China’s technology sector once brought lucrative returns to global investors betting on rapid growth in the world’s second-largest economy. But the good times are gone for now, as a government-led crackdown multiplies risks and depresses valuations.
The situation has led some of the world’s best-known investors to publicly express their reservations about investing in China. Ark Invest’s Cathie Wood, for one, has dumped shares in Chinese web giant Tencent and property site KE Holdings, and said valuations of China stocks would probably remain down for a while. Billionaire Masayoshi Son, chief executive of Japanese conglomerate SoftBank (which operates the Vision Fund) and a famous funder for Chinese technology startups, said he is now pulling back from investing in the country and waiting for more regulatory clarity.
“New rules and new regulations are beginning to be implemented,” he said during a recent news conference. “Until things get settled, we want to wait and see.”
Son, who famously made an early bet on Alibaba, now counts the stake in the Chinese e-commerce giant for 39% of SoftBank’s $239 billion in net asset value as of June this year. But Alibaba shares have tumbled about one third in value since peaking in February, and the company had to swallow a record $2.8 billion fine in April for monopolistic practices.
In the meantime, Chinese ride-sharing giant Didi Global, in which SoftBank holds a multibillion-dollar stake, is being subjected to a cybersecurity investigation and now trades at almost 40% below its initial public offering price. Analysts say shares of Chinese technology companies face even more downward pressure, as Beijing is determined to regulate the sector, and bring it in line with the state’s goal of ensuring data security and promoting more equal development.
“The regulatory pressure and regulatory scrutiny over China’s tech companies are still tightening up and it is not just a campaign that is going to fade away in a couple months,” says Feng Chucheng, a partner at Beijing-based research firm Plenum.
Feng likens the crackdown to China’s anti-corruption campaign, which first kicked off in 2012, and defied expectations of just being a fad to last into its ninth year. Beijing’s crackdown on the private tutoring industry is also much worse than expected. In a bid to alleviate parents’ financial pressure and boost falling birth rates, the government ordered in July tutoring companies seeking to teach school subjects to go nonprofit, and banned them from raising capital. The measures subsequently led to a broad sell-off in Chinese stocks, as investors ponder which industry could be targeted next.
The answer may not be one, but multiple areas. In a policy blueprint jointly issued by the State Council and the Communist Party’s Central Committee on Wednesday, authorities vowed to strengthen legislation and law enforcement in a sweeping range of sectors including anti-monopoly, national security and technology innovation. they also pledged to “make up for shortcomings,” and do research for new laws in areas such as artificial intelligence, cloud computing and internet finance.
Alex Wong, director of asset management at Hong Kong-based Ample Capital, says the government’s greater control over data collection and usage could hurt earnings in particular. This is because the likes of Alibaba and Tencent could face new limits in promoting tailored advertising and location-based services, derailing a once fast-growing area.
“The regulatory crackdown actually targets data collection and usage, and this is a very key destruction of value,” Wong says. “People won’t be willing to pay a premium [for these companies] again.”
Against this background, it may not be wise to invest and hold, although the pricing of many Chinese technology stocks has reached historical lows.
“Until it achieves a level of legal and regulatory stability, China’s investment story will remain much less compelling than it had been in quite some time,” says Brock Silvers, a Hong Kong-based chief investment officer of Kaiyuan Capital. “Even were it [regulatory crackdown] to cease today, recent moves have indelibly highlighted significant risks to previously complacent investors.”