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The U.S. wants ByteDance to sell TikTok. China is almost certainly going to refuse

2 months ago 36

Visitors are visiting TikTok's stand at the Appliance & Electronics World Expo (AWE) in Shanghai, China, on April 27, 2023. On March 14, 2024, the United States will pass a bill banning TikTok. 

CostFoto | Nurphoto | Getty Images

The U.S. could be about to force ByteDance, the Chinese tech giant that owns TikTok, to divest its U.S. business or effectively ban the app.

But a sale looks unlikely — not least because China is expected to block it.

The House on Wednesday approved a bill that requires ByteDance to divest TikTok, the social media platform it owns, within roughly six months for the app "to remain available in the United States." This legislation is not yet law and needs approval from the Senate.

Washington has long contended that TikTok poses a national security threat as American data could get into the hands of the Chinese government.

Lawmakers in the U.S. are also concerned about the short video app's alleged ties to the Chinese Communist Party, which the company has denied.

If the bill is passed, however, the Chinese government is unlikely to approve the divestiture of TikTok's U.S. business.

"The problem is that the Chinese government is unlikely to approve this type of forced … merger and acquisition," Paul Triolo, an associate partner at consulting firm Albright Stonebridge, told CNBC's "Street Signs Asia" on Thursday.

"Any kind of divestiture and then merger with another company or acquisition would have to be approved by the Chinese government, which would probably reject that and is probably advising ByteDance that it would reject that."

What has China said?

Wang Wenbin, a spokesperson for China's Ministry of Foreign Affairs, said Thursday that the U.S. bill is "at odds with the principles of fair competition and international trade rules," according to an NBC News translation.

"If the pretext of national security can be used to suppress excellent companies from other countries arbitrarily, there is no fairness or justice to speak of. It is a complete logic of theft to see something good and try to take it for oneself by any means necessary."

China is widely expected to block a deal, not least because this isn't the first time the issue has arisen.

Last year, the U.S. Committee on Foreign Investment in the United States (CFIUS) told ByteDance to divest TikTok or face a ban. At the time, Shu Jueting, a spokesperson for China's Ministry of Commerce, said the country would "firmly oppose" a move by the U.S. to mandate a sale of TikTok.

TikTok algorithm at the center

What complicates a sale further is TikTok's algorithm. This is the app's "secret sauce" and is the technology that enables it to recommend content to users to keep them engaged.

Last year, when CFIUS told ByteDance to sell TikTok, China's Shu addressed this, saying a divestiture or sale would effectively mean exporting this technology, which must go through administrative licensing procedures.

China would have to approve the transfer of the algorithm as part of the sale, Triolo said — something that seems very unlikely.

China is unlikely to approve ByteDance's divestiture of TikTok, analyst says

And it's hard to imagine how TikTok's U.S. business could be separated from the algorithm if China did not want that to be part of the deal. TikTok requires the algorithm to function.

"This algorithm is Chinese home-grown technology, and the Chinese state has said on multiple occasions that [it] considers technology like this to be important for its national security. Hence, it will not allow Chinese technology of this nature to leave its shores or to be in the hands of countries which it considers unfriendly," Richard Windsor, founder of research company Radio Free Mobile, said in a note published Monday.

"This makes a severing of ties between ByteDance and TikTok USA highly problematic as TikTok USA needs the algorithm to function, but this will contravene the wishes of the Chinese government and the laws it has put in place."

TikTok's big valuation

TikTok is one of the world's biggest social media apps, posing a serious challenge to the likes of Facebook owner Meta and Snap. TikTok was the most downloaded social media app in the U.S. in 2023, according to market insight firm Sensor Tower.

That makes TikTok hot property. Angelo Zino, a vice president and senior equity analyst at CFRA Research, told CNBC that it's possible that TikTok's U.S.-only business "could fetch a valuation north of $60 billion."

Given the uncertainty over the algorithm, however, and Chinese government approval looking unlikely, it's far from certain that a U.S. TikTok sale will even get to the valuation stage.

— CNBC's Jonathan Vanian contributed to this report.

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