But continuing share market volatility suggests that there is ongoing worry about further regulation and the path forward for China’s media and tech giants.
Hong Kong’s tech share index, which includes the principal stock listing of China’s largest company Tencent, and now also includes the secondary equity listings of Alibaba, Baidu and Bilibili, is deep in bear market territory. Closing at 8,232 on Friday, the tech index is 1% lower on the week, 3% lower for the year to date, and fully 25% down compared with its peak on Feb. 17, 2021.
Chinese competition regulators put the tech sector on notice in the last quarter of 2020 and announced their formal anti-trust probe of Alibaba on Christmas Eve. That the result of the investigation could be delivered so quickly and the scale of the fine, which was only 4% of revenue rather than the maximum 10%, were reasons for Alibaba shares’ brief rebound.
“To regulate is to ensure better development, and the act of tugging at the sleeve is also an act of love,” said the People’s Daily, the mainland government’s most important media mouthpiece. The government wants “healthy and continuous development of the country’s internet industry” and the fine did not deny the “important role of internet platforms in economic and social development,” the paper said.
Alibaba said that it accepted its punishment and knew of no other government actions against it. That was another cause for relief. There has been speculation in recent months that Alibaba might be forced to break up or dispose of its huge media and entertainment holdings.
“Despite the record fine amount, we think this should lift a major overhang on BABA and shift the market’s focus back to fundamentals,” investment bank Morgan Stanley said in a research note published on Sunday.
But the relief proved short-lived.
There is no guarantee that Alibaba’s attempts at compliance over a three-year probation period will necessarily be acceptable to the regulators.
And, underlining the notion that the whole tech industry remains in the government crosshairs, it soon emerged that the bosses of 34 Chinese tech firms had been summoned for a quiet dressing down. They were told to heed Alibaba’s punishment as a warning to them all.
Those in attendance are reported to have included reps from Baidu, Sina Weibo, iQIYI, Bytedance (the unlisted owner of Douyin and TikTok), Bilibili, Kuaishou, and Suning, the electronics retailer that owns streaming service PPTV.
Throughout the recent financial earnings reporting season, the issue of regulation cast a shadow over the sector. Despite China’s V-shaped economic recovery, and strong results from digital sector leaders, caution seemed to be as prevalent as references to COVID-19.
Tencent, which many industry watchers regarded as the next most vulnerable to government action, played down record profits. It even described working with regulators as the “strategic focus” of its fintech business. Tencent founder Pony Ma confirmed that he had been visited the State Administration of Market Regulation for a chat.
The government has most notably acted on monopoly practices such as demanding exclusivity from merchants.
It has also punished firms for not clearing mergers and acquisitions activity with regulators before deals are completed (12 were fined in March), suggesting that the government expects to micromanage private sector entrepreneurialism, and that it may reserve some activities for state-owned enterprises.
The anti-monopoly moves curb some of the “network effect” benefits that companies derive from achieving huge scale and being able to share client data across a wide range of group businesses. The clearest example of enforced fragmentation was the mandatary restructuring of Alibaba’s financial arm Ant Group.
In October, Ant’s blockbuster IPO was halted dead in its tracks. This month, Ant was busted down to being an unsexy holding company. Its valuation may have halved.
China’s new Personal Information Protection Law (PIPL) has some similarities to the General Data Protection Regulation system approved by the European Union in 2018: such as requiring companies to obtain user consent for data gathering and the user’s right to review such information. But, in reinforcing rules about transferring data outside China, it adds another dimension to Chinese state-control and bolsters regulation as a form of international competition. (The U.S. does not yet have a general data protection law like the E.U. or China.)
Beyond corporate M&A and data privacy, there are other areas that may come under the Chinese regulator’s gaze. There have been warning signals on live-streaming, news-gathering, online advertising, IP, gaming, and money-laundering. And, as has been shown with the Fan Bingbing incident of the past and Jack Ma and Alibaba’s recent travails, cutting celebrities down to size is standard issue Communist Party policy.
Even a well-respected and established giant like Baidu can look terribly fragile when it is required to spell out in black and white the risks that surround it. Its global offering document, published in March for its secondary share listing in Hong Kong, contains 72 pages of risk warnings and makes for daunting reading. In listed concerns including: “changes in U.S. and international trade policies, particularly with regard to China”; “uncertain” (Chinese) interpretation of its corporate structure; “complex and evolving
Chinese and international laws and regulations regarding privacy and data protection”; and “changing laws and regulations regarding regulatory matters, corporate governance and public disclosures.”
“China’s economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources,” it summarized.
As the next earnings season cranks up, further corporate commentary on regulatory matters will be essential reading.
Expect more statements of humble compliance. And look out for further signs that increasingly differing regulatory approaches might accelerate the already expected delisting of China’s media-tech and entertainment firms from U.S. stock markets.