Chinese Regulators Crack Down on Tech Giants — Stocks Come Under Pressure

When it rains, it pours – and China’s biggest tech companies are in the middle of a hurricane.

On Mar. 12, China’s antitrust regulator followed through on its threats to rein in the internet economy by fining 12 companies, including Tencent ($TCEHY) and Baidu ($BIDU), over past acquisitions and investments.

Caught in the reign

The fines are the latest in a slew of crackdowns on China’s tech giants over the last few months:

• Nov. 2020: Chinese authorities halted Ant Group’s $37b IPO – which is 1/3 owned by Alibaba ($BABA)
• Dec. 2020: Regulators launched antitrust investigations into Alibaba – and became the first antitrust investigation into a Chinese tech giant for power abuse.
• Feb. 2020: China finalized new antitrust rules – which could prevent tech giants from engaging in monopolistic practices

Since then, authorities have mandated that companies submit reports when adding new functions that “have the ability to mobilize society” – a likely reference to their controversial banning of Clubhouse in February.

Sunny days were just a tax haven away

Historically, many Chinese companies have registered offshore tax havens in a structure known as variable interest entity (VIE). For years, it was unclear how antitrust regulations applied to these companies.

Those days are no more. The new antitrust guidelines allow China to bring enforcement action retroactively, which set the stage for a recent wave of fines.

Although the fines were relatively small – 500,000 yuan ($77,000 USD) – the message was clear: if you want to follow through with a merger, acquisition, or investment, you better be getting government approval first.

For investors… Checking the forecast

North American investors have access to the fast-growing Chinese economy via the 200+ Chinese companies listed on major US stock exchanges – but here are  risks to consider before investing in China:

• Lower accounting standards – to address the historically shoddy accounting practices of Chinese companies, the U.S. Congress passed a bill forcing companies to meet U.S. accounting standards to be listed on U.S. exchanges
• Political risk – an otherwise promising company may find itself handicapped if its interests clash with the interests of the government
• Bubble warnings – China’s top banking regulator recently warned of the need to reduce debt amid the rising risk of bubbles

China’s recent actions could slow the growth of Chinese tech giants and weigh down their stocks. After the most recent set of fines, investors should be cautious with the storm clouds on the horizon before diving into Chinese stocks.