Chinese tech giants have lost as much as $50 billion in market value since Tuesday, August 17, 2021, when the State Administration for Market Regulation (SAMR) proposed new anti-trust regulations intended to tame the anti-competitive behaviour among big tech in the country, as well as protect consumers from harmful business practices by these firms.
Here is a brief breakdown of the new rules the SAMR announced on announced Tuesday:
Business operators will be forbidden from faking statistics and information about their product orders, sales and user reviews. The SAMR asserts that this fabricated information misleads customers into making decisions they would otherwise not have made if they had been presented with accurate information about their business operations and statistics.
Some companies have a (secret) tendency of paying numerous people to fabricate reviews about their competitors or rivals intended to hurt their reputations and use that to their advantage.
Other practices targeted by the SAMR include companies using data, algorithms and other means to divert web traffic from their rivals. This also includes those companies that create obstacles to prevent customers from installing or running rival services on their devices, which is seen as unfair competition.
The general public would view these measures as good for customers, intended to protect their privacy and let them choose what services to use and levelling the ground for fair competition among big, mid, and small-cap companies. Still, big tech’s revenue is not immune to the significant changes imposed.
One such company that has been heavily penalised is e-commerce tech giant Alibaba Group Holding Ltd (ticker: BABA). According to Bloomberg.com, Alibaba’s stock has dropped a significant 5.4% in Hong Kong today, Thursday, August 19, 2021, to record lows on the Hong Kong Stock Exchange (HKEX). Alibaba’s stock is currently trading at 162.10 HKD in Hong Kong.
China’s regulators are targeting several things like: user privacy, data collection and usage, treatment of customers and employees like drivers of ride-hailing companies, online advertising for the algorithms that target specific customer segments, online gaming, as well as live streaming services providers, among others.
Alibaba is also part of the 43 companies found guilty of illegally transferring user data like contact lists and location history by the Ministry of Industry and Information Technology (MIIT). The Ministry gave these companies up to August 25, 2021, to make rectifications or face punishment.
This year alone, Alibaba’s stock has dropped as much as 30% in Hong Kong, and it has been outperformed by the Hang Seng Index (HSI), which is down 7.85% year to date. The company is listed in the U.S stock exchange as well, and its shares have also dropped 26% this year so far.
Other companies that are seeing their stock sink due to these regulations include another entertainment and tech giant Tencent Holdings (ticker: TCE). Although it released an earnings report with results that exceeded analysts’ expectations for Q2 FY2021, the company started off Q3 FY2021 with a significant setback when state media called its online games “spiritual opium” and explained that its games are taking a toll on children. Since August 3, 2021, the date of the article’s publication, Tencent’s shares have dropped as much as 7%, and the company is struggling to recover from that slump. In a bid to please the regulators, Tencent has announced adjustments in its operations. Still, during its quarterly earnings call on Tuesday, its executives said they expect the regulators to announce even more regulations.
Ride-hailing company Didi Global (ticker: DIDI) seems to have chosen the wrong time to go public. On June 30, 2021, Didi, a Chinese ride-hailing company, had its shares listed on the New York Securities Exchange (NYSE) in what was the second-largest Initial Public Offering (IPO) by a Chinese company in the U.S after Alibaba. The company raised as much as $4.4 billion on its IPO debut, taking its market cap to upwards of $70 billion, becoming the second-largest ride-hailing company globally by market capitalisation only behind the market leader, Uber (ticker: UBER).
Less than a week later, Didi saw its stock fall as much as 5.3% on the New York Stock Exchange when the Cyberspace Administration of China (CAC) ordered the company to remove its app from online stores until the company adjusts customer data handling to the regulator’s guidelines.
According to the Cyberspace Administration of China (CAC), an investigation into how Didi managed customer data found that the company allegedly violated how it handled riders’ personal information and its treatment of drivers spread in over 16 countries 400 cities worldwide.
Other tech names that are feeling the heat from regulators are food-delivery giant Meituan (HKG: 3690), which is down 7.2%, and video streaming giant Kuaishou Technology (HKG: 1024) that has dropped as much as 4.7%.
It should be noted that when share prices drop, companies lose market value and last month alone, Chinese companies with shares listed globally have lost about $1 trillion in market value as a result of the anti-trust, privacy, live streaming, and data crackdown on tech giants by Chinese regulators.
Because a drop in share price means holdings become less valuable, a few global fund managers have decided to dump their Chinese stocks holdings in the past few months, and others are wondering whether holding Chinese stocks is even worth it. One company that sold its Chinese holdings is Catherine Wood’s Ark Invest, an investment management firm. The firm holds assets worth $60 billion.
Sine Gao, a Fund Manager at Taicheng Capital Management Co., said that investors would soon reach a point where they will stop pricing in additional policies that damage their holdings and noted that the growth of Chinese Big Tech might not resume to its previous rate after these incremental regulations.