China Tech Stocks have declined by about 40% since their peak in February 2021. This is due to the Chinese government tightening regulations for Chinese Tech companies. These actions include halting Ant Group’s IPO in November 2020 and removing Didi’s apps from China’s App Stores. While China had administered regulations that impacted individual firms in the past, they have expanded to regulate the broader Chinese Tech industry as well.

Why is the Chinese government clamping down on their Tech companies?

According to the rules issued by the State Administration for Market Regulation (SAMR) on its website, these are the main reasons:

1. Restraining Monopolies

Some of these China Tech companies grew into giants that used predatory pricing strategies. These actions included selling below cost and entering into exclusive contracts with vendors to exclude competitors. The government wanted to end these unfair practices. 

2. Govern Fintech

Alipay and WeChat Pay make up 94% of China’s mobile payments. These Fintech companies are eclipsing traditional China banks. Hence, the government wanted to regulate them and ensure that they will operate with the same rules as traditional Chinese banks.

3. Data Privacy

Didi’s largest shareholders are foreign companies – Softbank and Uber. There have been concerns about data leaking into foreign hands, especially with so much data on the Chinese citizens in Didi’s database.

What is the government really trying to regulate?

The China government’s primary concern was never to restrain monopolies. China has been, and will continue to be, full of monopolies. Data privacy is not of concern either.

1. Chinese government as the main shareholder

The Chinese government must always be the main shareholder of corporations operating in China. If they obey this, the regulations will be enforced in a laxer manner. The converse will occur for companies that disobey this.

Alibaba’s Jack Ma spoke out against the Chinese government and Didi went IPO against the government’s wishes. They will suffer the heaviest fines, exemplifying how the Chinese government will punish companies who go against them. However, large companies that obey the government will get smaller but comparative penalties to those that disobey the government. This prevents people from accusing the Chinese government of being biased. 

2. China’s Tech sector is the future

China is in a Tech supremacy competition with the US. Hence, all the innovations from these Tech companies are required to help the Chinese Teach sector thrive. Additionally, regulations that were initially very loose are now being tightened to ensure Tech companies are regulated in the long term. Thus, the change seems intense, but the government still wants these companies to thrive. The commotion surrounding this change is only temporary.

Possible changes in the industry

Source: IMD