Chinese regulators have punished the tech giants. What could come next.

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Chinese stocks slipped on Friday as regulators fined a dozen companies, including

Tencent Holdings,

amid Beijing’s continuing anti-monopoly crackdown on internet companies. Additionally, the struggling Ant Group CEO has resigned and reports have revealed that

Alibaba Holding Group

could face a heavy fine although regulatory measures more flexible than those targeting the fintech subsidiary Ant.

Investors have been watching closely how regulators deal with Ant, and Alibaba (BABA) and Ant co-founder Jack Ma, whose comments last fall angered Beijing officials before the introduction was scuttled in long-awaited scholarship from Ant. Ma’s low profile late last year raised concerns about his whereabouts until he recently reappeared at a public event.

The Wall Street Journal, citing officials familiar with the thinking of regulators, reported on Friday that Alibaba could face more lenient regulatory treatment provided it moves away from Ma and is more closely aligned with the Communist Party.

Generally speaking, political observers see the series of measures as a wake-up call, but one that has not jeopardized the long-term viability of the companies. “Alibaba’s move suggests that Beijing will only pursue a light regulatory response around the business practices of technology platforms, sending a message to be careful and clean up some of the bad business practices, but they will not take heavier action. given the importance of Alibaba. and ant to short-term financial stability and longer-term economic growth, ”said Paul Triolo of Eurasia Group via email.

This sentiment was echoed by TS Lombard economist Rory Green, who described the latest wave of developments as a positive sign. “Beijing has made its political point and is now focusing on antimonopoly, data and sound financial risks. Future regulations on data sharing and monopoly practices will benefit small and medium-sized businesses, small tech caps and the economy in general, ”Green said via email.

But investors were still shaken, with the

KraneShares CSI China Internet

exchange-traded fund (KWEB) down 4% to $ 83.96. Actions of

Tencent Holdings

(700. Hong Kong) fell 4% to HK $ 650.50 overnight while Alibaba shares slipped 4.5% on Friday morning to $ 229.82. The sector has been under the cloud since the scuttling of Ant’s IPO and has been hit recently, with investors focusing more on parts of the market that were lagging behind during the pandemic, as China’s Internet ETF fell by 15% last month.

The year could bring more regulatory and antitrust developments as China shapes its approach to the digital economy – and there is more clarity on Beijing’s fines on Alibaba and how it might do companies like restructuring of Ant.

“The Alibaba investigation is just the start. It is highly likely that more tech companies will be subject to antitrust investigation. And the antitrust fines will be higher than before, ”said Winston Ma, former managing director and head of the North American bureau of Chinese sovereign wealth fund, China Investment Corp., and co-author of The unicorn hunt: how sovereign wealth funds are reshaping investment in the digital economy.

According to the Wall Street Journal, Chinese regulators are considering imposing a fine on Alibaba that could be greater than the fine of $ 975 million.

Qualcomm

confronted in 2015 for anti-competitive practices. While that’s a large number, it’s relatively manageable given Alibaba’s financial weight. Potential divestments and a reduction in certain practices are also being explored. While fund managers do not expect these developments to derail the long-term attractiveness of companies like Tencent and Alibaba, it could reduce costs. Higher growth forecasts from Internet giants. minority acquisitions and investments could come under increased scrutiny and could dampen market share gains and the range of ways companies can monetize their huge user bases, fund managers fail to see these developments significantly upset the long-term outlook.

Sentiment around the two companies could also diverge, with the focus on Alibaba seen as more company-specific, linked to Ma’s comments and questions about Ant Group’s financial business model, says Brian Bandsma, chief market officer. emerging at Vontobel Quality Growth, which reduced its holdings at Alibaba but not at Tencent. While Tencent is not unscathed, Bandsma says it might be less vulnerable as regulators don’t focus on the video games and advertising that Tencent depends more on.

More generally, fund managers have looked elsewhere than large Chinese internet stocks, especially as the global economic recovery as a whole takes hold. While the latest development may have lowered the risk to Alibaba’s multiples, rising interest rates and more difficult year-over-year growth comparisons will continue to be a problem for some of the big winners of Alibaba. the internet last year, says Laura Geritz, an emerging market. manager who heads Rondure Global Advisors. That said, it is underweight the Internet sector, favoring more tourism-related businesses like convenience stores in Thailand and the Philippines and those well positioned to reopen economies throughout the year.

Bottom Line for Investors: Be cautious about Chinese internet stocks, not only because of lingering regulatory uncertainty, but also because investors are turning more to companies that are willing to invest. benefit as the global economy recovers from the pandemic.

Write to Reshma Kapadia at [email protected]