The crackdown on Chinese tech groups is not over yet. A fresh round of regulatory fines for Alibaba and Tencent marks the end of a shortlived relief rally.
The regulator has targeted the two groups for not properly disclosing past deals and failing to comply with anti-monopoly rules. Of 28 deals it says violated regulations, Tencent was involved in 12 and Alibaba five.
A 6 per cent drop for Alibaba’s share price may seem an overreaction given the size of the fines. The maximum for each case is just Rmb500,000 (slightly less than $75,000).
But the fact that the fines cover past transactions is troubling. There is a risk that regulators will reach even further back. This would have an outsized impact on Alibaba and Tencent. Between them, they accounted for nearly half of all venture capital flow for acquisitions in mainland China before the crackdown.
The next hurdle comes in August when Beijing is expected to implement a revised anti-monopoly law. The draft includes terms that demand companies seek an antitrust review before any planned mergers or acquisitions if any of the parties’ annual global sales exceed Rmb12bn ($1.79bn) and at least two parties’ domestic annual sales reach Rmb800mn. Large merger and acquisition deals in China face significant hurdles.
Alibaba and Tencent shares have gained more than 15 per cent from a March low. As antitrust scrutiny grows there is reason to expect those gains to evaporate.
There is one potential bright spot. Following a 90 per cent collapse in Chinese venture funding in the first five months of the year, deals are finally starting to pick up. Qiming Venture Partners, an early backer of ByteDance, has raised $3.2bn. Sequoia China has secured $9bn in fresh capital.
While dwindling acquisitions could cut valuations across China’s tech sector, the antitrust crackdowns could also mean more opportunities for start-ups to expand their businesses in areas once dominated by local giants.
