Xi Jinping’s crackdown on Chinese tech firms will continue

By Don Weinland: China business and finance editor, The Economist, Hong Kong

As the Chinese government stepped up its fierce attack against the country’s technology companies in the spring and summer of 2021, business leaders, analysts and investors found themselves repeatedly asking: when will it stop? More than $1trn was wiped off the collective market capitalisation of some of the world’s largest internet groups, such as Tencent, a gaming and social-media giant, and Alibaba, China’s e-commerce powerhouse. Entire business models—online tutoring, for example—were laid waste. Investors needed to hear that an end was in sight. But on August 8th the Communist Party issued a five-year blueprint aimed at reshaping China’s tech industry—confirming to even the most optimistic industry watchers that the abrasive changes would continue well into 2022.

As the new year dawns, vast swathes of China’s economy have been hit by the regulatory crackdown. Xi Jinping, China’s president, is rewriting the rules for how the economy works, and how the data that companies collect is treated. That has meant striking down some of the country’s most prominent tycoons, such as Jack Ma, the founder of Alibaba, and forcing other groups, such as DiDi Global, a ride-hailing giant, into submission. The speed of the reforms means that companies in fields from fintech-lending and e-commerce to self-driving cars, social media and video-gaming must rethink how they make money and handle data.

China’s president is rewriting the rules for how the economy works

All of this will lead to two big changes in 2022. The first will be a decline in the profitability of China’s tech sector. The country’s internet and e-commerce giants have been a goldmine for investors for years. That will slow down as some of the reforms implemented in 2021 are reflected in earnings in 2022. But not all sectors are being treated equally. At one extreme, some providers of online after-school tutoring have been forced to convert into non-profit organisations. Video-gaming is also being pummelled. In September regulators told gaming companies, including Tencent, that they should stop focusing on profits and instead concentrate on reducing adolescents’ addiction to playing. The short-video industry, dominated by companies such as ByteDance, Kuaishou and Bilibili, may receive similar treatment. Expect poor returns from firms in these areas in 2022.

Meanwhile, China’s biggest e-commerce groups—Alibaba, Pinduoduo and JD.com—are being forced to confront many of the monopolistic practices that bolstered their earnings in the past. Meituan, a super-app focused on food delivery, has been ordered to provide better support to its armies of drivers. Such changes will erode companies’ profits and clobber their share prices. Tencent’s price-to-earnings ratio is expected to fall from a multiple of about 32 in 2020 to 24 in 2022, according to Bernstein, a brokerage.

The second shift will be in how Chinese tech groups raise capital. Neither Chinese nor American regulators want Chinese companies to go public in New York. Even initial public offerings in Hong Kong have taken on a new level of risk. Chinese regulators have railed against the “disorderly expansion of capital” by tech firms. A meeting of a key decision-making body on August 30th noted that the initial crackdown had shown signs of success. American investors’ appetite for Chinese tech companies with heady valuations seems unlikely to recover in 2022. But expect several big firms to go public in Hong Kong, although at lower valuations.

Analysts at Morgan Stanley, a bank, call this a “reset” of an entire industry. As Chinese tech firms adjust to the reality of tighter government control, their value to investors will inevitably be lower.

Don Weinland: China business and finance editor, The Economist, Hong Kong■

This article appeared in the China section of the print edition of The World Ahead 2022 under the headline “From boom to techlash”