Chinese Tech Is Imploding

Chinese Tech Is Imploding

Chinese tech shares are in trouble.

Beijing’s abrupt blitz to rein in Alibaba, Tencent, and others, came as something of a shock this week, but the underlying rationale, to the extent you can ever truly discern such a thing in Party decrees, echoes concerns voiced by officials and regulators around the world. Essentially, China is worried that its tech titans wield too much power and may be prone to abusing it without sufficient oversight and guardrails.

A hodgepodge of new regulations pitched as an effort to expand on the country’s anti-monopoly law came just a week after Beijing’s dramatic, eleventh hour intervention in Ant’s planned IPO. Additional regulatory measures are apparently in the cards. Through Wednesday, the reinvigorated crackdown had precipitated a truly egregious slide in the Hang Seng Tech Index.

So, that’s more than 11% in just two sessions.

This is something of a tightrope walk for Beijing, which has made nurturing “homegrown” tech a priority in a world where the international community is increasingly hostile to China’s rise, both economically and otherwise. Kneecapping these giants, while consistent with the international backlash against big tech’s almost omnipotent aura, could chance undermining efforts to assert Chinese tech dominance. At the same time, allowing just a handful of companies to corner the market could stifle competition, something that would ostensibly undermine Xi’s avowed plans to encourage innovation.

“I literally gasped when I first read these guidelines,” Bloomberg quotes a Shanghai-based securities attorney as saying. “The timing — on the eve of Singles’ Day — the forcefulness and the resolve to remake the tech giants is startling.”

When it comes to Beijing’s penchant for stepping in to curtail what it deems to be deleterious trends or behaviors that might end up producing undesirable results, I’m not sure anyone should ever be “startled.” This is, after all, an authoritarian regime that prizes stability over all else. With some Chinese tech companies getting their tentacles into businesses that weren’t originally their purview, it’s hardly a surprise that the Party is nervous.

Insult was added to injury on Wednesday when Liang Tao, a vice chairman of the China Banking and Insurance Regulatory Commission, effectively put the fintech space on notice during remarks at a conference in Beijing. Those companies, Liang said, don’t alter the character of the financial industry and should expect that regulators will be watching for risks associated with the digitization of finance. Companies should operate under the same supervisory regime as banks, he added.

“We need to strike a balance between financial development, stability, and security,” Liang remarked. “We need to pay close attention to the risks from internet security, data protection and market monopoly.”

Between them, Alibaba and Tencent have seen almost $300 billion in market value evaporate in just two sessions.

Obviously, this is far from over, and you can absolutely expect to hear more from Beijing over the next six or so months.

The near-term issue is that the steep declines in big Asian tech come as markets are already predisposed to rotating out of technology winners and into sectors and names that are seen as beneficiaries in a reopening trade tied to vaccines and therapeutics produced by pharma giants in western nations.

These are falling knives, but if you can catch them by the handle and not the blade…


5 thoughts on “Chinese Tech Is Imploding

  1. Yeah…

    Look, the concerns around Big Tech are well noted and understandable. Ditto, financial stability, though maybe reigning in margin-enabled speculation might have been more efficient?

    But, here, there are clear (geo)political concerns – the fact remains that The Party (or Xi) refuses to have anyone but Itself (himself) yield any significant power or have a will, autonomous from said Party.

    It’ll be interesting to find out :

    1- if this allow for (technological) innovation. When the ability to dissent or innovate in spheres other than technical is that throttled, does it not also impact technical innovation, regardless?

    2- how this plays out into the geopolitical sphere. As said in a previous comment, Xi has on many occasions said that China was engaged in an ideological struggle to the death with liberal democracies/Western civilisation. Not that two different systems might work or that China was free to carve its own path or anything so whimsical. Ideological struggle to the death. One thing we’re learning about autocrats is to trust them to mean what they say. Disregarding such speeches as just the commie nonsense/pious dogma a Chinese leader must spout to appease The Party is not wise. There are enough indications that this is not what’s going on. He means it. The Party means it.

    This makes any geopolitical differences of interest very hard to resolve and win-win impossible. But Big Tech is clearly an area for that confrontation.

    Can China strangle/beat its champions into submission while maintaining their geopolitical/strategic/military impact on the rest of the world? TBD…

    1. I’m a buyer. Heh. Not really. Or at least not today. But I mean, honestly, if you’ve got capital to deploy and any of these big 10 tech names, no matter where they’re based, selloff 10% or more, it’s not a terrible idea to buy them. Obviously, this is not a recommendation of any kind, but it’s not exactly like the world is going to need less technology going forward. And these companies aren’t going away. So when I see something like Alibaba down ~15% in a matter of days, I’m looking at it.

      1. TBF, I’ve long been long Chinese Tech (the big names only, I don’t know enough to go into the weeds) but I’ve lighten up in recent months. BIDU because it had been a losing proposal, BABA b/c despite stellar returns, I was getting concerned about the whole political stuff. Still long, though, Tencent… Nice names to own too.

        But I’m now also monitoring Xi’s actions and the West’s reactions. If they want a fight to the death, us not wanting to engage ain’t going to be enough.

  2. Just bought BYD and watched it go up 25%. Again, these big guys do put a lot of foreign reserves into China’s bank. Propaganda is one thing, but cutting off one’s nose to spite one’s face is quite another, especially in a place where face is so important.

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