China tech crackdown: after a trillion-dollar rout, has the stock market drubbing gone too far?

  • China’s internet companies have lost an estimated US$1 trillion in value in the past 14 months
  • Most Chinese tech giants are now trading close to historic lows

This year will go down as a tough period for Chinese technology firms, as Beijing moved to exert control over the once-freewheeling sector. In the last of a four-part series, the South China Morning Post looks at the market fallout, the cost to investors, and the struggle to determine the end game. The first part is here, the second part here, and the third part here.

On the evening of November 3 last year, soon after China’s prime-time news broadcast ended, a short statement emerged from the Shanghai Stock Exchange, setting in motion a US$1 trillion rout in the offshore Chinese stocks, one that is still wiping out value more than a year on.

The exchange halted Ant Group’s US$39.7 billion dual listing in Shanghai and Hong Kong, 48 hours before shares were due to begin trading. It also kicked off a year-long clampdown on China’s internet-related industry, with various regulators from antitrust rules to taxation putting in stops to cool the feverish growth of the country’s internet giants.

The tumultuous year in China technology has not only wiped out billions and decimated the fortunes of some of the world’s richest entrepreneurs, it also fundamentally upended how some of the most promising start-ups are appraised. Assumptions of unfettered and symbiotic growth, often based on data collected from captive users in so-called internet walled gardens, can no longer be taken for granted.

“What China does in terms of tech regulations echoes similar concerns coming from other countries including the US,” said Wang Lei, a US-based portfolio manager at Thornburg Investment Management that manages US$49 billion of assets. “The way China deals with it is more straightforward and too abrupt for the capital market to digest in a short period of time.”

The 10 richest people in Greater China in 2019


Has the crackdown gone too far?

The answer to that vexing question could determine how quickly global stock investors can recover from their losses under the force of China’s regulatory assaults.

Some investors dismissed the suspension of Ant Group’s dual listing – the biggest fundraising in global finance – as a personal and temporary rebuff of Jack Ma, the largest shareholder of the fintech company and founder of this newspaper’s owner Alibaba Group Holding.

Months after the scrutiny on Ant Group and a record penalty on Alibaba, the focus shifted to Didi Global and its controversial US$4.4 billion New York initial public offering (IPO), followed soon after by a crackdown on for-profit tuition sector.

Chinese start-ups worth at least US$1 billion in 2018

“Investors have definitely underestimated China’s determination in curbing monopolistic behaviour within the digital economy, protecting data privacy and upholding social commitments,” said Tan Eng Teck, a portfolio manager in Singapore at Nikko Asset Management, which manages about US$282 billion of assets. It has been “a painful year for offshore investors.”

The setback spared no one, not even the most experienced global investors, including Singapore’s state investment firm Temasek Holdings, the world’s biggest hedge fund manager Bridgewater Associates and funds managed by investing giants like BlackRock.

Alibaba’s US-listed shares are now valued at 14.7 times projected earnings, close to their cheapest level on record, according to Bloomberg data. The Hang Seng Tech Index, which tracks tech giants as Alibaba, Kuaishou Technology, Meituan, and Bilibili, is trading at 37.3 times earnings, about 10 per cent below its historical average.

“You can argue that valuation looks very cheap, and Alibaba is [less than] half” its stock price at its October 2020 peak, said Wang at Thornburg. “Looking forward, what is the growth profile? I don’t think it is the same growth rate. How low can it be? It is still undecided and the jury is still out.”.

Alibaba’s shares have dropped 63 per cent in Hong Kong from its peak in October last year, while China’s biggest on-demand delivery service firm Meituan has slumped 50 per cent from its record high. Didi Global’s shares have sunk 60 per cent from their IPO price in late June.

Alibaba’s shares had surged by as much as threefold over the past seven years in New York. Hong Kong-traded shares of Tencent Holdings, the operator of the WeChat social-media app, jumped almost eightfold over the same period. At the peak of their valuations, Alibaba and Tencent were among the world’s 10 most valuable companies, racing to be the first US$1 trillion company in Asia.

While these industries – from e-commerce to ride-hailing and online games – are hailed as a new driver for China’s growth – financial might and influence have raised concerns among regulators who warned against “barbaric” growth, disorderly expansion of capital and social instability. President Xi Jinping’s “common prosperity” drive means the days of unbridled growth and ostentatious wealth are now long gone.

“The new era of heightened scrutiny is here to stay, and we are likely to see more measures in 2022 to fulfil regulatory objectives,” Swiss money manager Union Bancaire Privee said in a report. “The prize of market dominance may be diminished as leaders can no longer expand aggressively or sideline competitors simply by using their scale and financial strength.”

Xi is shifting his policy priorities to tackle some of China’s deep-rooted social issues: widening wealth gap, high education costs and runaway home prices.

These are seen as hindrances to a more harmonious society and a threat to China’s future economic growth. Heavy financial household burdens from education, housing and health care may foil Beijing’s new three-child policy to stem a decline in birth rate and expand the future labour force.

Attempts to call an end to the regulatory tightening have proved to be futile so far. The latest action was a record US$210 million fine on the top-grossing live-streamer Viya for tax evasion. Also, authorities in Alibaba’s hometown Hangzhou suspended a cooperation with AliCloud for failing to report a system loophole early.

The fallout is far-reaching for Hong Kong’s stock market, a crucial fundraising hub for Chinese companies since a 2018 reform of listing rules that opened the way for technology start-ups and pre-revenue pharmaceutical research labs to raise funds closer to home. Hong Kong, the world’s favourite place for IPOs in seven of the previous 12 years, likely have surrendered its pole position in 2021 to Nasdaq, Shanghai and New York.

Going into 2022, the regulatory overhang still remains a great challenge for traders. The biggest question for fund managers now is whether share prices have priced in all the headwinds. Some have called the market cheap enough to start loading up on tech stocks that are not directly targeted by the regulators.

Top 10 IPO markets in the first quarter of 2021

“For investors with a long-term horizon, 2022 will be a good time to start building positions in Chinese equities,” said Victoria Mio, a director at Fidelity International in Hong Kong. “Investors can start with sectors that align with the next phase of economic development in China, such as high-end manufacturing, renewable energy, electric vehicles, software, mass market consumption and next-generation health care.”

China’s onshore markets may be a safe harbour, where traders can access a variety of niche tech sectors that enjoy policy tailwinds such as clean energy, data security software and semiconductors. The Shanghai Composite Index has risen 4.3 per cent this year, with small-cap stocks rallying by 11 per cent.

The market capitalisation of Shanghai’s Star market, 12 months from its establishment in July 2019.


But first, investors must consider whether the clampdown on Chinese technology is over. They must also contend with a new reality that the fast-changing regulatory landscape in China has undermined the business models of Big Tech companies and probably stymied their earnings growth.

This renders the pre-crackdown stock valuations unjustifiable, according to Thornburg’s Wang.

Ant Group’s foiled IPO would have been the largest in global finance if it had gone ahead.


The latest quarterly results from Alibaba, Baidu and Bilibili bolstered Wang’s scepticism to some extent. Their poorer-than-consensus reports highlighted the cost of regulatory curbs. Alibaba will probably post a 31 per cent decline next year, the worst since 2017, according to Bloomberg data.

China’s internet stocks may also have lost their leadership, after holding sway over the broader market since 2015, according to Nikko Asset’s Tan. China’s stock market leaders tend to change every five to eight years. Before tech’s dominance, there were telecoms, banking and commodities, consumer names.

For Manuel Muhl, the Frankfurt-based analyst at DZ Bank who downgraded the rating on Alibaba in late July while everybody else was calling it a “buy,” the e-commerce giant still remains a valuation trap. He will not alter his bearish call, unless Beijing clearly signals an end to the campaign. Or the gap between the stock price and the intrinsic value becomes more “dramatic.”

“I am still bearish,” he said. “Sadly, despite the current valuation, we still haven’t reached this point.”

Author: Zhang Shidong, SCMP

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