Chinese tech is teetering precariously on the brink of something worse than a bear market.
The country’s tech giants have been beset with concerns since November, when Beijing decided to clip the wings of Jack Ma, after the flamboyant mogul criticized regulators the previous month. That ill-advised move effectively killed Ant’s planned mega-listing, setting in motion an increasingly aggressive anti-monopoly shakedown that threatens to ensnare Tencent.
From the time Ma chided regulators in late October through the end of 2020, the price of insubordination was around $11 billion (figure below).
Fast forward three months and Hong Kong tech found itself in a bear market when a series of horrendous losses punctuated months of trepidation. Rising bond yields in developed markets and concurrent jitters in big-cap US tech were insult to injury.
Now, with the first quarter winding down, the rout it back. Tencent fell nearly 3% in Hong Kong Thursday, building on outsized losses since the highs in January. The company is struggling to deflect investor concern over the ramifications of heightened scrutiny from Xi. Founder Pony Ma is apparently in close contact with regulators. Tencent characterized that correspondence as voluntary. “Proactive” is probably a better adjective. When it comes to initiatives championed by Xi, compliance is never properly “voluntary.”
The company claims any changes to its fintech arm(s) necessitated by new regulations won’t be material. That may be true, but the ambiguity is undermining sentiment. Nobody likes uncertainty.
Not helping matters is the overhang of prospective financial scrutiny in the US, where the push to force compliance with examinations by the Public Company Accounting Oversight Board didn’t die with Donald Trump’s presidency. In fact, the SEC indicated this week it’s moving ahead with action that would compel Chinese companies to submit to audit inspections. That, in turn, raises the risk of de-listings.
That isn’t “new,” at all. But it is news, with an “s.” It’s incremental evidence to support the contention that the Biden administration has no immediate plans to dial down tensions with Beijing.
“Tech giants from Tencent to Alibaba hit the plunge pool after US regulators rekindled threats to toss China’s most prominent corporations off US bourses, compounding concerns of a widening domestic antitrust crackdown,” AxiCorp’s Stephen Innes said Thursday, adding that the street is “starting to realize that any lingering hope of a reset in US-China trade relations is unwarranted.”
Everything from Baidu to JD.com to Meituan suffered on Thursday. The Hong Kong Tech index tacked on another daily loss. At the risk of trafficking in hyperbole, the situation is dire. The gauge is now down almost 30% from its highs in February (figure below).
Somewhat ominously, Bloomberg reported that Beijing is drawing up plans to “establish a joint venture with local technology giants that would oversee the lucrative data they collect from hundreds of millions of consumers.”
Amusingly, one of Bloomberg’s sources noted that a “key hurdle for such a joint venture would be existing rules around data privacy, which give individuals the right to decide how their information is used.” Something tells me that “hurdle” could be easily cleared domestically. China is, after all, a pseudo-police state.
“Tencent is now dealing with the same type of antitrust concerns in China with which Alibaba has recently grappled,” JonesTrading’s Mike O’Rourke remarked. “The weakness [is] so pervasive that we wonder if there’s more to it,” he went on to say, in a Wednesday evening note, before alluding to Intel’s plans to spend $20 billion on a pair of new chip factories.
“The human rights and sanctions issues with China are escalating,” O’Rourke said. “Maybe the post-Trump Intel move signals a new era of de-globalization.”