Why Baidu Fell Nearly 20% in July 2021

What happened

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Shares of Baidu logged a loss of 19.6% last month, according to data provided by S&P Global Market Intelligence, following a regulatory crackdown on many of China’s technology companies.

So what

The saga technically started in November of last year, when China’s State Administration for Market Regulations first began outlining new rules to curb internet monopolies. While the intent was seemingly aimed at names like Alibaba and Tencent, as the search engine fielding the vast majority of web searches made within China, Baidu isn’t immune to any new regulatory headwind.

Matters have consistently become more difficult since then, with the introduction of sweeping changes in corporate disclosure requirements, data security measures, and greater scrutiny of public offerings. Not even video games have escaped China’s recent regulatory interest. All of these either directly or indirectly affect Baidu and its well-diversified portfolio of tech company holdings, as well as projects outside of its core search business. Among these interests are artificial intelligence, apps, and autonomous vehicle technology.

As for the brunt of July’s setback for Baidu’s shares, however, blame China’s ride-hailing outfit DiDi Global (NYSE:DIDI). Shortly after it completed its IPO for an NYSE listing in early July, China’s Cyberspace Administration and Ministry of Public Security sent a small army of employees to DiDi’s headquarters to perform an on-site investigation of the company’s process for collecting and storing customer information. The move appeared mostly to be an effort to send a message to DiDi and any other technology player resistant to the government’s new rules; domestic investors certainly interpreted it as such.

Now what

It’s tempting to presume the regulatory crackdown can’t do any more damage than it’s already done. Baidu’s 20% tumble in July is just part of a bigger 43% pullback from February’s peak, mirroring weakness from many other Chinese technology stocks.

But the consensus assessment is that things could indeed get worse before they get better. The clampdown in many ways suggests China’s government is slowly positioning itself for greater, ongoing oversight of China’s tech industry. It doesn’t necessarily mean the government’s priority is to eliminate clear market leadership, to be clear. However, that is a prospective outcome of a more restrictive environment.

The sheer uncertainty of the movement makes all of these stocks including Baidu tough to own until it’s clear China’s State Administration for Market Regulations is easing up. That could be a while longer.

Author: James Brumley, The Motley Fool

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