Chinese internet stocks are sliding as proposed regulations took aim at technology platform companies, marking the second reminder in a week of the regulatory risks facing some of the world’s biggest internet companies.
(ticker: BABA) and
(JD) were among those down as much as 6% Tuesday morning. The
KraneShares CSI China Internet
exchange-traded fund (KWEB) was down almost 4% at $72.98.
China released an “Antitrust Guideline Proposal on Marketplace Models” to seek public opinion on a draft regulation that analysts think could lead to antimonopoly measures focused on internet marketplace companies. Those stocks have been among the biggest winners so far this year.
The draft regulation added to the downward pressure tech stocks have faced in recent days. Investors are shifting toward more battered and economically sensitive companies in response to positive news about a potential coronavirus vaccine and Joe Biden’s victory in the U.S. presidential election
And it comes on the heels of new regulations that scuttled Ant Group’s dual listing, in what was expected to be the largest initial public offering in the world, and backlash against controlling shareholder and Alibaba co-founder Jack Ma.
Taken together, all that raises questions about the strong gains logged by Chinese internet giants since the pandemic began.
“It’s just a reminder that China is a highly-regulated place. We get one of these reminders every two to three years,” says Laura Geritz, manager of the Rondure New World Fund. Geritz owns many of these internet companies in the fund, but has favored shares of companies that sell things on their platforms. An example is
Anta Sports Products
The draft rules, from China’s State Administration for Market Regulation, are part of a longer-term effort to rein in the big platforms for what regulators increasingly believe are major monopolistic practices, according to Paul Triolo, head of global technology policy at Eurasia Group. They amount to a warning shot, he said via email.
Some of that concern centers around the dominance of Alibaba and
(700. HongKong) in payments. Regulators are trying to implement measures that treat these big technology platforms more like banks, resulting in requirements for reserves that were imposed on Ant Group, Triolo said. That concern comes as the People’s Bank of China rolls out plans for a digital yuan.
The latest guidelines aim at creating a “fair and competitive landscape” for the marketplace economy, lower entry barriers for rivals, and strengthening antitrust regulation to encourage innovation and protect platform operators and consumers, said Citi analyst Alicia Yap in a note to clients.
If some of the guidelines are passed, Yap said, it could hurt companies financially if the use of personalized targeting on product and content recommendations are reined in. All e-commerce platforms would feel the pain, but it would be especially rough for Alibaba Group (BABA), Pinduoduo (PDD), and JD.com, though to a lesser degree, Yap said.
Measures dealing with “forced exclusivity” that limit competition could hurt
(3690. HongKong) temporarily, since it has had specific agreement with certain restaurants in the past, Yap said. But she said the company could keep its share of the delivery market, citing its “operation efficiency and effective execution.”
Removing forced exclusivity could be a small win for JD.com and Pinduoduo, Yap said, writing that both have complained some brands and merchants couldn’t stay on their platforms because of competitive pressures. Guidelines around bundling of products such as tickets and hotels without explicitly telling customers could limit the aggressiveness of online travel agencies’ marketing tactics and temporarily slow down cross-selling efforts, Yap said.
The guidelines—and concerns a regulatory cloud could loom over stocks—could give shorter-term investors a reason to turn negative on the sector broadly, Yap said. But she views any further selloff in companies with relatively less risk, such as Tencent, Meituan and JD, as a buying opportunity.
Similarly, Geritz said via email that each of the past regulatory concerns have ultimately offered a good buying opportunity.
Still, it could take time for that to play out since the latest regulatory clouds have come while investors are moving into more cyclical, recovery-oriented stocks and out of work-from-home beneficiaries like e-commerce companies and technology platforms.
Another potential catalyst for volatility is Alibaba’s big shopping event, Singles Day, on Wednesday. Watch out if sales aren’t as strong as expected.
Write to Reshma Kapadia at [email protected]