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China big tech at a critical crossroad

It seems that the latest regulatory clampdown on Didi Chuxing has created the impression of a nationalistic blend to it. The earlier clampdowns have come from the angle of a moral hazard reduction in the China economy via new restrictions on the fintech units of China's big tech firms, due to imprudent micro consumer lending practices. 

This led to the world's largest IPO, Ant Group, the fintech unit of Alibaba, being scrapped last year followed by anti-monopolistic fines imposed on China's big tech ecommerce platforms. Right now, the regulators are zooming into the significant amount of big data harnessed by Chinese tech firms, where they are considered as the crown assets that are likely to play a pivotal role either directly or indirectly in driving future revenue streams.  

The latest clampdown and especially on the new potential restrictions banning China tech firms to list overseas, particularly in the US, seems to relate to national security concerns. Perhaps China do not want to see the risk of localised big data that may contain sensitive information to fall into the hands of significant foreign shareholders, as well as China’s adversaries, that may be used to counter China’s plan of gaining a significant foothold in the global high technology space, such as artificial intelligence, semiconductors and 5G. Hence, these latest restrictions imposed on China's tech giants seem to have evolved into a national security agenda, rather than a correction on business practices, which have integrated into the bigger sphere of the ongoing US-China tech war.

The risk of nationalisation on China's big tech firms has created an overhang in the markets, which is the main trigger driving the ongoing negative sentiment, and it's likely to remain sticky if the Chinese regulatory agencies continue to adopt such a stance. The Hang Seng TECH Index broke below the 7,500 key major support yesterday and if there is a weekly closely below it, it is likely to see further losses towards the next support at 6,830 in the coming weeks, representing a further potential drop of -6% in the first step.

In addition, given the significant holdings of China tech stocks such as Tencent, Alibaba, Baidu and JD.com in global investment portfolios as their respective market capitalisation values have ballooned over the past five years on average, a further drop in the share prices of China big tech may trigger a contagion across the board. Yesterday, we witnessed a coordinated decline in European and US major benchmark stock indices; both the German DAX and FTSE 100 shed -1.7%. Thereafter, the S&P 500 and Nasdaq 100 followed suit with an intraday drop close to -1.6%, before losses were trimmed by half at the close of the US session.

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