Chinese technology stocks plunge on potential monopoly regulation

Chinese technology stocks plunge on potential monopoly regulation by Michael McKenna
China’s largest technology stocks were lower today as China is considering new antitrust regulation that could severely constrain how many big Chinese technology companies operate. China is realizing that technology monopolies are not a blessing but a threat to competition and in some areas even the state itself.

Shares in Alibaba, Tencent, Xiaomi and JD.com were down today 9.8%, 7.4%, 8.2% and 9.2% respectively as new guidelines are being released by China’s State Administration for Market Regulation stating that practices such as demanding vendors to transact only on one platform and provided differentiated prices due to buying history could potentially be illegal under the new regulatory framework. Essentially, the Chinese government is drawing a line in the sand sending the signal that these technology companies are becoming too powerful relative to the state itself, but also that they are extracting too much profit from consumers while constraining competition.

These new antitrust regulations formulated in China comes just after the planned Ant Group IPO was postponed due to incomplete regulation of fintech companies providing financial services but without the traditional regulation of financial holding companies. Last month China also drafted a new personal data law that will make certain business practices of Chinese technology companies more difficult. These policy actions could longer lasting impact on these companies’ profitability and valuations. They all align China with Europe on the state’s role vs technology monopolies putting more pressure on the US to change its regulatory framework. It seems though that the US is also changing its stance on technology as we wrote about last month with the big 449-page report on competition in digital markets by the House Subcommittee on Antitrust.

For years we have been talking about technology monopolies being bad for competition and in the case of Europe how they have starved governments of tax revenue. The digital economy is very different from the economy we came from, as it enables companies to quell competition and extract profits at levels not seen since Standard Oil at the start of the previous century that started the world’s first antitrust regulation. The chart below shows Tencent’s net income since 2001. It is this type of compounding that is beginning to frighten government leaders.

Chart below is for regulatory purposes

Topics: Equities China Technology

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