China’s Metaverse: An Emerging Technology Shaped by its Regulatory Environment

The concept of the metaverse captured global attention in 2021, just as China’s tech regulations were undergoing a veritable transformation. Along with the passage of the Cybersecurity Law (CSL) in 2017, the Data Security Law (DSL) and Personal Information Protection Law (PIPL) in 2021 established a foundation for dozens of more specific laws and regulations to follow. The metaverse will be the first new major global technology created in a world where China’s basic regulatory framework for cyberspace is already in place. As such, China’s iteration of the metaverse can be expected to be built on China’s own terms and molded by domestic policy priorities and regulatory constraints.

Policy Context

The metaverse is an emerging technology that can be thought of in reference to its earlier iterations: “Second Life,” “Fortnite” and, in movie form, “Ready Player One.” In reality, it requires only an avatar moving in a digital space, and does not necessarily involve augmented reality (AR), virtual reality (VR) or cryptocurrencies—only a screen.

China’s version of the metaverse will emerge in a highly specific regulatory environment. This domestic context includes strict regulatory enforcement, content regulations, strengthening antitrust actions, emphasis on protecting personal information, and increasing scrutiny of data exports, among many other characteristics. The government has made it explicit that its tech regulations intersect with its national security policies. Increasingly, policymakers have been looking to create an environment for “secure and controllable” technologies that are produced domestically and closely accountable to government oversight, including software.

Taken together, these priorities strongly suggest that China’s metaverse will not be interoperable with overseas metaverses. Stringent oversight of online content, scrutiny of algorithmic recommendations and limits on cross-border data transfers make connections with foreign systems difficult to implement. With its strong anti-monopoly enforcement, China should be expected to have many competing metaverses, though all will face similar constraints.

A key factor for shaping the kind of metaverse that emerges in China is the country’s blanket ban on cryptocurrencies. However, the government encourages the development of blockchain technologies and is not critical of non-fungible tokens (NFTs), which are known in China as digital collectibles. In fact, leading state-owned media outlet Xinhua and the Ministry of Industry and Information Technology (MIIT) have launched their own NFTs—as have leading tech giants such as Alibaba and Tencent – though they cannot legally be resold for profit. NFTs in China must be sold in the fiat currency, yuan, though in the future they are certain to be accessible via China’s nascent digital currency, the e-CNY.

A New Driver of Growth

After a 2021 policy agenda geared toward establishing a strict tech regulatory framework, policy has shifted to targeting economic growth. In the March 2022 Two Sessions meetings, the government announced an ambitious goal of achieving “around 5.5%” real GDP growth in 2022 despite various headwinds. Not long after the meetings did Omicron outbreaks appear in major economic centers including Shenzhen, Shanghai and Beijing, paralyzing logistics and business operations.

The metaverse is forming just as China seeks new drivers of economic expansion. In particular, the metaverse has the potential to stimulate growth in line with the government’s aim to use data and the digital economy to grow the real economy. For example, virtual, online retail within the metaverse could boost offline retail. Moreover, a vibrant metaverse industry would help supercharge the development of blockchain technology, an area the government has identified as a policy priority.

Government-affiliated entities are laying the groundwork for the private sector to innovate in this space. In April 2020, the Chinese government launched the NDRC-affiliated Blockchain Services Network (BSN), tasked with creating and managing NFTs without the need for cryptocurrencies. The MIIT-affiliated China Computer Industry Association, more recently assembled a metaverse committee whose aims include developing standards for the metaverse industry and promoting the integration of the metaverse with sectors such as education. The China Mobile Communications Association in parallel created the Metaverse Industry Commerce, also overseen by the MIIT.

Local and provincial governments are also turning their attention to the benefits of the metaverse. In November 2021, the Zhejiang government organized a symposium on developing the metaverse industry. In December 2021, Shanghai’s five-year plan for the technology industry mentioned strengthening R&D for the core technologies supporting the metaverse and to explore industry applications. In January 2022, the Wuhan government said it would integrate the metaverse, big data, cloud computing, and blockchain with the real economy.

A Work in Progress

China’s metaverse debut came with Baidu’s limited-functionality platform in December 2021. Ambitions have multiplied since, with Lenovo recently announcing it would invest $15.7 billion (~RMB 106.2 billion) in metaverse R&D over the next five years, and similarly ambitious announcements may not be far behind. Huawei could, for example, follow Ericsson’s lead and decide to construct virtual cities where it can deploy radio waves to test the best locations for 5G base stations. Leading domestic VR headset manufacturers may choose to rapidly scale up in preparation for the metaverse’s growth.

Thinking about and planning for the market opportunities from China’s metaverse from an MNC perspective is difficult, not least because few concrete examples have yet materialized. It is best to start with what is known: that the broad policy environment that will crucially shape what eventually emerges.

RECOMMENDATIONS FOR MNCS

• Actively follow the rollout of new laws and regulations in China’s broader tech regulatory space;
• Look to local governments’ efforts to develop a metaverse ecosystem based on their local development plans; and
• Develop metaverse-related offerings that align closely with policy goals to boost the real economy, including in education, manufacturing, and offline retail.