China flexed its muscles on Monday by fining Alibaba [$BABA] and two Tencent Holdings [$TCEHY]-backed companies, yet another signal that Chinese internet companies may face stern regulations that could potentially bleed into their stocks in the near-term.
China’s State Administration for Market Regulation levied fines of 500,000 yuan (or $76,500 U.S.)—minuscule, but the maximum permitted under anti-monopoly laws—against Alibaba and China Literature and Shenzhen Hive Box Technology, both backed by Tencent. Regulators assert that the companies didn’t put up the proper disclosures for past acquisitions. TikTok Just Won’t Stop
The fines come weeks after Chinese regulators revealed draft antitrust guidelines that analysts said were focused on the country’s large internet Goliath’s. Analysts expect more regulatory moves ahead. “The Communist Party has realized that fin-tech has prospered in the regulatory gray area between finance and technology,” says economist at TS Lombard, Rory Green. “At the same time, we are seeing a growing acknowledgment of the negative side effects of large tech monopolies. The impacts range from competition, productivity, and financial risks.”
Green draws a parallel to the regulatory pressure to that in the U.S. and notes that Baidu [$BIDU], Alibaba and Tencent represent roughly the same share of Chinese venture capital spending as Alphabet’s Google [$GOOGL], Amazon [$AMZN], and Facebook [$FB] represent of U.S. venture capital spending. Amid the top five Chinese internet companies, four are in bed with Tencent, which has been a savvy investor in Meituan Dianping, JD.com [$JD], and Pinduoduo [$PDD]. The FTC Wants Zuck to Get Rid of IG & WhatsApp
The moves are in line with China’s “dual circulation” economic initiative as regulators try to ward off the internet giants from suppressing competition in China’s economy, says Winston Ma, formerly a managing director and head of the North American office of China’s sovereign-wealth fund and the China Investment Corporation. “The government’s current focus is to make small and medium enterprises to become more active and competitive, and to generate more domestic jobs as well,” he adds.
On Monday, shares of Alibaba dipped 2.5%, to $257.96; shares of JD.com fell almost 3%, to $80.15, and the iShares MSCI China exchange-traded fund (MCHI) was down 1% at $78.69. The change in regulatory climate is negative for listed Chinese technology companies—and for MSCI China, where these companies are heavily represented, but positive for small- and medium- enterprises and the broader technology ecosystem, Green says.
As Chinese stocks see a better earnings outlook, Sean Taylor, DWS head of emerging markets, favors financials and insurance companies, whose valuations are attractive, and climate-related sectors that should benefit as China moves forward on its latest economic five-year plan. See Spot Run: Softbank Sells Boston Dynamics to Hyundai