What Investors Need to Know About China’s Tech Stock Crackdown

July 21, 2021

By: Wayne Duggan

U.S.-listed Chinese stocks took a big hit this week thanks to an increasingly aggressive crackdown by China on its own U.S.-listed Chinese tech stocks. Here’s a rundown of what investors need to know.

Didi Banned
The biggest victim of China’s recent regulatory crackdown is Chinese ride-hailing stock Didi Global Inc  (NYSE: DIDI). U.S. investors often refer to Didi as the Chinese version of Uber Technologies (NYSE: UBER).

Didi completed its U.S. initial public offering (IPO) on June 30, 2021, pricing its IPO shares at $14 and trading at an initial market capitalization of around $68 billion. Less than a week later, the stock tanked after China announced a cybersecurity review of the company. On July 7, China removed Didi’s app from the WeChat messaging app and Ant Group’s Alipay, essentially making it impossible for the nearly 2 billion Chinese users of the 2 popular app stores to download the app.

Regulators said the investigation and ban are part of a larger effort to increase supervision of Chinese tech stocks listed in other countries. The crackdown will reportedly focus on data collection and security.

Antitrust Fines
Shortly after the Didi ban was announced, Chinese regulators followed up with 22 antitrust fines on Chinese companies, including 6 companies owned by Alibaba Group Holding Ltd (NYSE: BABA) and 5 owned by Tencent Holdings ADR (OTCMKTS: TCEHY). The ruling Chinese Communist Party (CCP) said it has made reigning in large internet companies a top priority in 2021.

Alibaba has been a particularly popular target for China after founder Jack Ma publicly criticized Chinese regulators for stifling innovation in late 2020. Following Ma’s comments, the highly anticipated December IPO of Alibaba affiliate Ant Group was abruptly suspended, and Ma disappeared from the public eye for weeks. Chinese regulators subsequently fined Alibaba $2.8 billion as part of an antitrust probe back in April.

What it Means for the U.S. Investors
At first glance, China’s massive population of more than 1.4 billion people and its sustained annual GDP growth of above 5% make it seem like an excellent opportunity for long-term investors. However, a challenging geopolitical environment and a CCP that appears to be prioritizing political control over China’s big tech companies make U.S.-listed Chinese tech stocks an extremely high-risk, high-reward speculative investment at this point.

Chinese stocks are now getting pressured by both U.S. and Chinese regulators. In March, the U.S. Securities and Exchange Commission began rolling out new auditing standards that would potentially delist any Chinese company that fails to comply for 3 consecutive years.

In general, regulatory oversight of monopolies, data collection, and accounting practices is a necessary part of a free market that helps protect both investors and consumers. However, the market hates uncertainty, and U.S.-listed Chinese stocks may continue to struggle in the near term until investors get a clearer picture of just how much of a lasting impact the crackdowns will have on the size, profitability and growth rates of these Chinese tech giants.

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