Emerging Markets
China Squeezes Tech Sector - What Wealth Managers Say

As the country continues to tighten the regulatory squeeze on sectors such as technology, we take views from wealth managers about how they see matters panning out.
On Thursday, Chinese equities, led by technology stocks after
authorities in Beijing tightened their regulatory controls on
gaming companies for focusing solely on profit, suggested that
life for tech firms in the Asian giant is becoming increasingly
chilly.
The Hang Seng Tech Index tumbled 4.5 per cent, the largest drop
in six weeks, with Tencent Holdings dropping by almost twice that
amount in its worst day in more than a month. NetEase slumped 11
per cent in a decline that accelerated after a report that China
would halt approvals for new online games (source:
Bloomberg).
A few weeks ago, China shocked global markets by clamping down on
for-profit after-school education firms. Authorities halted new
sign-ups for Didi Global after the ride-hailing firm went public
in the US; Beijing wants to take the firm under state control,
reports have said, although Didi denies this. It has hit
video-game makers such as Tencent by restricting children’s
screen time. While specific actions vary, there is a common trend
of expanding state restrictions. Another example was when Ant
Group, an affiliate of Chinese e-commerce giant Alibaba, had been
slated to have its $34 billion IPO pulled in early November 2020
in what would have been the world’s largest share float ever.
However, investors were stunned when the IPO was pulled only a
few days prior to the event. (Reports said that Ant Group’s rapid
lending growth rattled regulators.)
Ironically, while these developments have prompted some wealth
managers to think that China is too risky, in late July, Goldman
Sachs cut its view of China’s offshore equity markets. The US
firm cited a disproportionately high index representation by tech
and privately owned companies for its adjustment of views on MSCI
China to “market-weight” from “overweight” (Reuters, 29
July). Pictet Asset Management, part of Swiss bank Pictet,
has also taken the same course. (This publication has also
written about the issues
here and
here.)
Given the situation, here are some more views by wealth and asset
managers:
Mark Martyrossian, CEO at Aubrey Capital
Management
The carnage wrought in several sectors of the Chinese market
(tech, educational and luxury brands) over the last weeks as a
result of a government diktat has been widely reported. With few
exceptions, the commentary is bearish and the news from China
suggests that further pressure is being brought to bear: earlier
in this week Tencent sought to display it credentials as a good
corporate citizen by announcing that it will be limiting the time
that youngsters can spend glued to its games to three hours a
week.
We wrote on the matter in July and cautioned that some of the
policies being discussed would undermine certain business models.
However, having covered the Chinese stock markets for the last 30
years, we did point out that sporadic regulation aimed at
tempering capitalist exuberance or excess was nothing new. Our
experience shows that whilst radical policy changes are difficult
to predict, picking the companies with robust models is still
possible and allows investors to profit.
The continued share price weakness since we last wrote has
prompted us to revisit the subject and highlight further examples
of erstwhile successful companies that have been in the cross
hairs of government scrutiny. We now know that several other
companies have been on the receiving end of regulatory censure:
one of the largest social media network companies, a now global
e-commerce platform which supports the livelihood of hundreds and
thousands of SMEs and a couple of tech companies which have
already penetrated the everyday life of millions of
consumers.
The names of these companies? “Well, off the record, on the QT
and very hush hush,” the stocks concerned are Facebook, Google,
Amazon, Apple and Microsoft! In other words, government
regulation is not just a Chinese phenomenon but a global one
- D.C. and the European Commission have been conducting
antitrust enforcement since the late 1990s. Each of the
aforementioned companies have been facing antitrust lawsuits
- Microsoft was fined $1.4 billion in 2008 and market cap
has increased 7x since then; Apple paid a fine of $15 billion in
2016 and its market cap has since tripled in value. The share
prices of the others following similarly hefty fines have, when
looked at over the medium term, hardly missed a beat. As
investors, our experience is that top class companies with
leading technologies and business models remain great investments
notwithstanding periodic sanctions. What doesn’t kill you it
seems can indeed make you stronger.
That being said, we do not ignore major policy changes in China:
the initiatives announced in the education sector have clearly
undermined many private sector businesses. Whilst we have no
doubt that - given the priority ascribed to education - private
tutors will remain in high demand, it is difficult to see how the
provision of these services provided by publicly-listed companies
can be feasible.
A direct read across from US/EU regulation on the one hand to the
sanctions announced in Beijing on the other may be an
extrapolation too far, but the damage done to the prices of good
quality companies supplying the consumer with innovative services
and products now look interesting (Tencent, Meituan, Bilibili are
all down between 40 to 50 per cent). Sentiment still blows to the
negative but there are signs of a price level being reached in
some of these stocks with attractive valuations for investors
willing to look beyond the short term.
Having reduced our exposure in China from 55 per cent at the
beginning of the year to just over 30 per cent today, we are not
intending to reverse this imminently, but we are scrutinising the
opportunities increasingly positively. One last word on the
differing perceptions between international and domestic Chinese
investors to these regulations. The latter seem less concerned as
evidenced by much more modest falls in local indices than those
referenced by the former. Government policy on “common
prosperity” in China appears to have more resonance at home than
abroad. We shall be writing on why this might be the case
shortly.
Frank Tsui, senior fund manager and head of ESG at Value
Partners
While regulatory tightening is not new in China, this time
markets are pondering the intention as it appears to go beyond
the normal frameworks and requires reassessment. We view the
recent policy implementations and draft consultations in various
sectors…as part of the long-term quality growth agenda - to
pursue equality, balanced developments.
Therefore, in spite of the near-term pains of curbing the power
of large corporates with monopoly potentials and impacts to
social harmony, the agenda to address long-term quality growth
will offer a quality outlook and we focus on identifying the
potential de-rating and re-rating developments in respective
areas.