China's Regulators Punished Tech Giants. What Could Come Next. - Barron's

China's digital payments firm Alipay in Shanghai. Regulators have cracked down on internet companies with antimonopoly measures.

Hector Retamal/AFP via Getty Images

Chinese stocks slid on Friday as regulators fined a dozen companies, including Tencent Holdings, amid Beijing’s ongoing antimonopoly crackdown of internet companies. Plus, the chief executive of embattled Ant Group resigned, and reports surfaced that Alibaba Group Holding  could face a hefty fine though softer regulatory measures than those targeting fintech affiliate Ant.

Investors have closely monitored how regulators deal with Ant, and Alibaba (BABA) and Ant co-founder Jack Ma, whose comments last fall irked Beijing officials ahead of the scuttling of Ant’s much-anticipated IPO. Ma’s low profile late last year sparked concerns about his whereabouts until he recently reappeared at a public event.

The Wall Street Journal, citing officials familiar with regulators’ thinking, on Friday reported Alibaba could face softer regulatory treatment provided it distances itself from Ma and is more closely in alignment with the Communist Party.

Broadly, policy watchers see the spate of measures as a warning shot but one that didn’t jeopardize the long-term viability of the companies. “The Alibaba move suggests that Beijing will pursue only a light touch regulatory response around tech platform business practices, sending a message to be careful and clean up some of the bad business practices, but they won’t take heavier measures given the importance of Alibaba and Ant to short-term financial stability and longer term economic growth,” said Eurasia Group’s Paul Triolo via email.

That sentiment was echoed by TS Lombard economist Rory Green, who described the latest spate of developments as a positive sign. “Beijing has made its political point and is now focusing on valid antimonopoly, data, and financial risks. Forthcoming regulation on data sharing and monopolistic practices will benefit small-, medium-sized enterprises, tech small-caps and the wider economy,” Green said via email.

But investors were still rattled, with the KraneShares CSI China Internet exchange-traded fund (KWEB) down 4% at $83.96. Shares of Tencent Holdings (700. Hong Kong) fell 4% to HK$650.50 overnight while shares of Alibaba slid 4.5% Friday morning to $229.82. The sector has been under a cloud since the scuttling of the Ant IPO and had taken a hit recently as investors focus more on parts of the market that have lagged behind during the pandemic, with the China internet ETF down 15% in the past month.

The year could bring more regulatory and antitrust developments as China hashes out its approach to the digital economy—and there is more clarity on the fine Beijing levies against Alibaba and how it may make businesses like Ant’s restructure.

“The Alibaba investigation is just the start. Most likely more tech companies will be subject to antitrust investigation. And the antitrust fines will be larger than before,” says Winston Ma, formerly a managing director and head of the North American office of China’s sovereign-wealth fund, China Investment Corp., and co-author of The Hunt For Unicorns: How Sovereign Funds Are Reshaping Investment in the Digital Economy.

According to The Wall Street Journal, regulators in China are considering imposing a fine on Alibaba that could be larger than the $975 million fine Qualcomm faced in 2015 for anticompetitive practices. While a large number, it is a relatively manageable one given Alibaba’s financial heft. Also under consideration are possible divestments and curtailment of certain practices.Though fund managers don’t expect these developments to derail the longer-term attractiveness of companies like Tencent and Alibaba, it could shave the upper-end of growth projections for the internet behemoths as acquisitions and minority investments could garner increased scrutiny and it could dampen market share gains and the array of ways companies can monetize their immense user bases, fund managers don’t see these developments upending longer-term prospects significantly.

Sentiment around the two companies could also diverge, with the focus on Alibaba seen as more company-specific related to Ma’s comments and questions about Ant Group’s financial business model, says Brian Bandsma, an emerging markets manager at Vontobel Quality Growth, who has reduced holdings in Alibaba but not Tencent. Though Tencent may not come out unscathed, Bandsma says it could be less vulnerable as regulators aren’t focusing on the videogames and advertising that Tencent is more reliant on.

More broadly, fund managers have been looking elsewhere beyond the big Chinese internet stocks, especially as the broader global economic recovery takes hold. Though the latest development may have curtailed the risk to Alibaba’s multiple, rising interest rates and more difficult year-over-year growth comparisons will continue to pose a problem to some of the big internet winners of last year, says Laura Geritz, an emerging markets manager who heads Rondure Global Advisors. That said, she is underweight the internet sector, instead favoring tourism-related companies like convenience stores in Thailand and the Philippines and those well-positioned for economies reopening through the year.

The takeaway for investors: Proceed with caution around China’s internet stocks, not just because of continued regulatory uncertainty, but also because investors are shifting more into companies poised to benefit as the global economy recovers from the pandemic.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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