Over the past year, the Chinese Tech industries such as Tencent and Alibaba face mounting operational difficulty from regulators as China’s once flourishing e-commerce and technology sector face scrutiny. Rising crackdown on anti-monopoly like practices as well as tighter legislation are also felt in sectors such as food, education, gaming, pharmaceutical drugs. These changes in the business environment as stated by Vice Premier, Liu He of the CCP, reflect China’s forward development towards social fairness, consumer rights protection and improved national security.
Resultingly, Chinese tech stocks continued its downward trend as of July 27th as the series of actions made by trustbusters would only delve the tech industry into murky waters as the potential winners and losers amidst the regulatory chaos become less evident. Extensive damage continued from August the 11th , as authorities announced a five-year plan of action to better regulate the industry, causing losses of up to $1trn in market capitalisation since February (shown in “The trillion-dollar question” chart from The Economist).
Since the start of this year, tech giants, Tencent and Alibaba have seen declines in the daily average share prices, shedding its value by at most 10 per cent (Tencent) and 7.7 per cent (Alibaba). The Nasdaq Golden Dragon China index, a benchmark also tanked by 10.9 per cent in the past 5 days, indicating its worst fall since 2008. The reason being decreasing consumer confidence in company shares as waves of antitrust laws and regulatory breaches cost Alibaba a whooping $2.8 billion. Tencent were also dealt penalties by Chinese regulators for sexually explicit content and anti-competitive practices, sinking the share prices by 11.3 percentage points since January. The graph below displays the daily average stock prices of Tencent Holdings Ltd and Alibaba Group Holding Ltd plummeting since February of this year.
The tech sector is not the only sector to be concerned about for investors, as regulatory crackdown broadens to other industries. For example, China’s stance towards the online tutoring business – suggests that making a profit from academic tutoring is prohibited –threatens to sweep millions in FDI into the private education industry.
As mentioned earlier, this new stage in China’s development as an advanced economy, sees many industries under increased scrutiny in the socialist market economy – one where state-owned companies operate in tandem with market capitalism. Under the Chinese growth model, the government would propose a five-year plan of action focusing on specific goals, strategies, and targets for growth. Currently, the focus seems to be towards opposing unfair and illegal practices through improving the “functional system of government agencies and promote better use of the government’s role”. The document also mentioned strengthening legislation in important areas such as “on the digital economy, Internet finance, artificial intelligence, big data” etc.
The recognition of how tech giants were able to dominate the Chinese market through data collection raises the eyebrows of state officials. Hence, utilising the State Administration for Market Regulation (SAMR) to redistribute wealth and power within monopolistic markets. In a recent case, the SAMR had accused Tencent and Alibaba – both have separate market sites – of preventing the exchange of information between both markets, effectively dividing the marketplace. Furthermore, merchants were only able to sell on one e-commerce platform, where a high operating fee had to be paid. This meant higher selling prices and lower margins for the buyer and seller respectively.
Nonetheless, this is all set to change as the enforcement of a more open business model by the SAMR, allows merchants to gain more control over pricing, potentially leading to higher sales margins and lower prices for consumers as mentioned by analysts. Investors in stocks on the other hand are less benefited as “long-running-tax benefits could soon come to an end”. Other businesses have been kept on the watchlist by SAMR, such as transport and delivery services Didi and Meituan, where the aim is to provide better wages and insurances to underpaid staff and drivers.
Written By: Nathan Ng
Edited by: Kabir Chadha