Chinese tech giants lost hundreds of billions of dollars in market capitalisation early this week as the government widened its crackdown on the sector – a move that has unnerved international investors who remember how Beijing last year put the brakes on the planned initial public offering (IPO) for Ant, one of the country’s largest fintech companies.
Edtech, food delivery and ride hailing companies were among those hauled over the coals for improper antitrust, employment, and consumer protection practices. Yet suspicions linger that the regulatory action is as much about silencing critical voices, such as that of Jack Ma who last year attracted attention from the government for criticising financial regulators ahead of Ant’s planned IPO.
Many observers expect the Chinese government to keep a close eye on big tech companies – not only to protect consumers from practices such as predatory pricing – but also to limit foreign influence on its tech giants that seek listings on bourses in the West. There are also concerns about data on Chinese citizens potentially ending up in the hands of China’s biggest political rival, the US.
Three tech giants – Tencent, Meituan, and Alibaba – lost more than $237 billion over 48 hours earlier in the week. Although there has since been a partial recovery in these share prices, there are signs of broken confidence, and many investors are expecting this to be the new normal going forward. The global ramifications could be significant, not least for the JSE, due to the massive exposure of Naspers to the Chinese market via Tencent. Despite a partial recovery in its share price, Tencent has ended the week down 9.6%.
For international investors, the crackdown raises concerns about the safety of foreign capital in the world’s second-biggest economy. Meanwhile, as the EU and US contemplate big tech regulatory moves of their own, we can expect to see countries like India and post-Brexit UK consider ways to make themselves even more attractive technology destinations. We recently highlighted some regulatory clampdowns here. Regular readers of our news will know we have been researching how to optimally incorporate exposure to China in our offshore house-view funds. This week’s developments highlight the complexities and risks of investing in that region, which is why we have been approaching the opportunity with caution.
“If you’re investing in companies with a footprint in China, I would think you understand you’re going to be subject to these kinds of risks. Maybe the import of these risks has become a little clearer.”
– Chester Spatt, professor of finance at Carnegie Mellon University’s Tepper School of Business
“Never ever do business with the government. Be in love with them, never marry them.”
– Jack Ma
- Earlier this week, the Chinese government banned online education firms from teaching courses that are taught in school and from raising foreign capital; and said they should be registered as non-profit firms. The move led to listed Chinese edtechs losing billions in market cap, while privately held start-ups lost their lustre overnight. Tutoring firm Gaotu Techedu saw its market cap fall from $25 billion to $880 million.
- China’s Hello, an app-based ride services provider backed by Jack Ma’s Ant Group, scrapped plans for an IPO in the United States against the backdrop of a regulatory crackdown on US-listed Chinese companies.
- Food delivery platform Meituan was down 17.7% in Hong Kong on Tuesday, eclipsing Monday’s massive 14% loss. This came as Chinese regulators issued new guidelines on Monday calling for improved standards for food delivery workers.
- On the Nasdaq, technology companies fared better, delivering strong earnings. Apple reported strong third-quarter earnings this week, with sales up 36% from the June quarter last year. iPhone sales increased nearly 50% on an annualised basis. Apple reported record third-quarter revenue on demand for iPhones, iPads, and services, bolstered by retail stores reopening globally and consumers embracing new 5G networks.
- Microsoft (which is a key holding in our actively managed offshore portfolios and the largest holding in our global house-view funds) also beat analysts’ estimates, with strong growth driven by cloud platform Azure. For the fourth quarter, Microsoft posted revenues of $46.2 billion in the period, along with net income of $16.5 billion and earnings per share of $2.17. The company’s revenues grew by 21% compared to the year-ago quarter. Net income expanded by a more toothsome 47% over the same time frame.
- Tesla managed better-than-expected earnings as record sales of its electric vehicles fattened margins and carried the company to a first $1 billion quarter of net income in its 18-year history. Tesla reported $1.14 billion in net income in the second quarter. Profit more than tripled to $1.45 per share on an adjusted basis, beating the 97c average of analysts’ estimates and marking the eighth straight quarter of profit.
- Google is taking legal action over an expanded version of Germany’s hate-speech law that recently took effect, saying its provisions violated its users’ right to privacy. Google, an Alphabet unit that runs video-sharing site YouTube, filed suit at the administrative court in Cologne to challenge a provision that allows user data to be passed to law enforcement before it’s clear any crime has been committed.
- Away from specific corporate news, commodities have been booming over the past 15 months. This is the second commodity bull market in two decades. As in 2007, there is debate over the likelihood of a commodity super cycle in which commodity prices trade significantly above their long-term price trends for an extended period. Unlike in 2007, when it was argued that Chinese demand drove the super cycle, proponents of the current potential super cycle point to the lack of new supply to meet future demand.
- Oil prices are also climbing, following industry data showing US crude and product inventories fell more sharply than expected last week. This has reinforced the expectation that demand will outstrip supply growth amid a surge in Covid-19 cases.
- From Monday, those who are fully vaccinated in the EU or US will not need to isolate when coming to England, Scotland, and Wales from an amber list country. Currently, only people who received their jabs in the UK can avoid quarantine when arriving from amber list countries, except France. According to the BBC, the UK government said the rule change will help to reunite family and friends whose loved ones live abroad.
- Naspers and Prosus shares saw their valuations plunge by R500 billion earlier this week as Tencent, their biggest single investment, became the latest victim of Chinese authorities’ clampdown on tech companies. The price movements of these shares impact a broad swathe of the investment community, from pension funds to retail investors, as the company accounts for more than a fifth of the local stock exchange. Naspers retraced most of its losses and ended the week down 4.6% – a relief to the many funds and retail investors with exposure to the share.
- Anglo American Platinum declared a record interim dividend as higher platinum group metal (PGM) prices combined with strong operational performances on mining and refining. Amplats, an Anglo American subsidiary and one of the world’s leading PGM producers, declared several financial records for the six months to end-June, with a R46.4 billion payment to shareholders in the form of a base and special dividend.
- AECI opted to pay out almost R200 million in a record interim dividend for the six months to June. The company is confident its rebound from Covid-19 will be sustained amid a global commodities boom and a pickup in infrastructure construction in South Africa.
- Discussions between low-cost SAA subsidiary, Mango Airlines, and South Africa’s air traffic management company, Air Traffic and Navigation Services (ATNS), over outstanding payments have failed, resulting in Mango suspending all flights. The two had agreed on payment arrangements, which Mango did not honour.
- State-owned rail, port and pipeline company, Transnet, has asked some of its employees to take forced leave as they can’t work because of the disruptions to the firm’s IT systems last week. It also emerged the company was working relentlessly to ensure employees were paid their July salaries. The company has been updating the public about its predicament using social media platforms. Read more here.
- In a look at the violence that beset large parts of KwaZulu-Natal and Gauteng a few weeks ago, The Economist argues that the carnage revealed much about the country in which it occurred. In particular, the violence puts a spotlight on the ANC ahead of local elections. The party’s failure to build a properly functioning state and to deliver economic growth created the potential for chaos. Its own factional battles set the timing. The effects of the destruction will be felt for years.
- S&P Global Ratings has also commented on the riots, saying it did not expect South Africa’s credit rating to be affected in the immediate term by the recent looting and violence, but that if it were to be prolonged or repeated, ratings could be at risk. While order and supply chains had been restored, the damage to elements of the country’s retail and financial infrastructure, economy, and consumer and investor confidence will take longer to repair.
- Finance Minister Tito Mboweni has assured South Africans that the fiscal path announced in the 2021 February budget will be maintained. However, he cautioned that the financial situation remains serious. National Treasury has been able to cover a massive R36.2 billion relief package due to strong revenue takings in the first quarter, and by reprioritising other support measures. This is on top of the existing pressures on the fiscus, such as the public sector wage bill, and the cost of the Covid-19 vaccination programme.
- In the aftermath of the recently failed insurrection, author and political analyst Richard Johnson outlines a gloomy outlook for the country. Follow this link to read more.
Sources: Dynasty, BusinessLive, Bloomberg, CNBC, ITWeb, Reuters, Wall Street Journal, Economist, BBC, Moneyweb, etc.