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BEIJING (BLOOMBERG) – With 22 pages of vaguely worded edicts, China has cast doubt on the future of its largest Internet companies and sparked a $ 290 billion stock sell-off.
Investors are now playing with how bad it could be for Alibaba Group Holding, Tencent Holdings and other Chinese internet giants as the Xi Jinping government prepares to implement a series of new antitrust regulations.
As is almost always the case, the country’s leaders have said little about how harshly they plan to crack down or why they decided to act now. But the draft of the rules released on Tuesday (November 10) gives the government wide latitude to control tech entrepreneurs like Jack Ma, who until recently enjoyed an unusual amount of freedom to expand their empires almost everywhere. aspects of Chinese life.
The country’s internet ecosystem, which has long been protected from competition by companies like Google and Facebook, is dominated by two companies, Alibaba and Tencent, through a labyrinthine investment network that encompasses the vast majority of companies. emerging companies in the country in AI arenas. (SenseTime, Megvii) to fresh vegetables (Meicai) and digital finance (Ant Group). His sponsorship has also groomed a new generation of titans, including travel and food giant Meituan and Didi Chuxing, China’s Uber. Those who thrive outside of his aura, the biggest being TikTok’s owner, ByteDance Ltd., are rare.
Antitrust rules now threaten to upset that status quo with a variety of possible outcomes, from a benign scenario of fines to the dissolution of industry leaders. While few Chinese observers claim to know where on that spectrum the authorities will land, most see this week as a tipping point.
“The Wild West era of policy arbitrage, taking advantage of weak industry regulations, has come to an end,” said John Dong, securities attorney at Joint-Win Partners in Shanghai.
These are some of the scenarios that analysts and investors are considering:
Mild
Optimists say that regulators are simply asserting their right to supervise Internet businesses, without attempting to initiate drastic change.
Even if the authorities take action, China has a tradition of staggeringly cracking down, or setting an example for high-profile companies. Tencent, for example, became a prominent target of a campaign to combat game addiction among kids in 2018. While its stocks took a hit, they eventually rebounded to all-time highs. Alibaba has followed suit after standing up to authorities on everything from unfairly pressuring merchants to turning a blind eye to fakes. Both companies were worth about $ 800 billion before stocks began to plummet this month.
“Every Internet leader may face some impact and have to adjust their practices, but regulations are unlikely to affect their leadership,” said Elinor Leung, an analyst at CLSA Ltd. in Hong Kong. “Internet platforms, by nature, are businesses at scale.”
Liu Bo, general manager of marketing and operations for Alibaba’s Tmall, said on the sidelines of the company’s Singles Day celebration on Wednesday that he was not surprised by the new rules and that the government was “improving” supervision in several industries.
Chinese Internet stocks led by Meituan and Tencent gained at least 3 percent on Thursday, recouping some of their two-day loss.
Bad
Some analysts predict that a crackdown is coming, but directed. They point to language in the regulations that suggests a strong focus on online trading, from forced exclusive deals with merchants known as “Pick one of two” to pricing based on algorithms that favor new users. The regulations specifically warn against selling below cost to eliminate rivals.
Such strategies helped drive eBay and Amazon.com out of China and have led companies like Alibaba, JD.com and the upstart Pinduoduo to accuse each other of using dishonest tactics.
Also included in the rules is a reference to the need for official approval in all mergers and acquisitions involving Variable Interest Entities. The VIE model has never been formally endorsed by Beijing, but has been used by tech titans like Alibaba to list stocks abroad. Under the structure, Chinese corporations transfer profits to an offshore entity with shares that foreign investors can own. Powered by Sina Corp. and its investment bankers during a 2000 IPO, the VIE framework is built on shaky legal ground and foreign investors have been perennially nervous that their bets vanish overnight.
“The VIE structure has been operating in a gray area in China, and to date, there is no law that says whether it is illegal or not,” said Zhan Hao, managing partner of Beijing-based Anjie Law Firm, which is specializes in antitrust.
One concern is that the uncertainty surrounding the new rules will chill investment, acquisitions and venture capital financing until officials shed more light on what they are prepared to do.
Nightmare
Most worst-case scenarios revolve around the idea that China’s leaders have become frustrated with the boastfulness of tech billionaires and want to teach them a lesson by breaking up their companies, even if that means short-term pain for them. the economy and markets.
China’s private sector has had a delicate relationship with the Communist Party for decades, and only recently has it been recognized as critical to the future of the nation. Many commentators have attributed the recent crackdown on fintech companies to comments Jack Ma made at a conference in October, when he condemned attempts to curb the burgeoning field as shortsighted and outdated.
Buried within the antitrust rules is a paragraph that brandishes vague but seemingly dire threats: Companies that violate antitrust regulations may be barred from making acquisitions. And if allowed to continue, they may be forced to divest assets, share intellectual property or technologies, or open up infrastructure to competitors and adjust their algorithms.
“The guidelines are very likely to lead to the eventual spin-off of the subsidiaries, and could result in the elimination of many smaller non-compliant companies,” said Dong of Joint-Win Partners. “No country in the world would allow all of this to exist in one huge entity.”
Alibaba, Ant and Tencent alone commanded a combined market capitalization of nearly $ 2 trillion before last week, easily surpassing state giants like the Bank of China as the country’s most valuable companies.
Alibaba and Tencent are also key sponsors of leaders in adjacent industries such as Wang Xing’s food delivery giant Meituan and car-calling leader Didi. They have invested billions of dollars in hundreds of mobile phone and internet startups, earning the status of king-maker in the world’s largest internet and smartphone market by users.
“There shouldn’t be a shred of doubt at this point for Internet companies, never question the drive or determination of the regulators,” Dong said. “There is nothing too big to fail, not in China.”
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