Chinese Technology – The pendulum

The regulatory pendulum swings back to the middle.

• Beijing has made a significant concession that implies that now that it has the private sector is firmly in its grip, the Chinese state does actually want its technology sector to thrive and even access foreign capital.
• The Chinese state has announced that it will change its rules around audit secrecy in order to enable US-listed Chinese companies to meet the disclosure requirement that will enable them to remain listed in the USA.
• This issue has been bubbling under the surface for a while and involves the Holding Foreign Companies Accountable Act which was amended in March 2021 to force Chinese companies to disclose data regarding their audits to the SEC.
• At the time, this looked to me to be a move designed to force Chinese companies to delist as there was no way that Chinese companies could comply as they would be breaking the law in China by disclosing this information to the SEC.
• The companies have until 2024 to comply, but this impasse looked certain to ensure that almost all of them would delist from the USA.
• For those that do not already have a Hong Kong listing, this could have made life very difficult as passing the data security check to list in Hong Kong is also proving to be very difficult.
• This is the bind that Didi finds itself in as it has abandoned its Hong Kong listing meaning that if it also loses the USA, then its shareholders will be in indefinite limbo.
• Having crushed the valuation of its technology sector through regulation and zero-Covid, it looks as if the Chinese state has realised that it needs the private sector as well as access to foreign capital if it hopes to compete with the USA in global technology.
• This move to allow the SEC-required disclosures combined with promises to support the technology sector and the VIE structure (see here) is a strong signal that the regulatory clampdown is effectively over.
• The Chinese state appears to have realised that it has gone too far and now that the new landscape has been established, the regulatory pendulum seems to be swinging back to the middle.
• This implies that the regulatory environment has now crystalised and as such it is now much easier to assess the outlook for the Chinese technology sector when one starts to look beyond the zero-Covid regime that is currently hampering the economy.
• The one exception to this is Tencent where its financial services business remains almost untouched in contrast to the devastation that has been wrought upon Ant Group.
• There is still chatter that Tencent will be forced to split WeChat Pay and the financial services businesses into separate companies like Ant Group but beyond Tencent, the skies are beginning to clear.
• The next step to recovery will be for China to lift its draconian zero-Covid regulations which I think it will do this year as Omicron is through the safety net and now looks set to spread very rapidly through China.
• Chinese vaccines are not very good at stopping disease but they are good enough at keeping people out of hospital meaning that once herd immunity has been established, some degree of normality will be able to resume.
• I am hopeful that this occurs towards the end of this year meaning that 2023 should see a good bounce for the Chinese economy.
• Hence, I think we will see a steady recovery in Chinese technology but the heady days of very rapid growth are clearly over and a more pedestrian outlook now prevails.
• This is why I remain comfortable with my position in Alibaba as the regulatory shadow has long since passed over the company and it still trades on a small fraction of the multiple that Amazon does.