A worker collects a package delivered by an automatic 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 bailouts of Chinese billionaire companies
Alibaba Group Holding
(ticker: BABA) and Ant Group, could look like a personal revenge, after Ma compared the state banking institution with pawnbrokers.
But they are probably marking the start of a broader campaign to counter China’s e-commerce and fintech industries, which are home to many of the largest and strongest emerging market stocks. Investor favorites, such as the social media giant
Tencent Holdings
(700: Hong Kong) and hero of food delivery
Meituan
(3690: Hong Kong) could participate in a wing cut in 2021.
“There are a lot of unknowns,” says Zoe Zuo, a global equity analyst at Ivy Investments. “It could take several quarters to understand what the new approach to government really means.”
The bill was reported in November, when authorities issued antitrust guidelines on the platform’s economy. The vague principles of these took some form last week with an Alibaba investigation because it relied on traders to sell exclusively through its websites.
Also in November, China’s bosses put the brakes on fintechs coming out of internet platform companies. They canceled Ant Group’s IPO a few days before it became the world’s most valuable financial company.
Tencent founder Pony Ma (has no relationship with Jack) avoided the major injury of his rival. But his company’s financial service is almost as big as Ant’s and he will likely gain his own official control, says Vivian Lin Thurston, portfolio manager for William Blair’s China A share growth strategy.
Meituan, whose triple-digit growth this year ranked 5th in emerging global markets, could anger regulators to win customers at a loss, another regulator practice has been monopolistic, he says. Brian Bandsma, an emerging market portfolio manager at Vontobel Quality Growth. “It looks like it could limit companies that use their balance sheets to compete,” he says.
Markets also pick a few winners from China’s crackdown on the platform economy, namely Alibaba’s smaller e-commerce competitors
JD.com
(JD) and
Pinduoduo
(PDD). Both shares rose, while Alibaba fell 7% in the last week. This is a shaky bet, Zuo thinks. “What happens will have implications for every company,” she says.
Especially since the online growth juggle in China shows signs of deceleration. China’s apparent suppression of Covid-19 has been (relatively) bad for internet business. Sales of goods, which increased by almost 25% compared to the previous year during the summer, decreased by 16% since August. With Chinese online sales approaching a quarter of total retail sales, the curve will continue to flatten, Thurston predicts. “The growth of e-commerce is at its maximum,” she says. “The biggest opportunity has been online financial services.” Until it was.
The good news is that investors are playing a tough game right now for Chinese regulatory offensives. Beijing has revised its rules on online gaming in 2018 and online education in 2019, preventing the growth of certain stocks, but leaving virtually thriving industries intact.
The Communist Party’s fear of Alibaba or Tencent’s power is tempered by pride in their achievements, says Thurston. “They want to use the industry to make leaps in financial services, but the IPO Ant Group made them realize how big it has become,” she says. “It’s a balancing act.”
Juice should also remain in stocks. “We’ve seen this happen so far in a variety of forms,” says Danton Goei, global portfolio manager at Davis Advisors. “The shares are still attractive.” Just watch out for swelling.