China's Tech Crackdown Continues to Send Biggest Names Sharply Lower

By Mariliana Fotopoulou Wednesday, November 11, 2020

China’s tech behemoths, namely Alibaba Group, JD.com, and Tencent Holdings, lost over $200 billion in market value during two days of a selling frenzy on Tuesday and Wednesday, following the latest Beijing's drive to restrain the growth of Chinese giants in the internet sector.

New Guidelines Focused on Limiting Power of Tech Giants

Beijing issued an edict in an effort to control the power of tech leaders in the country including Alibaba, Tencent, Xiaomi, JD.com Inc., and Meituan, sending tech stocks tumbling for a second consecutive day.

During a two-day selloff activity, the Hang Seng Tech Index slipped 10%, with shares of several companies plummeting at least 8%. Alibaba’s share price closed 9.2% lower despite registering the biggest single-day sales volume in history.

China’s top regulatory body — the State Administration for Market Regulation — issued the edict just a week after it imposed new restrictions on finance that resulted in the suspension of Ant Group’s historical initial public offering (IPO).

Beijing is evidently looking to eradicate the monopolistic practices in the tech sector and curb the growth of the leaders in this industry, such as Alibaba, Ant, Tencent, and others.

”China’s Big Tech will have to rethink their business models,” said Zhan Hao, a managing partner with Anjie Law Firm in Beijing.

“The philosophy of internet companies is winner-takes-all, and especially for platform operators, they garner user traffic and build up ecosystems that are similar to each other.”

China continues to restrain the power of private tech companies in the country that fuel its growth. Most of the time, giants like Alibaba and Tencent have been free to take over smaller businesses and make investments, thereby becoming leading supporters of famous startup companies.

This way, these tech leaders have built empires that operate across e-commerce, digital finance, social media, and entertainment sectors.

“I literally gasped when I first read these guidelines,” said John Dong, securities attorney at Shanghai-based law firm Joint-Win Partners.

“The timing — on the eve of Singles’ Day — the forcefulness and the resolve to remake the tech giants is startling.”

China’s regulator wants tech companies to comply with its set of rules that were developed to prevent anti-competitive practices. The watchdog may even demand from companies that run the Variable Interest Entity to file for specific operating permission. Variable Interest Entity refers to a business structure that Chinese tech companies use to attract international investments.

“A Sign of the Times”

The release of new guidelines comes just a week after the stock exchanges in Shanghai and Hong Kong suspended the Ant Group’s IPO.

While explaining why it suspended Ant’s IPO, the Shanghai Stock Exchange said the fintech giant had reported “significant issues such as the changes in financial technology regulatory environment. These issues may result in your company not meeting the conditions for listing or meeting the information disclosure requirements.”

Ant’s IPO was initially suspended in Shanghai. Shortly after, the company’s listing in Hong Kong was suspended as well. Veteran investor Mark Mobius said the suspension of Ant’s IPO is a sign of the times.

“I believe the Chinese government stepped in because they realized that they had to regulate these companies, so that they don’t … get too big,” Mobius said and added that other emerging industries are facing similar challenges.

“A lot of it is related to privacy and other factors.”

When asked whether the suspension of Ant was an isolated incident, Mobius said “definitely not” and added that the Chinese authorities may consider regulating the tech sector further.

In a similar manner, Andrew Collier, a managing director at Orient Capital Research, said the suspension of Ant’s public listing is a “disaster.”

“Regulation can be positive but this particular move was a disaster.”

“You don’t yank a $35 billion IPO two days before it’s going to be launched internationally, it makes the regulatory system look completely arbitrary and also confused,” he told CNBC.

Summary

Shares of tech leaders in China have stumbled over the last two days as a result of Beijing's latest crackdown to curb the growth of internet sector giants in the country. This news comes just a week after Ant Group’s historical dual IPO in Shanghai and Hong Kong was suspended on Tuesday, a move that some think is a part of China’s drive to maintain control over tech titans in the country.

About the Author


Headshot for author Mariliana Fotopoulou

Mariliana has an MSC in consumer analytics and business strategy. She has a special interest in fast-moving industries and big data.

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