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The Chinese Technology Crackdown. Where To Go From Here?
With the unforeseen and rapid nature of the Chinese government’s regulatory measures on Chinese tech companies, on-shore and international investors are wondering what to do next.
06 September, 2021

On the 2nd of July this year, Didi’s (NYSE: DIDI) global shares fell more than 10% in New York after the Cyberspace Administration of China (CAC) stated on its website that Didi was not allowed to register new users during its investigation. The CAC did not offer details regarding its investigation, stating it was to prevent data security-related risks, citing the Chinese national security law and cybersecurity law.

The announcement from the CAC came two days after Didi began trading on the New York Stock exchange. The Chinese ride-hailing company raised $4.4 billion during its initial public offering, and was worth $68 billion during its U.S debut.  The CAC’s timing of its investigation is comparable to the stoppage of Ant Group’s (HK: 6688) IPO in the Hong Kong stock market after an alleged discord between founder, Jack Ma, after summoning Ma and other executives mere days before the public offering in November.

Didi’s investigation was just the beginning of the crackdown on Chinese tech firms, as the Chinese government began imposing stricter regulations throughout the consumer and service technology industry throughout July and August.  

Private Education and Video Game Industry Under Fire 

On the 22nd of July, new regulations set by the Chinese government sent shockwaves throughout the international market. The government imposed new rule changes to their private tutoring and private education sector in an effort to boost the country’s birth rate by lowering the average cost of living. Under new regulations, all educational institutions offering tutoring on school curriculums will be registered as non-profit organisations. No new licenses will be granted, according to the official documentation. 

The news came as a shock to many investors, triggering a massive sell-off of Chinese education companies on the 22nd of July. Notably, Hong Kong- and New York-listed shares of Chinese private education companies such as U.S-listed TAL education group (NYSE: TAL) and Hong Kong-listed Oriental Education & Technology Group (HKG: 9901) fell up to 80% and 73% respectively throughout the trading day.

Come the 3rd of August, Chinese state newspaper Xinhua published (and then deleted) a report that labelled online gaming as “spiritual opium”. The report put forward the notion that it was harming the country’s teenagers, singling out Tencent Holdings (HKG: 0700), China’s largest video-game operator as the cause for the problem. Although the paper reduced their criticism of the video game industry the following day, Tencent still lost over 10% in the morning trade session on the first Tuesday of August. The criticism of Chinese entertainment triggered fears in other sectors. TikTok’s rival Kuaishou (HKG:1024) fell more than 15% in Hong Kong after the lock-up period expired on the 4th of August, allowing some of the video giant’s backers to dump their stock. 

After the criticism on the 3rd of August, on the 30th of the same month, the Chinese government imposed regulations to ensure that citizens under the age of 18 can only play up to 3 hours of video games a week. American depository receipts of Chinese gaming giant NetEase Inc. (NASDAQ: NTES) dove 8.8% while Tencent Holdings dropped 1.1% on the day

The Aftermath of the Chinese Tech-Selloff 

Bloomberg reports that during the months of July and August, the regulations imposed by the government on their tech firms incurred a $1.5 trillion sell-off, and it seems it is not going to get any better for Chinese tech traders in the near future. 

Despite the significant decrease in share prices across the board, equity investors are still not enticed by the current entry point. On the 21st of August, Alibaba Group Holding’s Limited (HKG: 9988) slumped to a record low in Hong Kong. In the same week, Tencent warned investors to prepare for further regulatory curbs on the Chinese tech sector.

Fund managers have told Bloomberg that they do not foresee the Chinese government’s barrage of regulations ending anytime soon. With one manager,  Li WeiQing of Shenzhen-based JH Investment Management Co. stating that buying signals will only begin to emerge once the policies of the government are clear.  

What Are Some Investors Saying Now?

With the unforeseen and rapid nature of the Chinese government’s regulatory measures on Chinese tech companies, on-shore and international investors are wondering what to do next. Some financial institutions like JP Morgan Chase & Co. believe that the government clampdown on tech companies shouldn’t be a cause to drastically alter their positions.

Gabriela Santos, a New York-based market strategist at JP Morgan stated that it was “business as usual for investing in Chinese equities,” and that everyone should not view everything the Chinese government does as an independent development but something that’s “a bigger piece of the puzzle.”. She continues to affirm that she “disagrees with the thesis that China is now uninvestable”, rather that investors should be more cautious in navigating the volatility, something she pointed out that is rather common in the Chinese market.

Other individuals, most notably one of China’s most high-profile bankers, Bao Fan, is turning his attention to growth stage enterprises. China Renaissance Holdings Ltd. (HKG: 1911)- the company which Bao chairs –  known for its portfolio holdings of Chinese consumer-facing internet companies – has now turned to backing start-ups deemed less susceptible to government regulation. Bao is looking to back companies that provide smart industrial technology that has the potential to transform supply chains, contracts and transactions. Companies in China Renaissance’s portfolio include businesses within the healthcare sector as well as the smart industry sector. Companies including Sinopharm Dental, Fapon Biotech, JingWei HiRain Technologies, and Svolt Energy Technology Co. Ltd. China Renaissance are also investing in driverless technology, with holdings in both NIO Inc. (NYSE: NIO) and Li Auto Inc. (NASDAQ: LI).  

China’s regulatory measures have severely affected investors over the last two months. Despite the positive outlook by some investors, many are still unsure of what the Chinese government has in store for its country’s tech companies. 

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