Picture: REUTERS
Picture: REUTERS

Bengaluru — China has withdrawn its approval for Facebook’s much-reported plan to open a venture in the eastern province of Zhejiang, the New York Times reported on Wednesday, citing a person familiar with the matter.

A Chinese government database showed that Facebook had gained approval to open a subsidiary, but the registration has since disappeared, according to checks made by Reuters.

The move is a setback for Facebook, which has been struggling to gain a foothold in China, the most populous country in the world, where its website and messaging app Whatsapp remain blocked. And it makes the social networking company the latest to get caught in the middle of US-China trade tensions.

US chip maker Qualcomm’s deal to buy NXP Semiconductors has yet to win approval from Chinese regulators, the only holdout from eight of nine global regulators required to approve the deal. The companies have said they will call off the deal if they do not win China approval.

"If China blocks this move by Facebook, it’s another shot across the bow at US tech companies as this tariff battle heats up between China and the Beltway, coupled by the Qualcomm-NXP saga continuing," GBH Insights analyst Daniel Ives said.

Facebook, which said on Tuesday it planned to create an "innovation hub" to support local start-ups and developers in China, did not respond to multiple requests for comment. While the about-face does not definitively end Facebook’s chances of establishing the company, it makes success very unlikely, a source told the New York Times.

The decision to take down the approval came after a disagreement between officials in Zhejiang and the national internet regulator, the Cyberspace Administration of China, which was angry that it had not been consulted more closely, according to the New York Times.

China strictly censors foreign news outlets, search engines and social media, including content from Twitter and Alphabet’s Google.

"At first blush it looks like it’s not trade-war related but more free-speech related. China has wanted to control what gets into the public hands which has made Google and Facebook’s entry difficult there," Elazar Advisors analyst Chaim Siegel said. "If the US and China were best buds maybe it could have affected this decision, but I don’t think so."

The Chinese internet regulator was not immediately available for comment. Other Chinese officials could not be reached outside business hours.

"While Facebook had hoped to dip a toe in the market and work with Chinese developers, its very presence appears to have become a large, and incendiary, political question," said Daniel Morgan, a portfolio manager at Synovus Trust, which holds 73,386 Facebook shares.

Facebook said on Tuesday that owning the China company would not change its approach to China, where it was still understanding and learning how to operate. Its venture in China was similar to what it did in other countries: Station F in France, Estação Hack in Brazil, Tech Hub launch in India, and Innovation Hub in Korea.

Shares of Facebook pared most of their gains to trade marginally up at $215.34, after touching a record-high earlier in the session. The company is due to report quarterly results after the closing bell.