How long will it take for China tech to recover from the sell-off?

by IFAST RESEARCH TEAM/ pic by BLOOMBERG

ON JULY 27, Tencent Holding Ltd fell 7.7%, while Alibaba Group Holding Ltd and Meituan fell 6.4% and 13.8% respectively, causing the Hang Seng Tech Index to drop by 6.6%. 

The sell-off continued the next day as Tencent, Alibaba and Meituan fell another 9%, 6.4% and 17.7% respectively, dragging down the Hang Seng Tech Index by 8%. Over three trading days, Tencent, Alibaba and Meituan suffered cumulative losses of 18%, 13.3% and 30.7% respectively. 

This was a consequence of the July 25 announcement that China’s anti-trust watchdog State Administration for Market Regulation (SAMR) who ordered Tencent to relinquish its exclusive music licensing rights and fined the company 500,000 yuan (RM326,634.65) for violations during its acquisition of China Music Corp in 2016. 

Tencent responded in a statement it will “comply with all the regulatory requirements, fulfil our social responsibilities and contribute to healthy competition in the market”. 

Hang Seng Tech Index is now 42.9% from its February peak, and trading at the lowest level since July 2020. 

Meanwhile, tech stocks dragged the broader Hang Seng Index lower and wiped out its year-to-date gains. 

Shares of private education firms New Oriental Education and Technology Group, Koolearn Technology Holding Ltd and China Best-study Education Group crashed more than 30% as Chinese government implemented restrictions on the sector. 

New restrictions include banning educational training institutions to raise money through stock listings, while foreign capital cannot invest. 

In November last year, the government halted Ant Group’s US$34.5 billion (RM145.63 billion) mega IPO, just a few days before it was scheduled to take place. SAMR announced a new set of rules targeting the use of monopolistic practices among big tech companies. Subsequently, Alibaba was slapped with a US$2.8 billion anti-trust fine.

While Alibaba is the most high-profile target, nearly a dozen other firms, such as Tencent and Didi Chuxing Technology Co, have had fines handed out to them for violating anti-monopoly rules. 

In June, Chinese regulators launched a cybersecurity probe on Chinese ride-hailing service Didi days after its massive US IPO, leading to its sharp share price retracement. 

This is not the first time regulators have intervened and China’s tech sector has bounced back before. 

Looking back at 2018, Tencent nose-dived as much as 46.9% from its then peak amidst negativity surrounding its regulatory struggles in online gaming. 

Hang Seng Tech Index was also dragged down by the negativity and fell as much as 41.8% over the same period. 

In 2018, Tencent’s online games business was confronted with a series of regulatory challenges. 

First, the Chinese government stopped Tencent’s launch of its highly popular PC game, Monster Hunter: World. 

Next, it was revealed that China has halted all video-game approvals since end-March without a fixed resumption date, a move that effectively stifled Tencent’s ability to monetise its much-hyped new games — Player Unknown’s Battleground (PUBG) and Fortnite. 

Regulators also announced that they will restrict the number of new games, crackdown on games with inappropriate content (violence and gambling) and limit playtime for minors (under 18 years old). 

The move came as regulators look to reduce myopia and video game addiction among children and teenagers. 

However, the pullback turned out to be short-lived as Tencent and Hang Seng Tech Index subsequently tripled over the next two years (before 2021’s retracement), benefitting from the growing Internet population in China. 


The views expressed are of the writer and do not necessarily reflect the stand of the newspaper’s owners and editorial board.