The recent developments at the Jack Ma-founded Ant Group have only served to serve as a reminder to international investors of the country’s changeable regulatory rules and the vulnerability of the sector, rather than sparking a relief rally in China’s damaged tech sector.

When China issued a $984 million fine for a unit of the Alibaba Group for breaking rules and regulations, the first market reaction was one of relief, with many market observers claiming it marked the end of a multi-year regulatory crackdown on the country’s technology sector.

However, the price of technology shares, particularly American depository receipts (ADRs) listed abroad, has hardly increased. Fund managers have a variety of justifications for staying away from the industry, such as anticipated strict regulation and a weak domestic economy.

“In short, tech policy tightening may have come to an end but will remain tight going forward,” said Jon Withaar, head of Asia special situations at Pictet Asset Management.

“The more accommodative regulatory conditions we saw in the past, which facilitated explosive growth across the platforms, have given way to higher levels of regulation and oversight which will likely mean more moderate growth in the mid to long term.”

Since Friday, when the fine was announced, both Alibaba’s shares listed on the Hong Kong Stock Exchange and its ADRs have increased by more than 9%. However, their price is still only a third of what it was in October 2020.

Since Friday, the KraneShares CSI China Internet ETF has increased by 5.4%, while the domestic CSI Overseas China Internet Index has increased by over 3%.

However, in the nearly three years since Ant was forced to postpone its initial public offering, China tech values have been decimated, and fund managers anticipate other challenges beyond merely legislative scrutiny. While rival juggernaut Amazon Inc. is trading at 59 times anticipated earnings, Alibaba shares are only 11 times.

“The golden era for these internet companies is evidently over. They have entering a long winter of price competition and market consolidation, an adjustment that is not going to end in one or two years’ time,” says Wong Kok Hoi, founder and CIO of APS Asset Management, which is based in Singapore and manages around $2 billion.

Wong cites monopolistic behaviours and fierce pricing competition as indications that the corporate environment had become more competitive. New laws had been enacted in the interim, and more might follow.

“It is dangerous to assume that, after the imposition of the fine, Ant financial can now do what it likes,” he said. “Will regulators now ease on enforcement after the fine? Don’t believe so because this is not how regulators in any country work”.

The demand for China’s fintech companies and online retail platforms like Alibaba and JD.com is suffering as a result of Chinese consumers becoming more frugal even as borders have reopened following the pandemic. In fact, some of these companies have stopped publishing the gross merchandising value (GMV) data they once bragged about.

Kai Kong Chay, a senior portfolio manager for Greater China stocks at Manulife Investment Management based in Hong Kong, explains that because many other companies no longer have structural drivers, he is very picky in choosing only services-focused companies with pricing power and penetration.

Derrick Irwin, a Boston-based fund manager for Allspring’s intrinsic emerging markets equity team, agrees that regulatory tightening has come to an end but notes that this does not always signal a return to the conditions that existed before Chinese President Xi Jinping’s ‘shared prosperity’ programme and the exorbitant valuations that accompanied it. ADRs for Alibaba were trading at $315 back then vs $90 this week.

“The government has learned that the private sector – particularly the tech sector – is a critical partner in jump-starting growth. The government will continue to exert pressure on key tech companies even as they allow growth to resume,” he said.

But for some sell-side experts, China tech has made progress.

Alibaba, for instance, is the Chinese online company that Morgan Stanley believes will grow the fastest, with a target price of $150.

The majority of investors, in particular institutions and hedge funds, have continued to be underweight on China, according to Min Lan Tan, head of chief investment office at UBS Global Wealth Management, APAC, based in Singapore.

“There is actually a lot of value in the internet space in China, and what is really needed is a confidence that growth has stabilized,” she said.

(Adapted from Reuters.com)

Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy