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Where are the Chinese tech giants heading amid ongoing regulatory crackdown?

alibaba

While the global stock markets are nose-diving on the Russia-Ukraine crisis, Chinese tech giants are facing a renewed regulatory overhaul by the Chinese government. The well-known Chinese conglomerates, including Alibaba, Tencent, Baidu, JD.com, and Meituan all suffered a week-long drop.

All these big Chinese tech stocks may continue to be under pressure with ongoing Chinese scrutiny. But could the Chinese stock markets be a safe haven for investors amid the ongoing geopolitical tension?

How does the Chinese policy affect the Chinese tech giants?

The regulatory crackdown might not be enough to describe the policy impact on Chinese tech giants, and the bigger regulatory picture offers a broader comprehension. The PBOC started easing measures by cutting the 1-year and 5-year loan rates in January, amid a slowing-down of economic growth caused by pandemic containment measures. Last year, China's President Xi raised 'common prosperity' to narrow the gap between rich and poor, which has widened in the pandemic era.

China is shifting to a more inward-oriented economy from an outward orientation in the post-pandemic era. China’s central bank imposed greater support to the real economy, particularly to those small businesses who suffered from the zero-covid-cases policy. Beijing calls the tech giants, who benefited from the pandemic, for being obligated to give support to the economy. Under the government policy guide, Alibaba plans for a $US15.5 billion donation, and Tencent pledges $US7.75 billion towards the “common prosperity” goal.

The food-delivery platform, Meituan, was ordered by the regulators to lower fees on the restaurant’s charges, especially in the health-restricted cities. In the meantime, the ongoing regulatory issues, such as antitrust and privacy issues become more sensitive to the regulators, with these tech giants growing rapidly during the pandemic.

Alibaba reported the slowest sales growth in its recent fourth-quarter results. CEO Daniel Zhang indicated the e-commerce giant would prioritise user retention rather than expanding market share in a tougher regulatory backdrop and with severe competition.

A bright side to Chinese tech stocks

When investors make decisions to invest in Chinese stocks, policy risk is one of the major factors that need to be considered. But for value investors, Chinese stocks could be reasonable choices in the current downturn in global markets and ongoing geopolitical tension over Ukraine.

Firstly, while China has less consumer price pressure than the other major economies, the PBOC is easing monetary policy versus the other central banks’ tightening stances. Secondly, Chinese tech stocks are way undervalued versus those high valued US tech companies. Alibaba, JD.com, and Baidu all lost two-thirds of their market value from the all-time highs at the beginning of 2021, with the current P/E ratio below 20. Thirdly, the Russia-Ukraine tension has less impact on Chinese stock markets, in terms of issues like oil supply shortages, with its neutral political stance.


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