China would prepare another offensive against technological giants

From Alibaba to Tencent, China’s biggest companies are once again at the center of a stock market storm, sparked by speculation that Beijing is preparing another offensive against the world’s biggest internet arena.

Three of China’s most valuable companies — Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Meituan — lost more than $100 billion over the course of three turbulent days. It’s a notable turnaround from just a week ago, when investors like Charlie Munger spotted bargains among Chinese tech giants following a $1.5 trillion 2021 sell-off. Macquarie issued a report this month titled “peak of repression.

Now, investors are frantically trying to analyze a series of events that suggest Beijing is once again preparing to rein in its giant private sector.

When Alibaba reports its results on Thursday, its executives will once again face questions about Beijing’s intentions for a sector subjected to unprecedented regulatory restrictions and punishment last year, after the Xi Jinping government launched a campaign of “common prosperity” to curb the excesses of the technology sector and force them to share the wealth.

The bloodshed began on Friday, when the head of state economic planning demanded that Meituan and his counterparts reduce the commissions they charge to restaurants in regions affected by the pandemic. On Monday, a pair of unverified online posts that went viral suggested that Tencent, which weathered the onslaught of 2021 better than most, was facing a major regulatory move, forcing its PR chief to conduct a unusually aggressive denial.

Later that day, Bloomberg reported that Beijing had ordered state-owned companies to report their exposure to Ant Group Co., owned by Jack Ma, the company hardest hit in a year-long government campaign against “disorderly capital.”

“The events of the last 48 hours are a wake-up call that regulation is not over.” said Michael Norris, an analyst at Shanghai-based consultancy AgencyChina. “We are going to be in a situation where regulation and the slowdown in the Chinese economy are going to go hand in hand. It’s going to be a challenge for companies that rely on consumers and merchant advertising to be able to do this year’s numbers.”

While many investors were counting on an end to relentless regulatory pressure, fundamental doubts remained about the ability of China’s tech giants to resume the growth they had enjoyed during a decade of near-limitless expansion. Alibaba and Tencent were already expected to post their slowest pace of quarterly revenue growth since their IPOs.

The shocked sector was expected to act more cautiously this year than ever, for example by slowing hiring and acquisitions from previous years. Didi Global Inc. is preparing to cut the number of employees by as much as 20% ahead of its Hong Kong IPO, Bloomberg News reported last week.

Twitter-like Weibo Inc. has begun realigning its business since the beginning of the year, assigning some employees to new roles before laying them off, the company said in a statement last week, in response to online posts He claimed that the company was laying off an ole people.

“The golden period of the internet in China is probably already behind us,” said Jessica Tea of ​​BNP Paribas Asset Management. “That said, we believe the height of regulatory intensity is likely behind us this cycle, as we move from policy normalization to growth normalization.”

Now, the latest demands placed on Meituan and its fellow food delivery partners, such as Alibaba’s Ele.me, suggest they too are being pressured to provide a national service, with uncertain long-term implications.

The move to slash food delivery fees shows Beijing is going to enlist wealthy private companies to ease the burden on smaller businesses hit hard by China’s economic slowdown and its zero-Covid strategy, analysts wrote this week. of Goldman Sachs led by Ronald Keung.

Its objective is “help companies in affected sectors overcome the impact of covid-related challenges by reducing their costs”, they pointed out. Although it may affect the short-term profitability of Meituan and Ele.me, a loss-making Alibaba company, analysts “they don’t see any long-term impact on Meituan’s business”.

The risks to growth are especially prominent at Alibaba, which was fined a record $2.8 billion last year after regulators forced it to end certain business exclusivity practices that were supposed to help it outperform rivals. The regulatory hit has slashed the company’s market value from $858 billion in October 2020 to about $310 billion.

His prospects are already difficult. Analysts expect revenue to rise just 11% in the December quarter, marking the slowest pace of growth since it went public in 2014. Alibaba’s operating margin has fallen to 10.7% from 30.4% in 2017. in the twelve months ending in September, pressured by new competitors and the weakening of economic growth.

The company has seen video streaming platforms Douyin — Byte Dance Ltd.’s TikTok local sibling — and Kuaishou Technology drive business away from its Taobao and Tmall marketplaces. To make matters worse, his main online influencer, Viya, was embroiled in a tax evasion scandal.