New Fines for Tech Giants: Another Regulatory Wave or Flurry?

Chinese tech titans including Alibaba, Tencent and Bilibili have been fined for not disclosing their M&A talks, fueling market fears of a return to tighter regulation.

Key Takeaways:

• China’s market regulatory authority has listed 28 M&A deals. It has slapped fines on tech companies such as Alibaba, Tencent and Bilibili for breaching disclosure laws.
• But market analysts say the risk of another crackdown on the tech sector is limited as the economy slows.

Fears of deregulation have once again shaken China’s tech sector, just as the market thought policymakers were loosening their grip on the online economy.

Major tech companies were suddenly hit with fines earlier this month for failing to accurately report past M&A transactions, the worst regulatory storm has cast doubt on past estimates. The fines were relatively small, but enough to raise concerns about the return of the campaign that rocked the market last year.

By conventional wisdom, this period should have been a market rally. In the year A pattern dating back to the 1980s dictated that investors in Hong Kong stocks would “sell in May and get out” before a market recovery in July. This year, however, the market followed a different direction.

The month of May brought a lot of positive news to lift the spirits of investors. DD (OTCPK:DIDIY) It is reported that it is preparing to return to the application stores A group of ants Planning a renewed IPO bid and Shenzhen authorities have launched a campaign to encourage spending by distributing vouchers at online titans Meituan ( OTCPK:MPNGF ) ( 3690.HK ) and JD.com (JD) (9618.HK).

As a result, as a leading technology stocks Ali Baba (BABA) (9999.HK), JD, Meituan, Tencent (OTCPK: TCEHY) (0700.HK) and NetEase (NTES) (9999.HK) rallied 23% to 54% from their lows in May. Meanwhile, the Hang Seng index rose 17 percent to 22,449 points from 19,178 points in early May.

But just when tech stocks looked set for a strong July, China’s antitrust campaign suddenly returned to the headlines, spooking investors.

On July 10, the State Administration of China issued a letter on receiving administrative penalties for companies in 28 cases of violation of market regulation. Among them are 13 cases related to Tencent and five disclosures of transactions related to Alibaba’s anti-monopoly laws. Others involved DiDi, Bilibili (BILLI) (9626.HK), Ping An Health (OTCPK:PANHF); Lenovo Group (OTCPK:LNVGY) (0992.HK) and Weibo Corporation ( 9898.HK ) ( WB ) but unlike previous cases involving fines in the hundreds of millions of yuan, the fine was only 500,000 yuan ($74,000) for each case.

Neglecting to report on M&A activity

According to officials, Alibaba was fined 2.5 million yuan for failing to report deals including China Business Network, Youku Tudu and Zhouyun Group. Tech leader Tencent was fined 6 million yuan in connection with 12 transactions, including companies such as Haomaile, QZing Technology and Xiaobang Guihua.

News of the fines caused a summer meltdown for tech stocks. Alibaba fell more than 15 percent last week, while Tencent, Meituan and Bilibili lost between 7 percent and 17 percent of their market value.

In the year Since the late 2020s, China has been in the grip of an increasingly aggressive and expansive tech industry, after launching a campaign against anti-competitive practices and investigations into corporate disclosures and cybersecurity.

But earlier this year, investors believed the Chinese government was softening its stance on tech giants to help the economy recover from Covid. The latest sanctions may cause policymakers to have second thoughts about the issue and increase risks for the market, said Kenny Wen, head of investment strategy at KG Asia.

“Several factors are likely to deter investors: regulatory storm may return, tighter monetary policy in the US to control inflation, sale of Tencent shares by major South African shareholder, as well as uncertainties surrounding the Covid-19 outbreak in China,” Wen said.

But on closer inspection, administrative fines from the antitrust agency may not signal a new wave of regulation that could stymie future deals.

All 28 cases were past transactions that should have been disclosed under antitrust laws. The market authority expressed confidence that companies will become more aware of disclosure requirements as antitrust enforcement becomes more formal. Companies will review past transactions and voluntarily report any disclosure failures, he said, promising to release judgment letters in other cases.

Low risk of regulatory strictness

The wording can be interpreted as a restatement of an earlier position. That being the case, market analysts don’t see much risk of a new wave of regulation coming in.

The authority announced the penalty last year, which led to extensive investigative efforts, for good reason. And the slowdown in the broader economy creates the possibility of easing stricter rules,” said KGI Asia’s Wen.

Evidence is mounting that China’s economy is in sharp decline, a series of urban sprawls and global trade disruptions are taking place. And authorities are still sending signals that they want to allow the online industry to generate much-needed growth.

In late May, China’s State Council reiterated the importance of ensuring the healthy and orderly development of the platform economy. Wang Yiming, a member of the Monetary Policy Committee of the Central Bank of China and deputy head of the Development Research Center of the State Council, said at the forum that China should take a series of measures to expand domestic demand, accelerate digitalization and transition to intelligence. Technologies. He also pointed out that it is important to introduce policy measures that will help the private sector and the plate economy to develop sustainably and healthily, as well as set expectations from the market.

Regulatory concerns aside, Tencent and Alibaba face other challenges. Tencent’s South African investor, Naspers, is set to sell its stake in the Chinese technology giant at an undisclosed time to support its share price. Tencent’s online gaming revenue is restricted by the government, allowing teenage players to log in between 8:00 a.m. and 9:00 p.m. Friday through Sunday nights only during the summer holidays.

Alibaba has a worse problem. According to the Wall Street Journal, Shanghai authorities have been linked to a breach of a police database that hosted executives from Ali’s cloud computing department. The report sent the stock to HK$100.

Wen said the Ali Cloud incident is a concern and advised investors to pay close attention to see if it heralds a closer examination of the cloud sector as a whole.

“However, it is our view that the impact on technology stocks in other sectors may not be too large. And investors should not be too concerned about policy risks,” Wen said.

Disclosure: nothing else

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Editor’s Note: Bullets for this article’s summary were selected by Search Alpha editors.