An employee picks up a package for delivery by automated conveyor belt to a JD.com distribution center in Beijing on July 16, 2020.
GREG BAKER / AFP / Getty Images
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It’s not just Jack Ma’s problem. China’s regulatory salvos at the Chinese billionaire corporations,
Alibaba Group Holding
(ticker: BABA) and Ant Group, may seem like a personal vendetta after Ma compared the state-owned banking company to pawnbrokers.
But they likely mark the beginning of a broader campaign to rein in China’s e-commerce and fintech industries, home to many of the largest and most popular emerging markets stocks. Investor favorites such as social media giant
Tencent Holdings
(700: Hong Kong) and food delivery hero
Meituan
(3690: Hong Kong) could get wing clips in 2021.
“There are a lot of unknown unknowns,” said Zoe Zuo, a global equity analyst at Ivy Investments. “It may take a few quarters to understand what the government’s new approach really means.”
The switch in question was spotted in November, when the authorities issued Guidelines for Anti-Monopoly in the Platform Economy. The vague principles in it took shape last week with an Alibaba investigation because it relied on traders to sell exclusively through its sites.
Also in November, the Chinese bosses put the brakes on the fintechs that emerged from the internet platform companies. They canceled Ant Group’s IPO before it was ready to become the world’s most valuable financial company.
Tencent founder Pony Ma (no relation to Jack) has avoided his rival’s lese majesty. But his company’s finance arm is almost as big as Ant, and is likely to receive its own official attention, said Vivian Lin Thurston, portfolio manager of China A-Shares growth strategy at William Blair.
Meituan, whose triple stock rise has made it the No. 5 name in global emerging markets this year, may ire regulators to win clients at loss-making prices, another practice that regulators have labeled monopolistic, says Brian Bandsma, an emerging markets. portfolio manager at Vontobel Quality Growth. “It appears that they are restricting companies that use their balance sheet to compete,” he says.
Markets also pick some winners of China’s crackdown on the platform economy, namely Alibaba’s smaller e-commerce competitors
JD.com
(JD) and
Pinduoduo
(PDD). Both stocks are up sharply, while Alibaba is down 7% in the past week. That’s a shaky bet, Zuo thinks. “What happens affects every business,” she says.
Especially now that the Chinese online growth molochian is showing signs of slowing down. China’s apparent suppression of Covid-19 has been (relatively) bad for internet business. Sales of goods, which rose nearly 25% year-on-year during the summer, have fallen to 16% since August. With Chinese online sales approaching a quarter of all retail sales, the curve will flatten further, Thurston predicts. “The growth of e-commerce is on the spree,” she says. “The greater opportunity was online financial services.” Until it wasn’t.
The good news is that investors currently face a tough scenario for Chinese regulatory offensives. Beijing revised its rules for internet gaming in 2018 and online education in 2019, hampering the growth of some stocks, but essentially leaving the booming industries intact.
The Communist Party’s fear of Alibaba or Tencent power is tempered by pride in their achievements, Thurston said. “They want to use the industry to take a leap forward in financial services, but the Ant Group IPO made them realize how huge it had become,” she says. “It’s a balancing act.”
There should also be juice in the broth. “We’ve seen this happen in different shapes and forms before,” said Danton Goei, global portfolio manager at Davis Advisors. “The shares are still attractive.” Just watch the bumps.