China’s model of state-controlled capitalism has made economic regulation very easy. In recent times there have been 50+ antitrust crackdowns on some of the countries largest tech firms including Alibaba and DeeDee, which has led to an overall wipeout of over $1 trillion in market cap. So what does this mean for investors? In order to understand the effects of this on investors’ portfolios, we first need to understand why these crackdowns occur in the first place.
The main reason is a series of violations of antitrust laws, which aim to create fair competition by preventing monopolies from forming. This effectively creates a more optimistic environment for new players to enter the market, where they don’t have to fear being crushed by the giants in the industry.
As an example, let’s take a look at Alibaba.
Alibaba was recently fined $1.5 billion for its exclusionary practices. Specifically, Alibaba wouldn’t allow vendors on its marketplace (AliExpress) to list their products or stores on any competitor’s app. Most vendors would actually comply with this policy as Aliexpress is the largest e-commerce platform in China and they would be able to get the most reach by listing on this platform. However, this effectively means that Alibaba’s competitors would be neglected as sales occurring through their platform would diminish.
The Chinese government’s vision is to create a competitive environment, where innovation is rampant and new start-ups emerge rapidly, as there has always been a reluctant sentiment in the Chinese tech start-up space. This is largely due to fear of the already established companies, such as Alibaba, being able to easily kill competition.
The speed at which these crackdowns have occurred and the rate at which the companies have been fined is alarming and suggests the government’s untrammeled power. Within 2-weeks of an initial warning, DeeDee (ride-hailing app) was put under a ban and did not even receive a chance to plead their case to the antitrust board. This has sparked even more inquiries and has created a new series of antitrust bills to come under consideration.
Effects on Portfolio
The new entrepreneurial environment the government is trying to foster opens a lot of opportunities to invest in early-stage businesses which have the potential to grow. However, many investors have already been deterred by the crackdown on the country’s tech giants. Many who at one point were firm believers in the growth of the Chinese tech giants have begun to pull out funds after this. This has led to record lows on the Hang Seng tech index where some of China’s largest tech giants are included. However, some companies such as Alibaba, had a share price increase after the fine was imposed as many investors remained certain of Alibaba’s potential.
Before investing in China it is important that investors understand the power dynamics of the government and the country’s large companies. Its political winds are changing direction and its effects on businesses and the market will be far more severe than what we are used to in a democratic or fully capitalist society. The effects of these crackdowns in the long-term are still to be seen, but many analysts believe that they will cause more harm than good.