Chinese technology stocks plunge on potential monopoly regulation

Chinese technology stocks plunge on potential monopoly regulation

Equities 5 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  More governments are realizing the threat big technology monopolies are to competition, economic growth and the states themselves. The information age has provided companies will tools to quell competition and lock vendors and customers into a highly profitable eco-system creating explosive earning growth. But with China's latest clampdown on the Ant Group IPO due to inadequate regulatory framework and the newly proposed rules to prohibit exclusivity behaviour by large Chinese technology companies the future for large technology companies might be changing. This is a big shift in attitude and something to think deeply about if you are a long-term investors in large technology companies.


Shares in Alibaba, Tencent, Xiaomi and JD.com were down today 9.8%, 7.4%, 8.2% and 9.2% respectively as new guidelines are being released by China’s State Administration for Market Regulation stating that practices such as demanding vendors to transact only on one platform and provided differentiated prices due to buying history could potentially be illegal under the new regulatory framework. Essentially, the Chinese government is drawing a line in the sand sending the signal that these technology companies are becoming too powerful relative to the state itself, but also that they are extracting too much profit from consumers while constraining competition.

Source: Bloomberg

These new antitrust regulations formulated in China comes just after the planned Ant Group IPO was postponed due to incomplete regulation of fintech companies providing financial services but without the traditional regulation of financial holding companies. Last month China also drafted a new personal data law that will make certain business practices of Chinese technology companies more difficult. These policy actions could longer lasting impact on these companies’ profitability and valuations. They all align China with Europe on the state’s role vs technology monopolies putting more pressure on the US to change its regulatory framework. It seems though that the US is also changing its stance on technology as we wrote about last month with the big 449-page report on competition in digital markets by the House Subcommittee on Antitrust.

For years we have been talking about technology monopolies being bad for competition and in the case of Europe how they have starved governments of tax revenue. The digital economy is very different from the economy we came from, as it enables companies to quell competition and extract profits at levels not seen since Standard Oil at the start of the previous century that started the world’s first antitrust regulation. The chart below shows Tencent’s net income since 2001. It is this type of compounding that is beginning to frighten government leaders.

Source: Bloomberg

Chart below is for regulatory purposes

Source: Bloomberg
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