China’s regulators punish technology giants. What may come next.

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Chinese stocks fell on Friday, when regulators fined a dozen companies, including

Tencent Holdings,

amid Beijing’s continued anti-monopoly crackdown on Internet companies. In addition, the Ant Group’s chief executive, in trouble, resigned, and reports have emerged that

Alibaba Group Holding

could face a hefty fine, albeit milder regulatory measures than those aimed at Ant.

Investors have been closely monitoring how regulators deal with Ant and Alibaba (BABA) and Ant co-founder Jack Ma, whose comments last fall angered Beijing officials before the long-awaited Ant’s IPO failed. Ma’s low profile at the end of last year raised concerns about his whereabouts, until he recently reappeared at a public event.

The Wall Street Journal, citing officials familiar with the regulators’ thinking, reported on Friday that Alibaba could face milder regulatory treatment, provided it distances itself from Ma and is more aligned with the Communist Party.

In general, policy observers see the flurry of measures as a warning shot, but one that has not jeopardized the long-term viability of companies. “Alibaba’s action suggests that Beijing will seek only a light regulatory response around the technology platform’s business practices, sending a message to be careful and clean up some of the bad business practices, but they will not take any heavier measures given the importance from Alibaba and Ant to short-term financial stability and long-term economic growth, ”said Paul Triolo, of the Eurasia Group, by email.

This sentiment was echoed by TS Lombard economist Rory Green, who described the latest wave of developments as a positive sign. “Beijing made its political point of view and is now focusing on valid antimonopoly, data and financial risks. Future regulations on data sharing and monopolistic practices will benefit small and medium-sized businesses, small technology companies and the economy in general, ”said Green by email.

But investors were still shaken, with the

KraneShares CSI China Internet

exchange-traded fund (KWEB) fell 4% to $ 83.96. Actions of

Tencent Holdings

(700. Hong Kong) fell 4% to HK $ 650.50 overnight, while Alibaba’s shares fell 4.5% on Friday morning to $ 229.82. The sector has been in a cloud since Ant’s IPO sank and has recently suffered a blow as investors focus more on parts of the market that were left behind during the pandemic, with the China Internet ETF falling 15% last month.

The year could bring further regulatory and antitrust developments as China exposes its approach to the digital economy – and there is more clarity about Beijing’s fines against Alibaba and how it can do business like Ant restructuring.

“Alibaba’s investigation is just the beginning. Most likely, more technology companies will be subject to antitrust investigations. And the antitrust fines will be higher than before, ”says Winston Ma, former managing director and head of the US office of the China sovereign wealth fund, China Investment Corp., and co-author of The hunt for unicorns: how sovereign wealth funds are reshaping investment in the digital economy.

According to The Wall Street Journal, regulators in China are considering imposing a fine on Alibaba that could be greater than the $ 975 million fine.

Qualcomm

faced in 2015 by anti-competitive practices. Although it is a large number, it is relatively manageable due to Alibaba’s financial weight. Possible divestments and the reduction of certain practices are also being considered. While fund managers do not expect these developments to make the long-term attractiveness of companies like Tencent and Alibaba unviable, this could reduce the upper limit of growth projections for Internet giants. minority acquisitions and investments can generate greater scrutiny and decrease gains in market share and the variety of ways in which companies can monetize their immense user bases. Fund managers do not see these developments significantly affecting the long-term outlook.

Sentiment around the two companies may also differ, with the focus on Alibaba seen as more company-specific, related to Ma’s comments and questions about the Ant Group’s financial business model, said Brian Bandsma, manager of emerging markets at Vontobel Quality Growth, which reduced holdings in Alibaba, but not Tencent. While Tencent may not be unscathed, Bandsma says it may be less vulnerable, as regulators are not focusing on the video games and advertising on which Tencent depends most.

More broadly, fund managers have looked elsewhere, in addition to the great Chinese shares of the Internet, especially as the global economic recovery sets in. While the latest development may have reduced the risk for Alibaba’s multiple, the higher interest rates and harder year-to-year growth comparisons will continue to pose a problem for some of the big Internet winners last year, says Laura Geritz, an emerging market manager who leads Rondure Global Advisors. That said, it is underweight in the Internet sector, preferring companies related to tourism, such as convenience stores in Thailand and the Philippines, and those well positioned for the reopening of savings throughout the year.

The lesson for investors: proceed with caution regarding China’s Internet stocks, not only because of continuing regulatory uncertainty, but also because investors are increasingly shifting to companies prepared to benefit as the global economy grows recover from the pandemic.

Write to Reshma Kapadia at [email protected]