 2017, reports detailing torture during police interrogations of the lawyers started to leak and provoked responses on WeChat and Sina Weibo.[33] The Citizen Lab, a research entity at the University of Toronto, began testing WeChat content for censorship and reported that 41 keyword combinations related to the 709 Crackdown were censored without WeChat users knowing.[34] [35]

Another Citizen Lab study in late 2017 identified a separate set of censored keywords related to the impending 19th National Communist Party Congress. Citizen Lab stated that, “even neutral references to official party policies and ideology were blocked in addition to references to the Congress, party leaders, and power struggles within the Communist Party of China.”[36] Previous research had found censored terms for WeChat related to the Hong Kong protests in 2014.

It appears that Tencent takes its guidance for cleaning up sensitive content from the government but does the policing itself. This is indicated by the fact that Tencent has been penalized in some cases for not policing thoroughly enough. In September 2017, Tencent was fined by the Guangdong cyberspace authority for failure to control its online content. Tencent Holdings, Baidu and Weibo all received the maximum fines allowed under the recently-implemented Cybersecurity Law for allowing their users to post banned content, reportedly including pornographic and ethnic-hatred content.[37]

Further interference came in November 2018 when the Cyberspace Administration of China announced that it was implementing a tightened management of Internet content. This resulted in the shutdown of 9,800 social media accounts on WeChat, Sina Weibo, search engine Baidu, and news aggregator Jinri Toutiao.[38]

The question of whether government intrusion extended to direct access to WeChat content was answered in part when WeChat’s latest version of its privacy policy statement was issued in late 2017. The text of this policy confirmed what had been suspected: WeChat shares private user data with the Chinese government. According to the policy statement, personal information and log data that WeChat collects to power advertising and direct marketing activities can be disclosed, “to comply with applicable laws or regulations, to comply with a court order, subpoena or other legal process, or in response to a request by a government authority, law enforcement agency or similar body.” Log data is collected automatically by WeChat and can include “mobile carrier-related information, configuration information, IP address, and device version and identification number, information on what the user has searched for and viewed using WeChat, including web search terms used, social media profiles visited, and content accessed.”[39]

This exposure of user data does not come as a surprise to Chinese users, who have long had privacy concerns with Chinese social media in general. The South China Morning Post (based in Hong Kong) quoted Li Yi, a researcher at the Shanghai Academy of Social Sciences, who asked, "How could WeChat fulfill the government's task if it does not store or analyze conversations from its users?" It also reported that Chinese businessman Li Shufu, owner of the Geely car manufacturing company, claimed that Tencent "is watching us through WeChat every day because it can see whatever it wants."[40]

Despite all this, Tencent has denied reports of storing and sharing data with the government. On a company website, they posted the message: "WeChat does not keep any user's chat history, and chat content is only stored in the user's mobile phone, computer and other terminal equipment. Because WeChat does not store or analyze the technical content of the user chat mode, rumors that 'we look at your WeChat every day' are purely a misunderstanding."[41]

However, official corroboration of the government intrusion into WeChat surfaced in April 2018 when a government anti-corruption commission in eastern China reported that it had used deleted WeChat conversations from a suspect to develop other possible suspects. The suspects it questioned all confessed, and the commission reported punishing 63 party officials. After the commission posted this information, the post went viral for being a rare admission of user privacy violations on behalf of the government. Chinese citizens talked on various forums about how they should protect themselves, with some wondering if they had to physically destroy their smartphones to protect themselves from government eavesdropping.[42]

CONCLUSIONS

Available information on how the Chinese government interacts with Tencent shows a growing trend of control and interference of what had been a relatively independent entity. No information was found to suggest that Tencent was somehow a front for the government or a controlled medium through which the government can conduct malicious activity online.

What appears to have happened is that Tencent under Pony Ma and Martin Lau has been incredibly successful to the point that it dominates many aspects of online activity in China. The government probably sees the success of a Chinese corporation as a positive development, but that corporation, operating the biggest communications medium in China and the biggest game platform in China, now needs to be subjected to greater monitoring and control. Internet control is being tightened up across the board in China under Xi Jinping, and the censorship of WeChat content is a component of that effort. However, the squeezing of Tencent Games by holding up licensing, costing this company many billions of dollars, seems to run counter to the government’s interest in a healthy economy. Perhaps this decision was made out of concern over game addiction. Perhaps it was intended to send the message of: no matter how big Tencent gets, it still answers to the Party.

Contact the Wapack Labs for more information: 603-606-1246, or feedback@wapacklabs.com

Prepared: Silkworm, Asia Desk
Reviewed: B. Schenkelberg
Approved: J. McKee

[1] www.tencent.com/en-us/abouttencent.html.

[2] www.scmp.com/tech/big-tech/article/2174075/tencents-co-founder-pony-ma-tells-chinese-

state-media-fate-played-role.

[3] www.bloomberg.com/news/features/2017-06-28/tencent-rules-china-the-problem-is-the-

rest-of-the-world.

[4] www.theguardian.com/business/2018/jan/13/tencent-the-500bn-chinese-tech-firm-you-

may-never-have-heard-of.

[5] www.business-circle.com.au/en/?p=3658.

[6] www.polygon.com/2018/3/29/17172326/tencent-ubisoft-explained.

[7] www.thestreet.com/markets/tencent-shares-rise-china-approving-new-games-14818809.