China regulations spur investors to reassess tech sector
Investors are reviewing their record holdings of mainland internet companies after Beijing proposed sweeping new antitrust rules for China’s technology industry.
Leading groups including Tencent, Alibaba and Meituan-Dianping have attracted record investment during the Covid-19 pandemic, according to data from Copley Fund Research, which tracks the investment activities of more than 180 of the world’s largest funds.
But that backing “is vulnerable to a reversal given vaccine hopes and potential regulation”, said Steven Holden, director and founder of Copley Fund Research.
The shift in sentiment comes after Beijing unveiled new draft rules targeting online lending by non-banking groups that were partly to blame for scuppering the $37bn initial public offering of Ant Group, the financial technology company. The listing would have been the world’s largest and was suspended just days before it was due to start trading. The cancellation was also seen as political, after Jack Ma, Ant’s founder, had publicly criticised Chinese regulators.
Separately, the State Administration for Market Regulation, China’s competition watchdog, published new draft rules last week designed to curb the power of tech groups. The move immediately hit the shares of China’s biggest growth stocks such as Alibaba, Tencent and food delivery giant Meituan.
Bruce Pang, head of macro and strategy research at China Renaissance, a Chinese investment bank, said the new regulations raised “major concerns” from investors. “For the leaders in ecommerce, there are some headwinds ahead,” Mr Pang said, adding that the issues facing the companies were short term.
Louise Dudley, a portfolio manager at Federated Hermes, said the combination of new regulations and a move by the Trump administration to prohibit American investors from investing in companies with suspected ties to the Chinese military, had heightened risk. “It’s something we are definitely aware of, perhaps it is more of a risk now than it was a month ago,” she said.
Wong Kok Hoi, chief executive of Singapore-based APS Asset Management, said his view of the sector had “changed drastically”, adding: “I believe the bull run in the tech sector in China has halted.”
Despite the concerns, many investors said China’s tech sector had become too big to ignore given the growth rates companies were delivering.
Eric Moffett, a portfolio manager at T Rowe Price, the asset manager, said he expected that market-leading companies would emerge stronger after the recent moves had tempered “investor exuberance”.
One banker pointed to the example of Tencent, whose shares tumbled in 2018 following government proposals to curb online gaming, its core business. The person said Tencent has recovered much of its losses showing “companies tend to just become smarter in engaging with the regulator”. The company has halved its losses since its dramatic sell-off earlier in November, but is still down 5.5 per cent from before the regulations were announced.
Brendan Ahern, chief investment officer at KraneShares, a manager focused on exchange traded funds for China, said it would be hard to displace the dominance of China’s biggest tech companies. “Just because you have choice doesn’t make the alternatives viable solutions,” he said.
Additional reporting Hudson Lockett in Hong Kong