New rules ban the use of booking apps by cab drivers during rush hour periods and ban their use entirely by private vehicles licensed for hire, according to a statement released late on Wednesday by the Shanghai Municipal Transport and Port Authority.
The fast-growing sector attracted over $43 million in investment over the last two years, according to internet data firm iResearch, from the likes of tech giants Tencent Holdings Ltd and IPO-bound Alibaba Group Holding Ltd, as well as U.S. venture capital firm Sequoia Capital.
The market is dominated by Didi Taxi and Kuaidi Taxi, backed by Tencent and Alibaba respectively, which together held almost 90 percent of the market by daily taxi app orders last year, according to iResearch.
Tencent and Alibaba have been locked in a battle to attract customers, offering generous rebates to drivers and riders to use their apps and payments systems.
Taxi booking apps, which allow users to "bid" for cabs by adding an additional flat fare, essentially allow customers and drivers to cooperate to break through government price controls on fares and negotiate a market price for transportation.
Use of the apps has divided opinion in China. Some cab drivers told Reuters they now would not go without them, while others complained the apps created an unequal playing field for both drivers and passengers.
Shanghai's stance is likely to concern industry insiders, as China's commercial centre and most populous city was widely viewed as a good seeding ground for the market-driven business.
SEARCHING FOR FARES
There have also been complaints that people are having increasing difficulty hailing cabs on the street, as many drivers refuse to pick up customers paying normal fares.
Instead taxi drivers cruise the streets with their eye on a collection of cell phones mounted on their dashboards running different apps, all searching for fare bids.
Under the new rules, Shanghai's cabbies will not be allowed to use the apps while driving, and can be fined for refusing to pick up ordinary-fare passengers.
"We encourage users and drivers to comply with relevant laws and regulations," said an Alibaba spokeswoman in emailed comments to Reuters, adding Alipay users can still pay for their cab rides with more than 8,000 taxi drivers in Shanghai.
Kuaidi Taxi did not respond to requests for comment. The firm's chief operating officer told Reuters this month that the authorities broadly supported the taxi app business.
Tencent has also developed a function in its popular WeChat messaging system that allows customers to book and pay for cabs using its e-payment mechanism, and refunds a portion of the fare to the user. Tencent did not immediately respond to requests for comment for this article.
Analysts say the payment system for the Didi app was developed in part to help Tencent compete with rival e-commerce giant Alibaba for a share of the booming online payment market, currently dominated by Alibaba's Alipay.
The new regulations could also hit services like U.S.-based Uber, which recently launched in Shanghai and other Chinese cities, and allows passengers to book private cars.
Uber declined to comment for this article.