Chinese regulators have punished tech giants. What could come next.

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

Tencent Holdings

amid Beijing’s ongoing anti-monopoly crackdown on Internet companies. In addition, the CEO of the controversial Ant Group resigned, and reports showed that

Alibaba Group Holding

could face a hefty fine, albeit softer regulatory action than those targeting fintech affiliate Ant.

Investors have been watching closely how regulators deal with Ant, and Alibaba (BABA) and Ant co-founder Jack Ma, whose comments last fall irritated Beijing officials ahead of the sinking of Ant’s highly anticipated IPO. Ma’s low profile late last year raised concerns about his whereabouts, until he recently reappeared at a public event.

The Wall Street Journal, citing officials familiar with regulators’ thinking, reported on Friday that Alibaba could face softer regulatory treatment, provided it distances itself from Ma and ties more closely with the Communist Party.

In general, policy watchers see the wave of measures as a warning, but one that has not endangered the long-term viability of the companies. Alibaba’s move suggests Beijing will only pursue a light regulatory response around tech platforms’ business practices, sending a message to be cautious and clean up some of the bad business practices, but they won’t take any tougher measures given the importance of Alibaba and Ant on short-term financial stability and longer-term economic growth, ”said Paul Triolo of the Eurasia Group via email.

That sentiment was echoed by TS Lombard economist Rory Green, who described the latest wave of developments as a positive sign. Beijing has made its political point and is now focusing on valid anti-monopoly, data and financial risk. Upcoming regulations on data sharing and monopoly practices will benefit small and medium-sized businesses, tech small-caps and the economy in general, ”Green said via email.

But investors were still upset with the

KraneShares CSI China Internet

Exchange Traded Fund (KWEB) fell 4% to $ 83.96. Shares of

Tencent Holdings

(700. Hong Kong) fell 4% overnight to HK $ 650.50, while shares of Alibaba fell 4.5% to $ 229.82 Friday morning. The sector has been in a cloud since the sinking of the Ant IPO and had recently taken a hit as investors focus more on parts of the market that lagged during the pandemic, with the Chinese internet ETF falling 15% in the past month .

The year could lead to more regulatory and antitrust developments as China challenges its approach to the digital economy – and there is more clarity about Beijing’s fine on Alibaba and how it could cause companies like Ant to restructure.

“The Alibaba investigation is just the beginning. More technology companies will likely be subject to antitrust investigations. And the antitrust fines will be greater than before, ” said Winston Ma, formerly 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 Are Reshaping Investments in the Digital Economy.

According to The Wall Street Journal, regulators in China are considering imposing a fine on Alibaba that could exceed the $ 975 million fine.

Qualcomm

faced in 2015 for anti-competitive practices. While it’s a large number, it’s relatively manageable given Alibaba’s financial weight. Possible divestments and curtailment of certain practices are also being considered. While fund managers do not expect these developments to derail the longer-term attractiveness of companies like Tencent and Alibaba, it could reduce the upper limit of growth forecasts for the internet giants. acquisitions and minority investments could receive more attention and dampen the rise in market share and the range of ways companies can monetize their immense user base. Fund managers fail to see these developments significantly distorting the longer-term outlook.

Sentiment around the two companies may also diverge, with the focus on Alibaba seen as being more company-specific in regards to Ma’s comments and questions about Ant Group’s financial business model, said Brian Bandsma, emerging markets manager at Vontobel Quality Growth, who is holding his holdings has reduced. in Alibaba but not in Tencent. While Tencent may not come out unscathed, Bandsma says it may be less vulnerable because regulators don’t focus on the video games and ads that Tencent relies on more.

More broadly, fund managers have looked beyond the major Chinese internet stocks, especially as the broader global economic recovery emerges. While the latest development may have mitigated risk to Alibaba’s multiple rising interest rates and more difficult year-over-year growth comparisons, some of last year’s big Internet winners will continue to be a problem, says Laura Geritz, an emerging market. manager leading Rondure Global Advisors. That said, she is underweight the internet sector, preferring instead tourism companies such as convenience stores in Thailand and the Philippines that are well positioned for year-round reopening economies.

The investor takeaway: Proceed with caution with China’s internet stocks, not only due to ongoing regulatory uncertainty but also as investors are moving more towards companies ready to profit as the global economy recovers from the pandemic.

Write to Reshma Kapadia at [email protected]