China’s regulators have punished Tech Giants. What can come next?

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

Tencent Holdings,

amid Beijing’s ongoing antimonopoly repression of Internet companies. Plus, the CEO of the disputed Ant Group has resigned, and reports appear on it

Alibaba Group Holding

can get a hefty fine, though softer regulatory measures than those aimed at the fintech-affiliated Ant.

Investors have been keeping a close eye on how regulators deal with Ant, and Alibaba (BABA) and Mr. Jack Ma, co-founder, whose comments last fall irritated Beijing officials ahead of anticipation of Ant’s much-anticipated IPO. Mom’s low profile at the end of last year expressed concern about his place where he recently appeared again at a public event.

The Wall Street Journal, referring to officials familiar with regulators’ thinking, reported on Friday that Alibaba could face milder regulatory treatment if it distanced itself from Ma and joined the Communist Party more closely.

In general, policymakers view the spate of measures as a warning shot, but one that does not jeopardize the long-term viability of companies. “The Alibaba move suggests that Beijing will follow only a light response to regulatory responses to technical platform business practices, and send a message to be careful and clean up some of the bad business practices, but they will not be heavier measures, given the importance of Alibaba and its short-term financial stability and long-term economic growth, ”said Paul Triolo, Eurasia Group, via email.

The sentiment was reiterated by TS Lombard economist Rory Green, who described the latest wave of developments as a positive sign. ‘Beijing has set its political point and is now concentrating on valid antimonopoly, data and financial risks. The forthcoming regulation on data sharing and monopolistic practices will benefit small, medium-sized enterprises, technological small businesses and the wider economy, ”Green said in an email.

But investors were still rumbling, with the

KraneShares CSI China Internet

exchange traded fund (CGT) 4% lower at $ 83.96. Shares of

Tencent Holdings

(700. Hong Kong) fell 4% overnight to HK $ 650.50 while Alibaba’s shares fell 4.5% to $ 229.82 on Friday morning. The sector has been under a cloud since the downfall of the Ant IPO and recently took a hit when investors focused more on parts of the market left behind during the pandemic, with the Chinese internet ETF rising 15% in the past month has dropped.

The year could bring more regulatory and antitrust developments as China withdraws its approach to the digital economy – and there is more clarity about the fine Beijing levies against Alibaba and how it could make businesses like Ant’s restructuring.

“The Alibaba investigation is just the beginning. Most likely, more technology enterprises will be subject to antitrust investigations. And the antitrust fines will be greater than before, ”said Winston Ma, formerly a managing director and head of the North American office of China’s Sovereign Wealth Fund, China Investment Corp., and co-author of The hunt for unicorns: how sovereign funds reform investments in the digital economy.

According to The Wall Street Journal, regulators in China are considering Alibaba a fine that could be greater than the $ 975 million fine.

Qualcomm

faced in 2015 for competitive competition practices. Although it is a large number, it is relatively manageable, given Alibaba’s financial levy. Possible rejection and curtailment of certain practices are also being looked at. While fund managers do not expect these developments to undermine the long-term attractiveness of companies such as Tencent and Alibaba, it could shave the forefront of growth projections for Internet imagery. acquisitions and minority investments can lead to increased research, and this can dampen market share gains and the variety of ways companies can earn their huge user base, and fund managers do not see these developments significantly increase long-term prospects.

Sentiment around the two companies may also differ, with the focus on Alibaba being more specific to the company related to Ma’s comments and questions about Ant Group’s financial business model, says Brian Bandsma, an emerging market manager at Vontobel Quality Growth, which reduced possession. in Alibaba, but not Tencent. While Tencent may not come out unscathed, Bandsma says it could be less vulnerable, as regulators do not focus on the video games and ads that Tencent relies on more.

More generally, fund managers have been looking elsewhere for the big Chinese internet stocks, especially since the broader global economic recovery has taken hold. While the latest developments may limit the risk of Alibaba’s multiple interest rate cuts and tougher year-on-year growth comparisons, some of last year’s big internet winners will remain a problem, says emerging market leader Laura Geritz. manager who heads Rondure Global Advisors. That said, she is underweight in the internet sector, but prefers tourism-related companies such as convenience stores in Thailand and the Philippines and those well positioned for economies that reopen year-round.

The takeaway for investors: go cautiously around Internet stocks in China, not only because of continued uncertainty in regulations, but also because investors are moving more to companies that could benefit as the world economy recovers from the pandemic.

Write to Reshma Kapadia at [email protected]