- Alibaba’s sweeping reorganization is seen as a sign that the Chinese government could relax its intense scrutiny of the domestic technology sector.
- Alibaba founder Jack Ma returned to public engagements, in another welcome sign for investors.
- China is targeting 5% growth this year, after two years of its economy battered by Beijing’s strict Covid policies and tightening regulations.
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 giants like Alibaba, in a move that could be positive for Chinese tech stocks.
“The regulatory headwinds we’ve had for the past two years … that’s now turning from a headwind to a tailwind,” George Efstathopoulos, portfolio manager at Fidelity International, told CNBC’s “Street Signs Asia” on Wednesday.
On Tuesday, Alibaba announced a major reorganization, aiming to split the company into six business units, in an initiative “designed to unlock shareholder value and promote market competitiveness.”
Over the past two years, the Chinese government has often spoken out about the “disorderly expansion of capital” of technology companies that have grown into large conglomerates. Part of Alibaba’s announcement noted that these splintered companies could raise foreign capital and even go public, seemingly counter to Beijing’s concerns.
Efstathopoulos said the move could signal a green light from the upper echelons of the Chinese government.
“You have senior leadership blessing for unlocking value, and to me that is a fantastic indication that we are now essentially moving away from regulation that is no longer the problem it was,” said Efstathopoulos.
Alibaba’s restructuring isn’t the only sign that Beijing could ease its controls on the technology sector. Jack Ma, the founder of Alibaba, returned to the public eye in China for the first time in months.
Some say Ma kicked off the technical crackdown in October 2020, when the billionaire made comments that appeared critical of China’s financial regulator. A few days later, Ant Group, Alibaba’s financial technology company controlled by Ma, was forced to delist its massive dual listing in Hong Kong and Shanghai after regulators said it failed to meet the requirements to go public.
Following this, the Chinese government handed out massive antitrust fines to Alibaba and food delivery giant Meituan, introducing a slew of regulations in areas from data protection to how companies can use algorithms.
Ma’s return to Hangzhou, where Alibaba’s headquarters are located, is seen as another sign of Beijing’s more positive outlook on the technology sector and entrepreneurs.
“Jack just didn’t show up in Hangzhou because he was tired of travelling. I think it was well orchestrated and fits with the administration’s campaign to show that, you know, they’re easing pressure on their private sector and welcoming the rest of the world,” Stephen Roach, a senior fellow at Yale, told me. University, Tuesday on CNBC’s “Squawk Box Asia.”
There have been further signs of regulatory relaxation in recent weeks.
The gaming sector was hit hard in 2021, as authorities became concerned about addiction among young people in China. Chinese regulators have frozen the approval of new game releases for several months. Last April, authorities began giving the green light to new games, mainly from domestic companies. This month, the video game licensing regulator gave its stamp of approval to a series of foreign titles for release in China.
Meanwhile, Chinese giant Didi, one of the companies involved in the regulatory overhaul, announced plans to expand its business. Didi went public in the US in June 2021, but was subject to a cybersecurity review by Chinese regulators within days of its listing. It was eventually delisted from the New York Stock Exchange and plans to head to Hong Kong.
In recent days, foreign technology executives, including Apple CEO Tim Cook and Qualcomm CEO Cristiano Amon, have visited China and met with government officials.
Jack Ma, founder of Alibaba, reappeared in the public eye in China for the first time in months. Alibaba then announced a massive reorganization of its operations. Experts see the move as a signal that the Chinese government is softening its stance on tech giants after a crackdown that began in late 2020.
Jean Chung | Bloomberg | Getty Images
In addition to warming the domestic technology sector, China is also attracting foreign affairs. The economy has been battered for the past two years, thanks in part to the country’s strict Covid policies and tightening regulations. The government is now aiming for around 5% economic growth this year.
To achieve that, it needs the help of private companies, including the technology sector.
“China is facing both weak economic growth and increasing tech competition from the US. It’s a pretty tough position to be in. So they need the economy to fire on all cylinders. Strict regulation on major technology platforms is on this moment just doesn’t make sense,” Linghao Bao, technical analyst at Trivium China, told CNBC via email.
While there are promising signs for investors, there is also cause for caution, cautioned Xin Sun, senior lecturer in Chinese and East Asian affairs at King’s College London.
Sun describes Alibaba’s reorganization as a move to “break up Alibaba’s business empire and reduce its massive influence that could potentially threaten” Chinese Communist Party rule.
“After the restructuring, Alibaba’s organizational structure will become more decentralized and control over its assets, data and resources will be less concentrated. The party could then more easily impose stronger political control over each of the new entities,” added Sun. .
He warns against too much optimism about the Chinese technology sector. While the latest moves provide some regulatory certainty, many questions remain about how other technology giants would fare.
“In the short term, Alibaba’s restructuring could be seen as the routinization of government regulatory action and provide some regulatory certainty for the industry,” Sun said.
In the long run, however, it raises more questions about the fate of other tech giants. Will Tencent, Meituan and ByteDance also be broken up? If so, will they make their own decisions or just wait for government orders? uncertainty will continue to weigh on entrepreneurs and investors and undermine their confidence.”
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