Beijing appears to be relaxing its scrutiny of giants such as Alibaba

  • Alibaba’s major reorganization is seen as a sign that the Chinese government may 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 looking to achieve 5% growth this year, after two years in which the economy was hit by Beijing’s strict Covid policies and regulatory tightening.

Beijing’s regulatory crackdown on the Chinese tech sector began in late 2020, wiping out more than a combined $1 trillion from the country’s biggest companies.

There are now signs that the central government is softening its stance on internet titans such as Alibaba, in a move that could prove positive for Chinese technology stocks.

“The regulatory headwind that we’ve had for the last two years … which is now turning from a headwind into a tailwind,” George Efstathopoulos, a portfolio manager at Fidelity International, told CNBC’s “Street Signs Asia” on Wednesday.

On Tuesday, Alibaba announced a major reorganization, which seeks to split the company into six business units, in an initiative “designed to unlock shareholder value and advance market competitiveness.”

Over the past two years, China’s government has frequently railed against the “disorderly expansion of capital” of technology firms that have grown into large conglomerates. Part of Alibaba’s announcement noted that these split businesses could raise outside capital and even go public, apparently going in the opposite direction of Beijing’s concerns.

Efstathopoulos said the move could indicate a green light from the upper echelons of the Chinese government.

“You have senior management blessing to unlock value, and to me that’s a wonderful indication that we’re now essentially moving away from regulation not being the problem it was,” Efstathopoulos said.

Alibaba’s restructuring is not the only sign that Beijing may ease its scrutiny of the technology sector. Jack Ma, the founder of Alibaba, returned to public view in China for the first time in months.

Some credit Ma with sparking the start of the tech onslaught in October 2020, when the billionaire made comments that appeared critical of China’s financial regulator. Days later, Ant Group, the financial technology arm of Alibaba controlled by Ma, was forced to scrap its massive dual listing in Hong Kong and Shanghai, after regulators said it did not meet the requirements to go public.

Following this, the Chinese government handed out huge antitrust fines to Alibaba and food delivery giant Meituan, and introduced a range of regulations in areas from data protection to the way companies can use algorithms.

Ma’s reappearance in Hangzhou, where Alibaba is headquartered, has been read 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 traveling around. I think it was well orchestrated and fits with the government’s campaign to demonstrate that, you know, they’re relaxing the pressure on their private sector and welcoming the rest. off world,” Stephen Roach, senior fellow at Yale University, told CNBC’s “Squawk Box Asia” on Tuesday.

There have been further signs of relaxation in the regulations in recent weeks.

The gaming sector was hit hard in 2021, when the authorities became concerned about addiction among young people in China. Chinese regulators froze the approval of new game releases for several months. In April last year, the authorities began to give the green light to new games, mainly from domestic firms. This month, the video game licensing regulator gave its stamp of approval to a batch of foreign titles for release in China.

Meanwhile, Chinese ride-hailing giant Didi – one of the companies caught up in the regulatory overhaul – announced plans to expand its business. Didi went public in the US in June 2021, but was subjected to a cyber security review by Chinese regulators within days of listing. It was eventually delisted from the New York Stock Exchange and plans to float in Hong Kong.

In recent days, foreign technology leaders including Apple CEO Tim Cook and Qualcomm CEO Cristiano Amon have visited China and met with government officials.

Alibaba founder Jack Ma reappeared in public in China for the first time in months. Alibaba then announced a huge reorganization of the business. 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 to the domestic technology sector, China is also courting foreign business. The economy has been hit for the past two years, thanks in part to the country’s strict Covid policies and regulatory tightening. The government is now aiming for around 5% economic growth this year.

To achieve that, it will need the help of private enterprises – including the technology sector.

“China is facing both weak economic growth and increasing technology competition from the US. It’s a pretty tough position to be in. So they need the economy to be firing on all cylinders. Tough regulations on big tech platforms just don’t make sense at this moment “, Linghao Bao, a technical analyst at Trivium China, told CNBC via email.

While there are promising signs for investors, there are also reasons for caution, warned Xin Sun, senior lecturer in Chinese and East Asian business at King’s College London.

Sun describes the Alibaba reorganization as a move to “break up Alibaba’s business empire and reduce its enormous influence that could potentially pose a threat” to Chinese Communist Party rule.

“After restructuring, the organizational structure of Alibaba will be more decentralized, and control over its assets, data and resources will be less concentrated. The party can then impose stronger political control over each of the new entities more easily,” Sun added.

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 tech giants can cope.

“In the short term, Alibaba’s restructuring may be perceived as a routine regulation of the government’s regulatory actions and provide some regulatory certainty for the sector,” Sun said.

“In the long term, 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 the order from the government? Such uncertainty will continue to weigh on entrepreneurs and investors, and undermine their confidence.”

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