Kan Feng
Head of Corporate Development and Strategy
14.09.2023

A quick view on China’s regulatory environment for the Chinese tech sector

 

Most recently, the focus in China has firmly shifted back to the challenges within real estate sector and potential knock-on effects on other sectors like the wealth management and pharmaceutical industry.

This has diverted attention away from the broader tech sector and its lackluster performance. The reason for this weak performance (see Chart 1) is basically that over the past two years, China’s tech companies have been operating under a challenging regulatory environment with officials 

repeatedly criticizing companies for various violations such as data privacy violation and monopolistic behavior, among many others.  

Nevertheless, since late 2022, we have observed that Beijing's approach starts to soften and gradually shifts to a more supportive tone. Since 2023, authority’s priorities are increasingly emphasizing on revitalizing the online platform sector as one of the engines to support China’s economic recovery1.

This might be a solid basis for recovery of the sector. 

Since 2022 regulatory pressure started to ease 

A difficult period for the Chinese techs

In late 2020, China initiated a regulatory storm against the Big Tech firms out of concerns that the major internet platforms like Alibaba, Meituan and Didi were becoming too powerful.

Since then, China has taken a number of steps to establish a more regulated operating environment for the internet sector. Between 2020 and early 2022, the regulatory authorities have pursued several landmark cases, amended the Anti-Monopoly Law, proposed updates to the Anti-Unfair Competition Law, and took a significant step in strengthening its data protection by adopting the Personal Information Protection Law (PIPL). Many of the initiatives have targeted antitrust, data and algorithm security, fintech regulation, and gig workers’ rights, among other areas.

During this period of regulatory tightening, the Chinese tech names experienced a sharp de-rating of their valuations due to destruction in investor confidence and uncertainties associated with the long-term stability in the operating environment of China1.

 

Hang Seng Tech Index posted negative return over the past 5 years and underperformed Nasdaq

- Cumulative and rolling performance view - 

Relative Performance (Hang Seng Tech Index vs. Nasdaq Composite); Source: Bloomberg, observation period: 01.01.2018 – 18.08.2023; FAM research
 

Early signs of easing 

Since 2022, regulatory pressure started to ease. The tech sector moved into a more normalized regulatory environment, as showcased by a series of early signs including supportive tone from Vice Premier Liu He in March 2022, followed by game license resumption in April, resumption of user registration for Boss Zhipin –  an online recruitment platform – in June and Cyberspace Administration of China (CAC)’s antitrust fine on Didi (mobile transportation operator) in July.

Moving in to the second half of 2022, the market gained further confidence toward the video gaming industry and platform economy. This, combined with China reopening its economy in late 2022 restored some of the previously lost confidence1.

 

In this following chart we show how major regulatory initiatives have moved from tightening (red) to supporting (green)2.


Regulatory inflection 

Moving into 2023, China's Internet industry continued to improve on the back of an easing regulatory tone.

In July 2023, the People's Bank of China imposed fines on Ant Group and Tencent, marking an end to regulatory probes. On 12th July, China’s National Development and Reform Commission (NDRC) praised Alibaba, Tencent and Meituan for their investments in key technology areas. Later on, Premier Li Qiang presided over a symposium with platform enterprises to listen to opinions and suggestions for promoting the standardized and healthy development of the platform economy.

Representatives from companies such as Meituan, Xiaohongshu (social media and e-commerce platform), Alibaba Cloud, and Douyin (TikToks Chinese Version) delivered speeches, while representatives from PDD, JD.com and others submitted written statements. Overall, this marks the regulatory inflection point and is widely viewed as an indication of a more easing regulatory cycle ahead.

Source: Bloomberg, FAM research, Morgan Stanley research as of August 2023

The tech sector well positioned for a near term recovery

Going forward, we expect a continuation in the positive regulatory environment for the big tech companies in China.

Since early 2023, the market has already witnessed encouraging recoveries across the tech sector. For example, with the resumption in gaming license, leading gaming companies (both Tencent and Netease) have posted healthy recovery in gaming revenue in Q1 and are expected to deliver growth acceleration for the rest of the year driven by a wave of new launches.

 

In Summary

We believe the increasingly supportive regulatory tone is largely driven by

  • big tech’s important role in supporting China’s economic recovery as Premier Li Qiang urged the big techs to do more to support the economy amidst a weaker than expected post-covid recovery; and
  • official’s prompt support for the development of generative AI in the country. Regulators are increasingly recognizing platforms' roles in driving technological innovation, transforming traditional industries, and enhancing China’s global competitiveness.

From a valuation perspective, investor confidence on the Chinese tech names has been severely hit over the past few years, primarily due to the lack of longer-term visibility on the operating environment. Hence, we do not envision a strong recovery in the equity multiples of the sector for now and expect future share price upside be driven, to a greater extent, by earnings expansion. We believe the tech names are well positioned for a recovery in the near term and are optimistic towards the sector’s general recovery.

Fosun Industries

  • Fosun is a global conglomerate based in Shanghai, China, with a diversified portfolio of businesses spanning healthcare, insurance, real estate, and other sectors. Some of the notable brands are global Businesses like Wolford, Clubmed and Avanc Pharmaceutical.  The company itself was founded in 1992 by a group of entrepreneurs with a vision to build a world-class enterprise that would create value for all stakeholders. Today, Fosun is recognized as one of China's most dynamic and innovative companies, with a strong track record of growth and expansion both within China and abroad.

    At the heart of Fosun's success is its commitment to innovation, entrepreneurship, and responsible business practices. The company's core values include integrity, innovation, pragmatism, and excellence, which guide all of its business activities. Fosun is also deeply committed to social responsibility, with a focus on promoting sustainable development, protecting the environment, and giving back to the communities in which it operates. Overall, Fosun's history and values reflect a company that is dedicated to creating long-term value for all stakeholders, and that is committed to building a more sustainable and prosperous future for all.

    Fosun has a significant global presence, with industrial operations located in almost 20 countries and regions spread across five continents. Additionally, nearly 40% of the company's total revenue is generated from overseas business. To further strengthen its global innovation capabilities, the company has established a "Shanghai-Silicon Valley" global innovation headquarters and integrated pharmaceutical research and development (R&D) systems in China, the United States and India. The company also boasts a diverse talent pool, with almost 40% of its 76,000 employees coming from overseas. Moreover, among the approximately 110 Fosun Global Partners, the Fosun has more than 10 overseas partners.

Fosun Asset Management

  • Fosun Asset Management Co., Ltd. (hereinafter referred to as "Fosun Asset Management") was founded in 2013 and is the wholly-owned flagship asset management company of Fosun International Limited. Fosun Asset Management was incorporated in Hong Kong under the Companies Ordinance of Hong Kong as a limited liability company on July 8, 2013, and is licensed with the Securities and Futures Commission of Hong Kong effective March 3, 2016. Fosun Asset Management is also registered with US Securities and Exchange Commission effective March 2, 2018.

    With over 30 specialists directly covering Fixed Income, Equities and Alternatives in Asia/China market.

 

 

Sources:

  • 1)FAM assessment, based on Bloomberg data and Morgen Stanley Research.

    2)Market sizes are determined by a combined top-down and bottom-up approach, based on a specific rationale for each market segment. As a basis for evaluating markets, we use annual financial reports of the market-leading companies and industry associations, third-party studies and reports, survey results from our primary research (e.g., Statista Global Consumer Survey), data on shopping behavior (e.g., Google Trends, Alibaba Trends), and performance factors (e.g., user penetration, price/product). Furthermore, we use relevant key market indicators and data from country-specific associations such as GDP, consumer spending, internet penetration, and population. This data helps us estimate the market size for each country individually.

 

 

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