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Key takeaways
- Stocks in China plunged Monday as the country’s anti-monopoly authority announced multiple fines for failure to report past merger activities
- Alibaba and Tencent (a Chinese ecommerce giant and the owner of TikTok, respectively) were among the guilty parties fined
- The Hang Seng Tech Index in Hong Kong dropped nearly 3.9%, while the broader Hang Seng Index fell about 3%
- China is expected to continue its crackdown on monopolies – particularly in the tech sector – in the coming year
Chinese stocks dropped sharply Monday, pressured by an unprecedented tech selloff amid Covid lockdown-related weakness in the broader market.
The source of the market’s tech troubles stem from a new wave of fines slapped on China’s burgeoning tech sector. Notably, Chinese giants Alibaba and Tencent faced multiple fines for failure to comply with anti-monopoly transaction disclosure laws.
As a result, Hong Kong-listed shares of Alibaba plunged 5.8%. Tencent fared slightly better, dropping just 2.9%. The tech selloff dragged down the Hang Seng Tech Index in Hong Kong by nearly 3.9%, while the broader Hang Seng Index shed 3%.
A look at the latest penalties
On Sunday, China’s State Administration for Market Regulation (SAMR) released a list of 28 violations of its anti-monopoly law. Each case involved merger deals – some stemming back to 2011 – that had not been reported for antitrust review. Documents show that regulators determined earlier this year that each of these deals breached the country’s existing competition laws.
Of the 28 cases, five involved ecommerce giant Alibaba, including its 2021 equity purchase in subsidiary Youku Todou. Alibaba also received a fine for failing to report its 2015 investment in financial media outlet Yicai Media Group.
Social media and video gaming giant Tencent – which owns TikTok – was slapped with 12 accusations. One fine targeted the company’s 2011 acquisition of a 20% stake in shoe-selling website Okaybuy Holding. (Both Alibaba and Tencent were fined for antitrust activities last November, as well.)
Four more fines were imposed on Didi, China’s Uber equivalent. Other offenders include video site Bilibili, social media operator Weibo and private equity firm Citic Capital. SAMR also fined a joint venture between health tech company Ping An Healthcare and Japanese conglomerate SoftBank.
SAMR documents revealed that authorities determined these deals breached anti-monopoly laws between March and May of this year. Notably, authorities didn’t order the companies to undo any deals. Instead, each case was fined 500,000 yuan (around USD $74,600), the maximum amount under current law.
China’s Anti-Monopoly Law
China’s Anti-Monopoly Law first came into effect in 2008, long before today’s tech giants commanded such enormous market-moving potential.The original law was designed to target foreign companies that China believed could use mergers and acquisitions to dominate the Chinese market.
Under the law, all merger deals with “potential monopoly implications” were required to submit to regulatory review before proceeding. But it wasn’t until December 2011 that the Ministry of Commerce first published regulations stipulating punishments for antitrust activities.
Following new regulations, the Ministry of Commerce, which primarily handled foreign trade and investment, investigated deals involving outside parties. (For instance, in 2017, Japanese giant Canon was fined 300,000 yuan prior to announcing its takeover of Toshiba Medical Systems.)
And then, in 2018, anti-monopoly review authority passed to SAMR during a government reshuffle. It was during that period that the regulator began looking toward mergers wholly contained within the Chinese market, too.
A new era of anti-monopoly regulation
The current campaign against monopolistic behavior began in late 2020 with Beijing’s new push to stunt the growth of Chinese Bit Tech Companies. The first trickles started in late 2020 when Ant Group – an Alibaba affiliate – saw its high-profile IPO suspended.
What followed was a flurry of government investigations throughout 2021 that saw a whopping 98 fines imposed on major internet and platform-based companies like Meituan, JD, Baidu, Alibaba and Tencent. These companies faced a cumulative fine of 21.74 billion yuan, or around USD $3.25 billion.
At the same time, SAMR kickstarted a hiring spree that expanded the bureau nearly 30%. In November, the antitrust arm was renamed the State Anti-Monopoly Bureau and launched to vice-ministerial status, upsizing its budget and manpower.
In Sunday’s statement, SAMR noted that, while it was fining offenses committed when the government prioritized foreign acquisitions, these were all “past deals that should have been reported but were not.” The regulator also stated that it would accelerate the process of reviewing old deals “to help companies move forward with a lighter load.”
In recent months, China has also updated its Anti-Monopoly Law to reflect its newfound resistance to homegrown monopolies. Starting 1 August, the maximum fine for undeclared mergers will increase to 5 million yuan, or roughly $747,000 – 10 times the current fine.
Why now?
The United States has a long history with anti-monopoly and trust-busting laws. But given that China is just now finding its zeal for regulating corporate dominance, one wonders: why?
Likely, the reason is a combination of ideological and political beliefs that serve the current administration, and also address China’s growing wealth inequality.
Chinese leader Xi Jinping has often promoted the “Common Prosperity” idea, which holds that all citizens should hold moderate wealth and the rich should give more back to society. Meanwhile, the Chinese government has noted that the country’s spectacular tech sector expansion has played a role in exacerbating wealth inequality in the past. It’s possible that because of that, authorities seek to strategically minimize tech growth.
China has also expressed national security concerns, given the enormous wealth of personal and financial data that tech companies collect. By limiting tech dominance and placing regulations on using information, China can protect its national interests from foreign companies and agencies.
New regulations and business: what investors can expect
Since the start of China’s tech crackdown, local financial markets have seen enormous volatility – some of which has likely bled onto the national stage. For instance, since 2020, Alibaba’s market valuation is down nearly 70%, while Didi has shed over 80% of its IPO value.
Experts believe that the amended anti-monopoly law will close some regulatory loopholes, preventing large companies from abusing their market dominance. With thorough regulation and punishment, they also hope to prevent illegal activities from jeopardizing fair market competition.
Currently, there’s no indication that major industry players will halt growth and moneymaking activities. Rather, large companies will simply have to tread more carefully to remain in compliance with old and new regulations. At the same time, companies with market shares below established thresholds won’t be held to the same standard under new “safe harbor” provisions to protect small businesses.
Don’t let Alibaba and Tencent drag you down
In investing, it’s often intimidating to stay in the market when a country imposes new regulations that impact business profits and share prices. It’s even scarier when those regulations impact a sector that, so far this year, has seen enormous share price losses amid investor uncertainty, economic woes and recession fears.
Fortunately, Q.ai is here to help you navigate these turbulent times.
With our Emerging Tech Kit, you can put your money to work in tech’s longstanding influence around the world. And don’t forget to turn on Portfolio Protection to ensure that your money enjoys its own “safe harbor” – no matter what regulations may arise.
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