Meta and Snap shares gain on TikTok ban threat

US lawmakers from both political parties delivered a grilling to TikTok CEO Shou Zi Chew as the administration considers banning the app, which now has over 150 million monthly active users in the US, over security concerns. Meanwhile, Google suspends PDD from the Play Store over malware concerns.

• TikTok CEO testifies in US as President Biden contemplates ban.
• PDD blocked on Play store over malware concerns.
• Global X Social Media ETF gains 3% on prospect of TikTok ban.

TikTok’s CEO Shou Zi Chew faced questioning from US lawmakers on 23 March, as talks of a nationwide ban of the Chinese-owned social media platform gather momentum. Ahead of the hearing, Chew confirmed that TikTok has 150 million monthly active users in the US, up 50% since 2020.

There is support from both Republicans and Democrats for legislation which would empower President Joe Biden to ban TikTok on national security grounds. Biden has previously threatened to ban TikTok in the US unless its Chinese owner, ByteDance, divests its ownership of the app.

The looming threat is benefitting TikTok’s US-based social media rivals. Meta’s [META] share price gained 2.2% on 23 March following what many viewed as an underwhelming performance from Chew under aggressive questioning. Snap’s [SNAP] shares gained 3.1%.

While Chew and TikTok argue that the perceived security risks are non-existent and concerns are driven by geopolitical fears, TikTok’s popularity and recent accusations of aggressive data harvesting raise questions related to user safety, as well as to international security.

Controlling the algorithm

Security concerns over TikTok fall into two broad categories. The first is that data collected by the app could be shared with the Chinese government, or let Chinese government agents gain access to sensitive information stored on a phone that has TikTok installed.

The UK is one of a growing list of countries to have issued a ban on TikTok on government devices in response to such fears. France, the Netherlands and Norway have also issued bans.

The second concern is that Chinese propaganda could be broadcast to the app’s user base, which now numbers over a billion people, via its opaque “For you” algorithm.

For this reason, control over the algorithm is a key battleground. Beijing is heavily resistant to exporting it, and has legislated to block any divestment of TikTok without the government’s consent. These moves have, in turn, undermined Chew’s assertion that TikTok is independent of the Chinese government.

Responding to data security concerns, Chew repeatedly discussed Project Texas, an effort that would see US TikTok data firewalled in US data centres managed by Oracle [ORCL]. However, US politicians are sceptical that this would be sufficient to prevent data falling into the hands of China’s governing party.

There is a third, non-security concern, however, which is the fundamental fairness of TikTok being allowed to operate in Western countries when Western counterparts, like Facebook, Instagram and Twitter, are not allowed to operate in China.

Pinduoduo stock falls on Play store delisting

Notwithstanding these questiions, there are doubts over both the likelihood and feasibility of a nationwide ban.

Thomas Hayes, chairman and managing member of Great Hill Capital, told Reuters that "the rumours of TikTok's demise may be greatly exaggerated."

Google [GOOGL] has, however, shown how a ban could work in practice this week, in a case that reflected the worst security fears of anti-TikTok politicians.

Chinese-owned PDD Holdings’ [PDD] Pinduoduo app was suspended on the Play Store on 21 March over malware issues detected on “Off-Play” versions of the app. PDD stock fell 4.2% the following day.

Funds in focus: Global X Social Media ETF

Social media gains on hopes of TikTok being banned were not limited to Meta and Snap. The Global X Social Media ETF [SOCL] gained 3.1% on 23 March, reflecting optimism across the sector. Meta is SOCL’s top holding as of 24 March, with 13% of net assets, and is likely to have driven this movement. Snap is the sixth-largest holding, with a 5.58% weighting.

The gains leave SOCL up 7.6% in the past month and up 18.3% year-to-date.

Investors seeking exposure to Chinese companies with a substantial US business can select the Invesco Golden Dragon China ETF [PGJ], which tracks an index of Chinese companies with US listings. PDD stock comprises 6.81% of the fund as of 24 March.

PGJ is down 1.1% over the past month, but up 3.9% year-to-date.