Chinese tech stocks drop as Beijing readies new policy guidelines. Alibaba, JD, Tencent, and Meituan lost around $250 billion in market capitalization yesterday. The losses occurred as Beijing announced plans to crack down on internet monopolies. Last Tuesday, Chinese government regulators released its guidelines on internet companies. These policies aimed to protect fair competition in the market and safeguard consumers.
China’s State Administration for Market Regulation (SAMR) issued the draft last Tuesday. They contain guidelines that prevent anti-competitive practices in the internet sector. Regulators designed the guidelines to stop Internet monopolies from continuing anti-consumer behavior. Alan Li, Atta Capital portfolio manager, says “This is probably just the first warning shot.” He added: “The policy is clearly targeting the tech giants, with e-commerce, online food delivery and ride-hailing platforms likely to receive the biggest blow because of how concentrated these sectors are.”
Market Cap Wipeout
Shares in Alibaba and JD.com fell by more than 10% since the announcement. Alibaba lost more than $97 billion in market capitalization, while JD lost $26 billion. Both companies are now bracing for their worst week in the market. Meituan, a popular Chinese shopping platform, and gaming firm Tencent, also lost billions. All four companies lost a combined $255 billion.
While the rules remain in draft form, expect stock prices to remain in limbo. Worse, the market is switching from tech to cyclical, creating added pressure to sell. Pfizer and BioNTech announced great results for their Covid-19 vaccine trials. This sparked optimism in the market that recovery is imminent. As such, investors are starting to move back to cycle-driven stocks.
China is Showing Everybody Who’s Boss
The antitrust guidelines followed Beijing’s move that shuttered Ant Group's planned IPO. Ant was on the verge to become the world’s largest public offering at $34.5 billion before China shut it down. Billionaire Jack Ma, the founder of Alibaba, is also the owner of Ant.
This policy draft is the latest move by China to maintain control of its biggest tech companies. Regulators wanted to limit e-commerce websites to protect the internet economy. This will result in fair market competition and healthy growth.
Jeffrey Halley, the senior market analyst of Oanda, thinks this means a “much more vigorous regulatory environment.” He said that China is wary of actual or possible monopolistic behavior.” He noted “the sheer size of the incumbents,” which could lead to unfair competition. New players can also get squeezed out.
Lately, Chinese regulators have intensified warning tech companies against monopolistic behaviors. They warned that the government would publish more regulations. These will target online transactions, streaming, and other services. Regulators vowed to crack down on “illegal cases” during the popular Singles Day season. They warned firms against inflating sales figures and shorting customers.
The China Consumers Association, a government-backed consumer rights group, called for “rational consumption.” State news network CCTV warned platforms to stop dishonest practices. They called out sites to make “fewer tricks.”
Tech Companies Already Felt the Squeeze
Chinese tech companies felt the squeeze of competition even before the policy draft. Alibaba and Tencent held dominant positions but saw their market shares shrink. Morgan Stanley analysts noted that: “competition has already intensified in recent years, with ‘incumbents’ (e.g., Alibaba, Tencent) losing market share to ‘disruptors’ (e.g. Pinduoduo, Bytedance).” They added: “The consequences will likely be less meaningful given reduced dominance across segments compared to a few years ago.”
The added regulations may increase the pressure on Chinese tech firms. “We believe the potential implementation of the new antitrust regulations has negative implications for major Internet companies with dominant positions across segments,” the analysts added.
Sell-offs are often short-lived
While disastrous at first glance, Chinese tech sell-offs are often short-lived. This is not the first time this happened after a government announcement for a crackdown. In some cases, the sell-offs became buying opportunities for shrewd investors.
In 2016, Baidu stocks plummeted after a crackdown on medical ads on its search pages. Shares recovered their losses and surged to new highs the following year. In 2018, Tencent and NetEase’s shares dropped after Beijing halted monetization licensing. Once approvals resumed, both stocks began trading above their 2018 highs.
Slight Impact on Bottom Lines
The SAMR posted its draft policies so that the public can comment and share their opinions. Everybody has until the end of November to give inputs and suggest revisions. The proposed policies can minimally impact the bottom lines of these internet companies.
Some of the practices criticized by the regulators are predatory in nature. They include posting different prices for the same item to different customers. They also frowned on the practice of preventing sellers from trading on rival sites. Loss leading, where companies sell items below cost, were also called out.
Watch this as Yahoo Finance's Aikiko Fujita reports on China's draft antitrust regulations to regulate Chinese tech firms:
Investors of The Capitalist, do you dabble in Chinese tech stocks? Do you agree it’s time to sell off, or do you hold until the smoke clears? Let us know what you think about Chinese tech stocks by sharing your comments below.