By Kwai San Wong, Equity Analyst at Sarasin & Partners
China’s recent crackdown on internet companies has alarmed investors, sending their stock prices tumbling. What is the likely impact of these new regulations? Are Chinese internet companies still investable?
Over the past six months, there has been a major regulatory reset in the Chinese internet sector. Certain events, such as the anti-trust investigation and the subsequent fine of Alibaba, the Cyberspace Administration of China’s probe of ridesharing company Didi Chuxing, and the shutdown of after-school tutoring have triggered a market sell-off. As a result, China’s internet sector has significantly underperformed US big tech since February 2021, with both Hong Kong and Chinese indices seeing sharp falls.
Why now?
Having allowed the internet sector to innovate and develop in the past decade, China has now started to regulate it. This is not a bad thing. While we are firm believers in the power of digitalisation – one of our five themes – to shape our future and transform our lives, the internet sector has had no shortage of ESG issues.
The transformation to a digital world has brought about a number of societal challenges, such as data privacy, algorithm bias, addiction, platform responsibilities, anti-trust, tax, and unconventional governance. In the US, Amazon, Apple, Facebook and Google have all grappled with these issues amid widespread scrutiny. Chinese internet companies are no different.
In China, companies such as Alibaba, Meituan and JD had used various tactics to ensure merchants stayed exclusively on their platforms, violating China’s anti-trust principles. Netizens have complained about the practice of discretionary pricing, where platform companies (such as Meituan, Alibaba, Ctrip and Didi) allegedly use big data and algorithms to provide different prices to different users.
Another issue is the illegal over-collection and use of personal data, with Chinese regulators calling out a number of apps, developed by Bytedance, Kuaishou, Baidu, Tencent and Alibaba, in May this year. The issue of closed platforms is also a problem in China, with Tencent and Alibaba’s eco-systems closed to each other. Predatory pricing – where platform companies give heavy subsidies to users to drive out competitors, and subsequently put up prices again once the industry is consolidated – is also allegedly common in the Chinese internet space.
We believe the government’s increasing concern over these ESG issues, together with a number of domestic and international events (e.g. Jack Ma’s criticism towards financial regulations, China’s desire for semiconductor localisation following US technology bans and political transition to Xi’s third term in 2022), have unleashed the current regulatory cycle.
What the Chinese government wants to achieve
We believe there are two main driving forces behind the current regulatory cycle in China. Firstly, after declaring victory in eradicating poverty early this year, President Xi has shifted the focus to “common prosperity”, with the aim of closing the gap between the rich and the poor. Secondly, China has declared 2021 to be the year it will “prevent the disorderly expansion of capital”. China’s internet sector has raised billions of dollars in the past decade, and the government is keen to ensure that this capital is not used to power monopoly, promote rent-seeking, harm merchants or abuse users.
The Chinese government has now initiated regulations and investigations in multiple areas. Alibaba and Meituan have faced anti-trust investigations and committed to making changes; Didi, which collected sensitive personal data on trips and travels, is now subject to a cybersecurity review. Tencent and other companies have been asked to rectify their data collection practices.
