The Chinese government’s crackdown on its domestic technology industry continues, with Tencent under fresh pressure despite the company’s efforts to follow changing regulatory expectations.
News broke over the weekend that Beijing filed a civil suit against Tencent “over claims its messaging-app WeChat’s Youth Mode does not comply with laws protecting minors,” per the BBC. And NetEase, a major Chinese technology company, will delay the IPO of its music arm in Hong Kong. Why? Uncertain regulations, per Reuters.
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The latest spate of bad news for China’s technology industry follows a raft of regulatory changes and actions by the nation’s government that have deleted an enormous quantity of equity value. After a period of relatively light-touch regulatory oversight, domestic Chinese technology companies have found themselves on defense after the Chinese Communist Party (CCP) came after their market power in antitrust terms — and some of their business operations from other perspectives. Sectors hit the hardest include fintech and edtech.
Gaming is also in the CCP crosshairs.
After state media criticized the gaming industry as providing the digital equivalent of drugs to the nation’s youth last week, shares of companies like Tencent and NetEase fell. Tencent owns Riot Games, makers of the popular League of Legends title. NetEase generated $2.3 billion in gaming revenue out of total revenues of $3.1 billion in its most recent quarter.
NetEase stock traded around $110 per share in late July. It’s now worth around $90 per share after expectations shifted in light of the gaming news, indicating that investors are concerned about its future performance. Tencent’s Hong Kong-listed stock has also fallen, from HK$775.50 to HK$461.60 this morning.
Tencent tried to head off regulatory pressure, announcing changes to how it controls access to its games after the government’s shot across the bow. The effort doesn’t appear to have worked. That Tencent is being sued by the government despite its publicly announced changes implies that its proposed curbs to youth gaming were either insufficient or perhaps moot from the beginning.
The Exchange is looking into the Chinese venture capital market tomorrow, making today’s news items concerning the country’s technology industry more than cogent. From where we stand this morning, it appears that the regulatory wave that started some time ago among some of China’s largest tech companies is not over yet.
It’s worth noting at this juncture that the changing regulatory landscape in China is not only hitting tech companies. The CCP recently said that it “must cut off the black hand of the capital” regarding its domestic entertainment industry, including what it perceives to be toxic fan culture. Of course, entertainment often runs on tech rails, meaning changes to the entertainment sector could impact technology companies. But it appears that a broader push to more centralize the CCP and exert more control over what Chinese citizens do in their spare time is underway.
One thesis regarding the tech crackdown itself was that Chinese leadership wanted to shift the focus of its technology industry toward harder-tech efforts. Less social media, more hardware and chips. But even in those areas, the government is causing turmoil. As Bloomberg reported this morning:
A warning in state media Friday that regulators will show no tolerance in cracking down on speculators in the chip market sent related stocks lower on Monday.
China’s biggest chip foundry Semiconductor Manufacturing International Corp. dropped 5% in Hong Kong, while Hua Hong Semiconductor Ltd. tumbled 5.7% in its worst drop in nearly three months. Shanghai-listed Will Semiconductor Co. fell 5.7%, while Hubei Tech Semiconductors Co. was down 3.3%.
The regulatory bull took on prices in the semiconductor space, warning against hoarding of components.
Where startup investors put capital to work in the rest of the year in China may provide a roadmap concerning where smart money expects a lighter regulatory touch, or perhaps even state support. Today, however, the news appears to indicate that we should expect more of the same as we’ve seen in recent months from the Chinese government: More complaints about the impact of “excessive” capital in its industries, more tumbling share prices and more held IPOs.
That’s not a recipe for investor confidence or startup success.
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