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Antitrust crackdown on China's tech sector could lead to greater competition, S&P says

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Competition is likely to intensify among Chinese internet companies, such as Big Tech firms Alibaba Group Holding, JD.com and Tencent Holdings, as Beijing places greater scrutiny on mergers, overseas listings and anticompetitive behaviour in the technology sector, according to S&P Global Ratings.

An ongoing crackdown on the sector, particularly antitrust inquiries, are a "tail risk" for the industry in China, but could open the door for additional investment spending as companies seek to grow organically, the credit rating agency said.

Practices that are perceived to give companies unfair advantages or the ability to grow through acquisitions could be limited by regulators as they try to level the playing field in the industry, S&P said.

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"For Chinese internet companies, the government is likely seeking to balance security and social stability considerations with growth and innovation," it said in a presentation.

Beijing has increased its scrutiny and undertaken a broad crackdown on the industry since it abruptly shelved the planned dual listings of Ant Group, the operator of the ubiquitous Alipay app, in November. That has included a record US$2.8 billion fine against Alibaba, the owner of the Post, in April for anticompetitive behaviour.

The scrutiny of the industry has only intensified since Didi Chuxing, the operator of China's dominant ride-hailing app, went forward with a US$4.4 billion initial public offering in the United States in June before a data security review was completed.

Beijing has since said it will review all overseas listings of companies that hold the data of more than 1 million of Chinese consumers and would bar IPOs by the country's edtech platforms, which provide online education, as part of a crackdown on China's off-campus tutoring industry.

On Friday, a bureau focused on cybersecurity at the Ministry of Industry and Information Technology (MIIT) summoned 12 major tech companies, including Alibaba, Tencent and ByteDance, to instruct them on how to improve their operations to comply with China's new Data Security Law.

Alibaba paid a record US$2.8 billion fine for anticompetitive behaviour as part of Beijing's heightened scrutiny of the tech sector this year. Photo: Reuters alt=Alibaba paid a record US$2.8 billion fine for anticompetitive behaviour as part of Beijing's heightened scrutiny of the tech sector this year. Photo: Reuters

The rapidly shifting landscape has left foreign investors uneasy, with nearly US$1 trillion wiped off of Chinese stocks traded in the US last week. It also triggered a US$700 billion sell-off last month in Hong Kong's stock market, which is dominated by mainland companies.

The crackdown could hinder dozens of companies that have filed or are planning to file for US listings, with a number of companies already shelving their IPO plans, including Ant-backed bike-sharing firm Hello Inc, Chinese social media and lifestyle platform Xiaohongshu and e-commerce platform Meicai.

The US Securities and Exchange Commission asked Chinese issuers last week to provide more information on their structure and the risk to investors before seeking to go public on American bourses.

Ray Dalio, the founder of Bridgewater Associates, the world's biggest hedge fund, urged investors this weekend not to panic over Beijing's recent moves.

Ray Dalio, the founder of Bridgewater Associates. Photo: Screen grab from YouTube alt=Ray Dalio, the founder of Bridgewater Associates. Photo: Screen grab from YouTube

"As for investing, as I see it the American and Chinese systems and markets both have opportunities and risks and are likely to compete with each other and diversify each other. Hence they both should be considered as important parts of one's portfolio," Dalio, a long-time China investor, said in a LinkedIn post on Saturday. "I urge you to not misinterpret these sorts of moves as reversals of the trends that have existed for the last several decades and let that scare you away."

The US capital markets are likely to remain a funding source for Chinese companies despite the increased scrutiny, S&P said.

Despite the crackdown, the variable interest entity (VIE) structure, which many Chinese firms have used to go public in the US, should remain safe for now, S&P said, noting that risks are rising in more sensitive sectors.

Under a VIE structure, companies form an overseas entity - usually incorporated in a jurisdiction such as the Cayman Islands or the British Virgin Islands - and share the profits or economic benefits of the onshore business with foreign investors who would normally be restricted in how they could directly invest in a mainland company.

The structure was pioneered in 2000 when Sina Corp, the operator of Weibo, NetEase and Sohu.com went public in the US, but has always remained in a legal grey area in China.

"Dismantling VIEs on a wide-scale without appropriate compensation for investors may hurt foreign investment in China," S&P said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.