As China clamps down on payment services, is Tencent’s share price facing a dip?

According to Bloomberg, Tencent’s [TCEHY] share price has been thrilling investors in Hong Kong, as the stock’s Hong Kong-listed shares climbed towards their biggest ever monthly gain at the start of the week. Investors were buying options contracts that bet Tencent will rise past HKD800 by the contracts’ expiry on Thursday, pushing the price of one such contract up by 118,300%. At close Monday, Tencent was up 10.93% at HKD766.50.

Tencent’s share price gains mean the tech giant now stands a chance of becoming China's third trillion dollar company by market cap. Could a potential government clamp down on online payments burst the Tencent’s bubble?

Beijing clamps down on Tencent’s online payments

The People’s Bank of China (PBOC) has announced plans to investigate any non-bank entity that makes up over half the digital payments market on antitrust grounds. The PBOC will also investigate if two companies make up more than two-thirds of the market.

Tencent and Ant have a duopoly in the area, putting them both firmly in the regulators sights. As reported by Bloomberg, Tencent's WeChat Pay made up 38.8% of the mobile payments market in China in the second quarter of 2020. Rival Ant's AliPay holds a 55.6% market share.

“This shows there’s no let-up in regulatory tightening on the sprawling fintech businesses. The rules fill the void of defining market monopoly in China’s payments industry,” Dong Ximiao, a researcher at Zhongguancun Internet Finance Institute, told Bloomberg. 

Arguably, the regulator has a case. Despite China having 233 licensed providers, including TikTok owner ByteDance, growth in online payments has slowed. As of 30 June last year, total online transaction growth slowed to 8.8% — a steep fall from the 23% growth seen in the same period in 2019, according to iResearch.

“The finance industry is becoming more and more dependent on information technology, leading to a growing urgency in ramping up antitrust efforts in this sector,” Liu Xu, a researcher at the National Strategy Institute of Tsinghua University, told Reuters.

"The finance industry is becoming more and more dependent on information technology" - Liu Xu, National Strategy Institute of Tshingua University

The PBOC plans to give non-compliant companies a one year grace period to adapt to the new rules. Those that fail to do so face the possibility of being broken up by business type.

The move by China's central bank runs parallel to wider alterations affecting Chinese technology companies, including the scuppering of Ant's $37bn IPO in November.

Government intrusion is bound to bring back bad memories for investors interested in Tencent’s share price. In 2018, Tencent's share price slumped due to a government crackdown on online gaming. That same year, Beijing banned new games for 9 months, triggering a slump in Tencent's share price. 

Can Tencent become China’s next $1trn company?

That said, Tencent’s share price is soaring right now. Tencent's market capitalisation stands at almost $842bn, jumping $143bn in January alone (as of 28 January’s close). Part of this is the euphoria surrounding global technology stocks, with investors piling into Hong Kong listed companies.

Tencent's share price has gained 18.95% so far this year, fuelled in part by growing excitement ahead of live-streaming platform Kuaishou’s planned IPO. Tencent-backed rival to TikTok is set to raise $6.3bn in what would be the biggest tech debut since Uber's [UBER] in 2019.

“We’re expecting Kuaishou will be very hot. That is boosting not only Tencent’s share price but also most internet-related companies," said Dickie Wong, head of research at Hong Kong-based broker Kingston Securities.

“We’re expecting Kuaishou will be very hot" - Dickie Wong, Kingston Securities

The mooted IPO saw Tencent's share price soar over 10% on Monday 25 January, spurring a wider China tech rally. It seems that how far Tencent can climb in 2021 will depend not only on investor belief but, also, how much free rein Beijing is prepared to offer its tech sector.