China tech stocks Tencent, Alibaba in govt crosshairs; lessons for investors – China expert Professor Michele Geraci

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China’s tech giants – including Tencent – are coming under increasing pressure from regulators worried about their growing influence. China’s President Xi Jinping has ordered regulators to step up their oversight of internet companies, crack down on monopolies and promote fair competition.What’s behind these developments and what are the consequences for investors with exposure to Chinese tech stocks? Unpacking developments for the BizNews community is China financial markets and economy expert Professor Michele Geraci, of the University of Nottingham. – Jackie Cameron

Professor Michele Geraci on tech companies and the Chinese government:

What is happening is that China is trying to balance the line that separates the role of the government and the role of the market. These lines tend to move in one direction or another, as certain industries develop and find bigger space. At some point, they either cross that line or they get very close. This is the time where government and company need to, in a way, reassess their own respective role – specifically in the case of internet companies that have grown very fast in China. They have not only pushed the line of the scope of influence, but they’ve also done it very fast.

So this has been a very dynamic development that has required the government to intervene to respect those boundaries. The way China moves between state and market; It’s like an elastic band. There’s a long-term direction, but there are tactical adjustments in the short-term.

On whether the Chinese government is doing anything different to the United States:

Many things. My advice to the investors is [that] we are lucky now because the Chinese government does things in a different way -and that may be a challenge. But the positive thing is that they tell us what they’re going to do. They have a five-year plan – which has just come out a few days ago – that basically highlights the areas where the government wants the economy to develop.

So it does give us guidelines. It’s a little bit like when investors look at corporate management annual reports. Normally, in the annual report, the company sets the strategy for the future, with the budget marketing activities and so on. That’s exactly what the Chinese government believes. It’s almost an annual report, with the results of the previous year and a plan for the next year and medium to long-term plan (5, 10, 15 years).

I used to be in the investment community. I was an investment banker. It is very difficult in China to pick individual companies, but it’s much easier to pick sectors. The government drives the development of sectors -macro. Then within that sector, there will be winners and losers and that will be, in a way, affected by different dynamics. This will be very hard.

That’s why I always tend to say the best route is to follow the plan of the government. Play the factors that have been identified as those where the government will invest and push to develop, rather than picking individual companies.

On what the next five years may hold for Tencent and Alibaba:

The plan is that the government wants the sectors – not the companies –  but the internet sectors to  develop more. Already, the digital economy is about 35% of the overall GDP. It’s growing in double digits. There will be new 5G and artificial intelligence, both on the software and the hardware. There will be a big push in the semiconductor industry. We’re going deeper into the development of those technology sectors – not just mobile phones. It’s not just Apple, but it is also down to the actual making of those things, of the microchips and even further down to the elements that make up of those chips.

On what these companies are doing that the Chinese government doesn’t like:

They have grown a little bit too fast, crossing that line and entering, for example, the world of banking by maybe mobilising customer deposits. The line can be blurred when a company sells goods on the internet – like Amazon and Alibaba – and the customer uses a prepaid card to put some funds that will be available when they need to make the purchase. Little by little, the funds put into these prepaid cards look like a bank deposit. So companies then have to decide how to manage those funds. Do they offer a little bit of interest? 

And that kind of means that they’re really crossing the line, into a sector that unlike the internet, needs to be highly regulated because it’s a systemic sector for the economy. Not everyone can open a bank. You need a license, because you need to have some certain requirement ratio for financial stability. Not everyone can ask people to put their savings into their account, even if in exchange they pay some interest. This has been the thing that has caused a concern in Beijing. Seeing those Internet companies crossing the boundary of strictly being in the internet sector and moving into banking.

There are two problems. One, you’re moving into a sector that is not yours. That’s already a red alert. Two, you’re moving into a sector which is strategically important. Banking drives the renminbi value [and] the value of interest rates. Of course, this cannot be in the hands of individual private companies.

On whether companies like Tencent and Alibaba will be able to grow:

It’s a very difficult to answer, to be honest. I want to re-emphasize the point. The micro sector is an easy call. The micro call on [an] individual company is a little harder. So if you ask me, will Alibaba continue to grow? I can very honestly – and I hope everyone would say this – I don’t know. If you ask me whether the internet [and] online shopping sector will grow, then I will be very confident to say I think so.

I think it’s good that you’ve asked me this question, because this is the message that we have to give to our readers. Getting into individual companies adds a different level of risk, compared to investing in companies that trade or operate in Europe. Here in China, it’s a policy driven economy largely. Policy can change, suddenly, that could affect individual companies. So you have TikTok that can go very high suddenly, then it may encounter some problems. That’s why a prediction of individual micro companies is very difficult. I’ve been in China 15 years and I’ve always shied away from making calls on individual companies, it’s best to look at sectors.

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