- Alibaba’s major reorganization is seen as a sign that the Chinese government may relax strict scrutiny of the domestic technology sector.
- Alibaba founder Jack Ma has returned to public engagements, another welcome sign for investors.
- China is looking to achieve 5% growth this year, after two years in which its economy was battered by Beijing’s strict Covid policies and tightening regulation.
Beijing’s regulatory crackdown on China’s technology sector began in late 2020, wiping out more than a combined $1 trillion from the country’s largest companies.
There are now signs that the central government is softening its stance on internet titans like Alibaba, in a move that could prove positive for Chinese technology stocks.
“The regulatory headwinds that we’ve had in the last couple of years … that’s now turned from a headwind into a tailwind,” George Efstathopoulos, portfolio manager at Fidelity International, told CNBC’s “Street Signs Asia” on Wednesday.
On Tuesday, Alibaba announced a major reorganization, which saw the company split into six business units, in an initiative “designed to unlock shareholder value and improve market competition.”
Over the past two years, the Chinese government has often railed against the “bad expansion of capital” by tech companies that have grown into huge conglomerates. Part of Alibaba’s announcement said that these broken businesses could raise external capital and even go public, seemingly going in the opposite direction to Beijing’s concerns.
Efstathopoulos said the move could indicate a green light from the upper echelons of the Chinese government.
“You have the blessings of senior leadership for unlocking value, and, to me, that’s a wonderful indicator of where we are now actually moving away from regulation not being the issue it once was,” he said. said Efstathopoulos.
Alibaba’s restructuring is not the only sign that Beijing may be easing its scrutiny of the technology sector. Jack Ma, the founder of Alibaba, is back in the Chinese public eye for the first time in months.
Some have credited Ma with initiating the tech crackdown in October 2020, when the billionaire made comments that seemed critical of China’s financial regulator. A few days ago, Ant Group, the financial technology affiliate of Alibaba controlled by Ma, was forced to scrap its massive Hong Kong and Shanghai dual listing, after regulators said it failed to meet requirements to go public.
After this, the Chinese government handed down massive antitrust fines to Alibaba and food delivery giant Meituan, introducing more regulation in areas from data protection to the way in which companies can use algorithms.
Ma’s reappearance in Hangzhou, where Alibaba is headquartered, was read as another sign of Beijing’s more positive outlook on the technology sector and entrepreneurs.
“Jack didn’t just show up in Hangzhou because he was tired of traveling. I think it’s well organized and suits the government’s campaign to show that, you know, they’re relaxing the pressures on their private sectors and welcome the rest. of the world,” Stephen Roach, a senior fellow at Yale University, told CNBC’s “Squawk Box Asia” on Tuesday.
There have been more signs of easing regulation in recent weeks.
The gaming sector will be hit hard in 2021, as the authorities are concerned about the addiction of young people in China. Chinese regulators have held back approval of new game releases for months. In April, the authorities began to green light new games, especially from domestic companies. This month, the video game licensing regulator gave its seal of approval to a batch of foreign titles to be released in China.
Meanwhile, Chinese ride-hailing giant Didi – one of the companies caught up in the regulatory overhaul – announced plans to expand its business. Didi went public in the US in June 2021, but found itself subject to a cybersecurity probe by Chinese regulators within days of listing. It was eventually delisted from the New York Stock Exchange and plans to float in Hong Kong.
In the past few days, foreign technology executives including Apple CEO Tim Cook and Qualcomm CEO Cristiano Amon visited China and met with government officials.
Jack Ma, the founder of Alibaba, has reappeared in public in China for the first time in months. Alibaba then announced a major reorganization of its business. Experts see the move as a signal that the Chinese government is softening its stance on the tech giants after a crackdown that began in late 2020.
Jean Chung | Bloomberg | Getty Images
Besides heating up the domestic tech sector, China is also courting foreign business. Its economy has collapsed in the past two years, thanks in part to strict Covid policies and tightening regulation. The government is currently aiming for around 5% economic growth this year.
To achieve that, the help of private enterprises – including the technology sector – is needed.
“China is facing weak economic growth and increasing tech competition from the U.S. It’s a pretty difficult position to be in. So they need the economy to fire on all cylinders. The strong regulation of large tech platforms is unreasonable at this time,” Linghao Bao, tech analyst at Trivium China, told CNBC via email.
While there are promising signs for investors, there is also reason to be cautious, warned Xin Sun, senior lecturer in business in China and east Asia at King’s College London.
The Sun described Alibaba’s reorganization as a move to “dismantle Alibaba’s business empire and to reduce its massive influence that could potentially pose a threat” to the Chinese Communist Party’s rule.
“After the restructuring, Alibaba’s organizational structure will be more decentralized, and control over its assets, data and resources will be less concentrated. The Party will then be able to impose stronger political control over each one of the new entities is easier,” Sun added.
He cautioned against over-optimism around China’s technology sector. While the latest moves bring some regulatory certainty, many questions remain about what other tech giants will do.
“In the short run, Alibaba’s restructuring can be seen as the government’s usual regulatory actions and provides some regulatory certainty for the sector,” Sun said.
“In the long run, however, this raises many questions about the fate of other tech giants. Will Tencent, Meituan, and ByteDance also break up? If so, will they make their own decisions or will they just wait on orders from the government? Such uncertainty will continue to weigh on businessmen and investors, undermining their confidence.”
