Tech investors wary of China’s charm offensive to attract funding

Investors are sceptical about Beijing’s recent pledge to support China’s biggest technology companies in the coming year, following a bruising regulatory campaign that has tamed internet titans such as Alibaba and Tencent.

During an annual policy meeting that sets out the agenda for 2023, China’s top leaders pledged last month to support digital companies to “fully display their capabilities” in promoting economic growth, according to a readout of the closed-door summit on Chinese state media.

But venture capitalists and foreign investors remain wary about the apparent reversal of a brutal, two-year regulatory campaign.

Beijing has levied huge fines on internet players, launched probes over data abuses, limited children’s gaming hours and nearly wiped out the edtech sector when it banned for-profit tutoring for core curriculum subjects.

Alibaba’s market capitalisation has fallen by about 70 per cent and Tencent’s by about 50 per cent since both companies’ share prices peaked, in October 2020 and February 2021 respectively.

The lingering concerns were validated last week when China’s securities regulator took aim at two Nasdaq-listed online brokerages, Futu Holdings and Up Fintech, which allowed Chinese investors to buy overseas stocks and operated in a regulatory grey area.

The China Securities Regulatory Commission banned the companies from signing up new Chinese users and said it would send supervisory teams to their offices, sending both groups’ shares plummeting more than 25 per cent in New York.

Fundraising for high-growth tech start-ups has also fallen off a cliff. These groups raised a total of Rmb143bn ($20.5bn) in the three months to September, according to data provider ITjuzi, a decline of nearly 60 per cent from the same period in 2021, despite government efforts to bolster investor confidence in recent months.

“The regulatory crackdown has shaved hundreds of billions off the market capitalisation of China’s internet giants,” said Duncan Clark, founder of the Beijing-based BDA Consultancy. “Investors will not forget this in a hurry.”

A Hong Kong-based tech investor at a large international bank said foreign capital was reluctant to dive back into the internet space, with the near-total annihilation of the edtech sector last year proving to be particularly scarring.

That culminated in the collapse of several smaller tutoring groups and sent valuations of larger groups such as New Oriental tumbling more than 90 per cent. “The sense of gloom is hard to dispel,” the investor added.

It has been five months since the last punitive action was taken on one of China’s major internet companies, and Beijing has messaged its clear intent to cool off on the regulatory crackdown, saying issues such as children’s video gaming addiction have been “resolved”. Instead, officials emphasise the importance of stimulating growth to counter rising unemployment.

Yi Lianhong, the new provincial party secretary of Zhejiang, last month urged Alibaba to “unleash innovation” during a visit to its headquarters in Hangzhou, the first such meeting in two years.

“The visit signals that officials are recommitted to growing the economy,” said Clark. But he added that investors remained nervous because the shift appeared to be driven by the weakening short-term economic outlook. “To what extent is the regulation over, or is the change being driven by the need to do CPR on the economy?”

A Hangzhou regulator involved in the Alibaba probe said it was difficult to tell if the crackdown was over, noting that local authorities were ultimately acting on directives from Beijing. He said Zhejiang officials had broadly supported the group founded by Jack Ma, which raised the province’s profile and brought jobs and investment to the region.

Some industry insiders argue Beijing’s campaign has successfully tamed its internet giants. After being slapped with a record $2.8bn anti-monopoly fine, Alibaba was forced to stop strong-arming some merchants into exclusively selling products on its platform, a tactic it used to cement its dominance.

The Hangzhou regulator said conditions for merchants had improved since taking action against Alibaba. “Alibaba had turned into the bully rather than the helper. The situation has improved now,” they said.

Alibaba did not respond to a request for comment.

Experts say ByteDance’s successful foray into ecommerce on Douyin, the Chinese sister app of TikTok, was aided by the government prizing open competition. According to data provider YipitData, Douyin merchants sold about 40 per cent more merchandise in October and November compared with the same period in 2021.

But the campaign also triggered a sharp slowdown in financing, which has prevented the growth of new start-ups.

“As investors pulled money out of the tech sector, this hampered the growth and development of new competitors and further entrenched the position of incumbents,” said Angela Zhang, an antitrust expert and professor at the University of Hong Kong.

Shaun Rein, managing director of the China Market Research Group, said venture capital and private equity funds were wary of diving back into internet companies. “They see China becoming more socialist,” he said. “Entrepreneurs are worried the government won’t let companies make fat margins, so the pool of potential deals is smaller.”

However, Rein added that hedge funds, with their shorter investment horizons, were “getting interested again”, following recent news that the US audit regulators have gained sufficient access to the financial books of Chinese tech groups listed in New York to stave off a delisting threat.

“They are looking for short-term gains,” he said, adding that venture capital and private equity investors with longer investment horizons remained “negative on regulatory risk”.

Additional reporting by Ryan McMorrow in Beijing