Just how big a deal is China’s ‘tech crackdown’ anyway?
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Global markets were rocked last week by the latest regulatory moves of China that threatened to hit even their heaviest tech titans.
China’s Ministry of Education said it was considering rule changes to control exorbitant price increases for after-school tutoring fees which would essentially mean providers would have to become not for profit.
This is not the first time this year Chinese companies were targeted by the government. In April, Alibaba (NYSE:BABA) copped an antitrust fine of around A$3.6 billion.
And ride-hailing giant Didi Global (NYSE:DIDI) plunged a week after making its NYSE IPO debut, when the Chinese government blocked its apps from being downloaded in China, citing cyber security concerns.
Ironically enough, 2021 has been a record year for capital raised by Chinese listings – US$12.8 billion according to Refinitiv and Reuters.
Arguably investors were just as concerned about what might be next as much as what has been formally announced.
Could other tech companies (including major tech giants like Alibaba and Didi) be forced to turn to not for profit models?
It’s anyone’s guess but one take came from Bloomberg Intelligence.
It reckons even if China followed through in forcing edtech firms to go not for profit, such a radical move would be unlikely to happen to the big tech giants .
“The core consumer-internet businesses of China’s tech titans like Tencent and Baidu aren’t likely to be made not-for-profit, we believe, as this wouldn’t serve the same policy goals as requiring education technology companies to transform,” said analyst Tiffany Tam.
“That change reduces the cost of raising children and spurs population growth in-line with government policy.
“Although some key aspects of consumer internet business models such as monopolisation, intense subsidising of new offerings and discriminatory pricing could be outlawed and punished, these policy initiatives can be achieved without eliminating companies’ profits.”
Some other scenarios Tam warned about were crackdowns on misleading and explicit internet content and aggressive levels of cash burns.
But she did say the prospect that firms could be forced to delist from foreign exchanges was unlikely even if not impossible.
“Chinese tech companies have benefited tremendously from raising capital in foreign markets and forced delistings would cut off a key source of capital for the group, destroying the confidence of offshore investors in these securities,” Tam said.
“With the policy costs of such a move far outweighing any benefits, we think the risk is low.”
NBC reported last week China’s securities regulator, seeking to soothe fears, told brokerages it would continue to allow Chinese companies to go public abroad including in the US.
The ASX has far fewer Chinese companies listed than a few years ago with many coming to list in 2015 and 2016 as they sought to avoid the cost and free float requirements of larger Asian exchanges.
But many of these had departed the bourse by the start of 2020 for varying reasons – although two consistent problems were difficulty in repatriating money from China and meeting reporting deadlines.
Yet there are still a handful left and other local companies that have China as a major market.
One Chinese company on the ASX which commented on rumours of a broader “tech crackdown” by China last week was Fintech Chain (ASX:FTC).
Fintech Chain said the measures were fair, would not hurt its own growth and development.
“Recent policy measures rectifying China business environment (such as antitrust), imposed by the Chinese government are fair and will have a positive influence on the long-term social and economic development of Chinese business and the community at large,” it said.
The company said anti-trust principles were embedded in the framework of its technology and consequently would not impact the company’s current business and future plans.
Its shares rallied 15% on Friday.
Yet there are three other edtechs which may be affected by an ‘edtech crackdown’ either in having products from Chinese students or with Chinese clients in 3PL Learning (ASX:3PL), Retech Technology (ASX:RTE) and Janison Education (ASX:JAN).
None have commented on the specific measures although Retech, which provides multi-platform e-learning services to corporations, noted in its quarterly the Chinese government saw the importance of vocational education and its prominence in corporations.
But it is not just the Chinese government with the power to spook investors.
Over the weekend, America’s Securities and Exchange Commission warned it would not allow Chinese companies to raise money in the USA unless they fully explained their legal structures and disclose the risk of Beijing interfering in their businesses.
This latest news had a mixed effect on Chinese listed companies. Didi actually rose over 4% (after denying a Wall St Journal report it was looking to go private) but Alibaba shed another 1%.
Yet with Wall St possessing over 200 listed Chinese companies on the major exchanges and Australia only a handful, equity investors Down Under are far more likely to be impacted by a China tech down through movements in the major indices rather than individual companies.
While ASX equity investors seem to have been spared right now, the same cannot be said for some of the ASX’s China focused ETFs such as Ishares’ China ETF (ASX:IZZ) and Van Eck’s China A50 ETF (ASX:CETF).
While these were among the best performing ASX ETFs earlier in the year, both have retreated in the past week.