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23 April 2021

China Strikes Back

Owing to the nation’s rapid development in recent decades, technology is one sector in which China is excelling. Lenovo, the computer company (1984), Huawei, the smartphone company (1987), Tencent, the internet and social media firm (1998), and Xiaomi, the multinational electronic company (2011), have all been founded in the last four decades in a sign of the rapid development and industrialisation of the country.

Many of China’s tech firms have now grown beyond their domestic presence, becoming global brands despite still being relatively new to the scene.

Despite their success and value to the Chinese economy, this month the country’s regulators led a crackdown on tech firms, handing out a record US$2.8bn fine to Alibaba, the e-commerce giant, often compared to the likes of Amazon and eBay. The company, which is owned by Chinese billionaire Jack Ma, was said to have “abused its market position for years.” Despite being a record fine, the penalty accounts for just 4% of the firm’s domestic revenue in 2019.

China’s anti-monopoly regulatory which investigated Alibaba found that the firm restricted merchants from conducting business or running promotions on rival platforms. In response, the company said it would lower entry barriers and business costs faced by its merchants.

Joe Tsai, Alibaba Group’s Executive Vice Chairman, suggested that platforms and technology companies like Alibaba are increasingly appearing on regulators’ radars as they continue to grow in importance.

In the days following the ruling on Alibaba, Ant Group, an affiliate of Alibaba which operates China’s largest digital payment platform Alipay, announced a large-scale restructuring play with regulators telling it to act more like a bank than a tech firm.

This week, it was revealed that China’s central bank is attempting to take control of Ant Group’s vast amount of consumer lending data in another crackdown on Jack Ma’s tech empire. The People’s Bank of China is looking for Ant to surrender its data to a state-controlled credit scoring company run by former executive of the central bank. This entity would then serve other financial institutions, including state-owned banks in direct competition with Ant Group.

Alibaba boasts over 800 million users in China alone so, due to its standing in the country and wider industry, the regulator’s decision to investigate and fine it is serving as a wake-up call for others. Other firms including ByteDance, the owner of social media app TikTok, shopping platform Meituan and agriculture technology firm Pinduoduo are all said to be aware of Alibaba’s experience and are looking to learn from it.

While Alibaba’s fine is part of a wider regulatory crackdown on Chinese tech firms, a much-needed update which suggests that the market is maturing. However, it can also be seen as a political move by President Xi Jinping suggesting that under his rule, nothing can be bigger than the Chinese Communist Party.

In October 2020, Ma largely disappeared from public view after criticising state-owned banks and regulators. Ant Group then pulled its US$37bn initial public offering (IPO) the following month, and IPO which was set to be the world’s largest.

Chinese-led rules and regulations are not the only regulatory worries the country’s tech firms have. Huawei, which had a 20% share of the global smartphone market as recently as the second quarter of 2020, sold its Honor phone brand for a suggested US$15bn sum in November 2020 to ensure the firm’s survival in the wake of US sanctions.

As the Chinese tech sector continues to develop, it is inevitable that more stringent regulations will follow in a sector which some refer to as the “Wild West.”

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
China Strikes Back
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