Chinese internet stocks collapse because regulatory risk is back

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China’s internet stocks slide as proposed regulations targeted technology platform companies, marking the second reminder in a week of regulatory risks some of the world’s largest internet companies face.

Actions of

Alibaba Group

(ticker: BABA) and

JD.com

(JD) were among those who fell 6% on Tuesday morning. the

KraneShares CSI China Internet

the exchange-traded fund (KWEB) fell nearly 4% to $ 72.98.

China has issued a “Market Model Antitrust Guidance Proposal” to solicit public opinion on a draft regulation that analysts say could lead to anti-monopoly measures focused on Internet market companies. These stocks have been among the biggest winners so far this year.

The proposed regulations have added to the downward pressure that tech stocks have been under in recent days. Investors look to more battered and economically sensitive companies in response to positive news about a potential coronavirus vaccine and Joe Biden’s victory in the US presidential election

And this follows new regulations that scuttled Ant Group’s dual listing, in what was to be the world’s largest initial public offering, and backlash against Alibaba majority shareholder and co-founder Jack My.

Taken together, all of this raises questions about the significant gains made by Chinese internet giants since the start of the pandemic.

“It’s just a reminder that China is a highly regulated place. We get one of these reminders every two or three years, ”says Laura Geritz, director of the Rondure New World Fund. Geritz owns several of these internet companies in the fund, but has favored stocks of companies that sell products on their platforms. An example is

Anta sports products

(2020. Hong Kong).

According to Paul Triolo, head of global technology policy at Eurasia Group, the draft rules, emanating from the Chinese State Administration for Market Regulation, are part of a longer-term effort to contain the big flats. -forms for what regulators increasingly consider to be major monopoly practices. They are a wake-up call, he said via email.

Part of this concern centers on Alibaba’s dominance and

Tencent Holdings

(700. HongKong) in payments. Regulators are trying to implement measures that treat these large tech platforms more like banks, resulting in reserve requirements that have been placed on Ant Group, Triolo said. The concern comes as the People’s Bank of China launches plans for a digital yuan.

The latest guidelines aim to create a “fair and competitive landscape” for the free market economy, reduce entry barriers for competitors and strengthen antitrust regulation to encourage innovation and protect platform operators and operators. consumers, Citi analyst Alicia Yap said in a note to clients.

If some of the guidelines are adopted, Yap said, it could hurt companies financially if the use of personalized targeting on product and content recommendations were limited. All e-commerce platforms would feel the pain, but it would be especially difficult for Alibaba Group (BABA), Pinduoduo (PDD) and JD.com, although to a lesser degree, Yap said.

Measures dealing with “forced exclusivity” that limit competition could harm

Meituan Dianping

(3690. HongKong) temporarily, because he had a specific deal with some restaurants in the past, Yap said. But she said the company could maintain its share of the delivery market, citing its “operational efficiency and efficient execution.”

Removing forced exclusivity could be a small victory for JD.com and Pinduoduo, Yap said, writing that the two complained that some brands and merchants could not stay on their platforms due to competitive pressures. . Guidelines for bundling products like tickets and hotels without explicitly notifying customers could limit the aggressiveness of online travel agency marketing tactics and temporarily slow cross-selling efforts, Yap said.

The guidelines – and concerns that a regulatory cloud could emerge over stocks – could give short-term investors a reason to turn negative for the wider sector, Yap said. But she sees any new sales to relatively less risky companies, such as Tencent, Meituan, and JD, as a buying opportunity.

Likewise, Geritz said via email that each of the past regulatory concerns has ultimately provided a good buying opportunity.

Nonetheless, it might take time for this to materialize as the latest regulatory clouds have surfaced as investors turn to more cyclical, recovery-oriented stocks and work-from-home beneficiaries such as trading companies. electronics and technology platforms.

Another potential catalyst for volatility is Alibaba’s big business event, Singles Day, Wednesday. Be careful if sales aren’t as strong as expected.

Write to Reshma Kapadia at [email protected]