Chinese regulators continue to apply pressure on the country's biggest tech companies, this time reportedly looking to split up Alibaba
(NYSE:BABA) founder Jack Ma's Alipay. Beijing is pushing for Alipay to
create a separate app for its loan business.
Chinese stocks are coming off a choppy week where the worries about government crackdowns were exacerbated, not least by the vagaries of the actions. Gaming stocks Tencent
(OTCPK:TCEHY) and NetEase
(NASDAQ:NTES) faced the brunt of the focus the last couple of weeks as Beijing imposed restrictions on online gaming hours for children. Last week, the stocks dropped sharply on a report from the
South China Morning Post that regulators were halting approval of online games, only to bounce back some after the paper later
clarified the government is just slowing approvals for now.
Leader Xi Jinping is making these moves to address social inequality and "avoid an existential threat from an outsider of the Chinese Communist Party" that could challenge the hierarchy, Thanos Papasavvas, CIO at ABP Invest, said on Bloomberg TV earlier this month.
Christopher Wood, global head of equities strategy at Jefferies, says that the moves simply look like Beijing wanting its gaming limit of three hours per week enforced, but that the market reaction shows increasing nervousness in the sector.
"The problem remains that for many foreign equity investors, given the structuring of their portfolios, the internet sector is the private sector in China for all practical purposes," Wood writes in his latest "GREED & fear" note. (Emphasis added.)
"In this respect, the issue remains that foreign investors' recent experience in Chinese equities is very different from investors in the mainland market," he says. "This is because the portfolios of growth orientated foreign investors have traditionally been most exposed, in GREED & fear's view, to the three sectors most at risk of continuing regulation. That is internet, education and healthcare."
Tech makes up 38.7% of the MSCI China Index
(NASDAQ:MCHI) and 13.6% of the MSCI Emerging Markets Index
(NYSEARCA:EEM).
Retail fervor: While the sector is mostly driven by institutional money, "there is also evidence of late of bargain hunting on the part of American retail investors," looking at the KraneShares CSI China Internet ETF
(NYSEARCA:KWEB), tracking the CSI China Overseas Internet Index. "While the ETF's price has declined by 50% from the peak reached in mid-February, its shares outstanding and market capitalization are up 222% and 64% over the same period to 149m shares and US$7.9bn respectively," Wood says.
The problem with passive: As big companies get bigger, their outsize influence on indexes could become a vulnerability. "The Chinese regulatory campaign against the internet sector, in terms of changing the rules of the game, is also a salutary reminder that the ultimate problem with passive investing, otherwise known as investor socialism, is that everybody owns the same thing; a trend further exacerbated by the boom in investing in index tracking ETFs," Wood asserts. And the problem isn't confined to China.
"With the six Big Tech stocks now accounting for 24.7% of the S&P500 market capitalization, the risks are obvious if Washington ever summons the backbone to actually do something about Big Tech as opposed to just talking about it," he adds. The "new head of the Federal Trade Commission, Lina Khan, clearly wants to do something about. But it is quite another question whether she will be allowed to." (
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