The crackdown on Chinese tech

Within the past month there has been major a crackdown in the Chinese technology sector causing billions of dollars to be wiped from the market cap of many Chinese corporations. Why has the Chinese government chosen to do this, how has it affected some of China’s largest businesses and how have investors reacted?

One of Xi JingPing’s main goals is to maintain the stability of the Chinese communist party. The first major exhibition of this was in November 2020 with the suspension of Ant Group’s IPO after Jack Ma’s comments which suggested the Chinese communist party was ill-suited in fostering healthy innovation. After this suspension, regulators imposed new regulations that affected online lending and directly impacted Ant’s lending and credit business. Ant group is still yet to go public.

Fast-forward to 2021 and Beijing’s increased regulation in China’s technology industry, used to combat issues with data security, has eroded $87bn from some of the wealthiest tycoons since the beginning of July. This regulation has caused major selloffs as investment in eCommerce and gaming has fallen by 54% and 96% to $4bn and $121m respectively.

One of the worst affected has been Colin Huang, founder of Pinduoduo, who has lost one third of his total wealth.

Alongside gaming and eCommerce, companies in the online tutoring sector, who saw exponential growth at the start of the pandemic, have also been hit considerably hard. Businesses in this industry have been told to restructure their business models as to become non-profit organisations.

Although this may be linked to China’s fight against big tech, it has also been used to reduce the bad effects of private online tuition which is both a cost to parents, as well as having negative effects on the psychology of children.

With this all occurring, investors and funds are shifting their capital from eCommerce to semiconductors and biotech groups in a bid to avoid the regulatory assault on the Chinese technology sector. For example, recent Venture Capital investment has increased by 446% to $8.9bn in the Chinese semiconductor industry.

This movement makes sense since the Chinese semiconductor industry is heavily backed by a multi-million government subsidy which aims to increase the international competitiveness of Chinese firms and fight off other countries attempting to stifle China’s tech industry.

A similar story exists in the EV and renewables market which Beijing has designated as a priority to develop. This is exhibited by Shanghai’s Star 50 index which tracks companies within these industries and is already up 14% in 2021.

At this current moment, regulatory action is overshadowing the size and fundamentals of some of China’s biggest technology companies. Whether the stocks of these businesses recover will depend on the Chinese government’s willingness to let them do so. For the moment, however, investors are moving to safe havens where their money is more secure.