Beginning in late 2020, Beijing’s regulatory onslaught on the Chinese IT industry cost the nation’s largest corporations more than $1 trillion in revenue.

There are currently indications that the central government is changing its posture toward internet behemoths like Alibaba, a development that might be advantageous for Chinese tech equities.

“The regulatory headwinds that we had in the past two years … that’s now becoming from a headwind to a tailwind,” George Efstathopoulos, portfolio manager at Fidelity International, told CNBC.

In a move “intended to unlock shareholder value and boost market competitiveness,” Alibaba unveiled a significant reorganization on Tuesday that aims to divide its business into six groups.

The “disorderly expansion of capital” of internet companies that have expanded into big conglomerates has been a frequent target of criticism from China’s government during the past two years. In contrast to Beijing’s worries, a portion of Alibaba’s release emphasized that these fragmented enterprises might receive outside funding and even go public.

According to Efstathopoulos, the action can be interpreted as approval from the highest levels of the Chinese government.

“You have senior leadership blessing for unlocking value, and, to me, that is a fantastic indication where we are now essentially moving from regulation not being the issue that it was,” Efstathopoulos said.

The restructuring of Alibaba is hardly the only indication that Beijing may be lessening its oversight of the digital industry. For the first time in months, Alibaba founder Jack Ma made an appearance in China’s media.

Some attribute Ma’s comments that appeared to be critical of China’s finance regulator in October 2020 as the impetus for the commencement of the tech crackdown. A few days later, Ant Group, the part of Alibaba’s financial technology division controlled by Ma, was forced to abandon its huge dual offering in Shanghai and Hong Kong after hearing from regulators that it did not meet the standards to go public.

After this, the Chinese government levied hefty antitrust fines against Meituan, the world’s largest meal delivery service, and Alibaba, as well as enacting several regulations covering everything from data privacy to the usage of algorithms by businesses.

It has been assumed that Ma’s homecoming in Hangzhou, where Alibaba is based, is another another indication of Beijing’s improved attitude toward the IT industry and businesspeople.

“Jack just didn’t show up in Hangzhou because he was tired of traveling around. I think it was well orchestrated and fits with the government’s campaign to demonstrate that, you know, they are relaxing pressures on their private sectors and are welcoming the rest of the world,” Stephen Roach, a senior fellow at Yale University, told CNBC’s “Squawk Box Asia” on Tuesday.

Over the past few weeks, there have been additional indications of regulatory loosening.

The gaming industry was severely impacted in 2021 as officials in China grew concerned about youth addiction. For several months, Chinese regulators put a hold on the approval of brand-new game releases. Authorities started to approve new games in April of last year, primarily from domestic companies. A number of international video games were approved for release in China this month by the organization that oversees video game licensing.

In the meantime, Didi, a major Chinese ride-hailing company that was affected by the regulatory reform, unveiled intentions to grow its operations. Didi went public in the US in June 2021, but only days after listing, Chinese regulators began to examine its cybersecurity.

It eventually delisted from the New York Stock Exchange and plans to float in Hong Kong.

Cristiano Amon, the CEO, traveled to China and spoke with leaders of the government.

China is opening up to the indigenous tech industry while seeking global enterprise at the same time. Due in part to the nation’s harsh Covid regulations and regulatory tightening, its economy has suffered over the past two years. Now, the government expects the economy to increase by about 5% this year.

It will require the assistance of private companies, notably those in the tech industry, to do that.

“China is facing both weak economic growth and rising tech competition from the U.S. It’s a pretty tough position to be in. So they need the economy to fire on all cylinders. Tough regulations on big tech platforms just doesn’t make sense at this juncture,” Linghao Bao, tech analyst at Trivium China, told CNBC.

Xin Sun, senior lecturer in Chinese and east Asian business at King’s College London, cautioned that although there are encouraging indicators for investors, there are also reasons to be cautious.

To “tear apart Alibaba’s commercial empire and to minimize its enormous influence that may potentially pose a challenge” to the Chinese Communist Party’s authority, according to Sun, is the goal of the Alibaba reorganization.

“After restructuring, the organizational structure of Alibaba will become more decentralized, and the control over its assets, data and resources will be less concentrated. The Party could then impose stronger political control over each of the new entity more easily,” Sun added.

He issues a warning against exaggerated confidence over the Chinese technology industry. Although the most recent actions provide regulatory certainty, many uncertainties still exist over how other internet titans may suffer.

“In the short run, Alibaba’s restructuring might be perceived as the routinization of the government regulatory actions and provide some regulatory certainty for the sector,” Sun said.

“In the long run, however, it raises more questions about the fate of other tech giants. Will Tencent, Meituan, and ByteDance be broken up too? If so, do they make their own decisions or do they just wait for the order from the government? Such uncertainty will keep weighing on entrepreneurs and investors, undermining their confidence”.

(Adapted from CNBC.com)

Categories: Economy & Finance, Entrepreneurship, Regulations & Legal, Sustainability