It’s the $96 billion — and counting — question for investors in China. After last year’s bruising crackdown on Big Tech, Wall Street has been speculating on when Beijing will relent.
The latest selloff in benchmark tech stocks is a wake-up call that the worst is far from over. The government said on Friday that China’s online food-delivery platforms should reduce the fees they charge businesses, sending the shares of industry leader Meituan tumbling. Meanwhile, the National Audit Office demanded that state-owned enterprises disclose their financial exposure to Alibaba Group Holding Ltd.’s fintech affiliate Ant Group, and Tencent Holdings Ltd. plunged Monday on rumors — denied by the company — of more regulatory crackdowns.
In just two trading days, the so-called ATM — Alibaba, Tencent and Meituan — lost about $95.7 billion in market value. At of Monday's close, the Hang Seng Tech Index has fallen 6.1% this year.
These are indications that the campaign is unlikely to be relaxed after a few quarters. Rather, when President Xi Jinping’s “common prosperity” drive, which aims to narrow wealth gap and broaden the middle class, runs into trouble, every productive unit of the society, from the Ministry of Finance to big businesses, will be called upon to sacrifice.
Consider the regulatory pressure on Meituan. Behind Beijing’s latest services-industry directive is a tacit acknowledgement that China’s mom-and-pop shops are suffering a long, rough winter as the government’s Covid-zero policies bite. Just like the rest of the world, small businesses, which tend to be in retail, restaurant and tourism, suffer disproportionately amid virus-related lockdowns.
The latest quarterly survey of 15,569 small businesses by Peking University and Ant Group Research Institute paints a dire picture: Sales are weak and profitability is nowhere in sight; small businesses lack the cash reserves to survive extended lockdowns. Average sales were at only 30.6% of the pre-pandemic level, while 27% surveyed were operating at a loss and another 19.1% were barely breaking even. Their average cash piles will run out in less than three months if there’s no incoming revenue.
Pinched by rent, rising commodities prices and higher labor costs, small businesses are most worried about breaking even, according to the survey. This perhaps underpins the central planner National Development and Reform Commission’s new guidelines that included asking food-delivery platforms such as Meituan to further lower their service fees, especially in areas suffering from Covid outbreaks.
Wall Street analysts have expressed confidence, calling Meituan shares oversold. Goldman Sachs Group Inc., for instance, said in a Feb. 20 note that Meituan’s 5%-6% service fee commissions are “among the lowest” globally. But from the central planners’ viewpoint, that’s still a lot for little hot pot restaurants that are struggling to stay afloat.
In 2021, Meituan was estimated to have generated 42.6 billion yuan ($6.7 billion) in gross profits on revenue growth of 56%, yielding a respectable 23.8% margin, according to analysts polled by Bloomberg. It can share some of small businesses’ plight.
To be sure, Meituan is not the only sacrificial lamb. Various levels of the government, from the central bank to the finance ministry, were required to make concessions, such as providing more financing and VAT tax breaks. Earnest local officials were also warned not to be too quick with disruptive district lockdowns, a sign that Beijing’s policy makers are starting to recognize that its strict Covid policy is hurting the working class and the real economy.
Since Xi made his push for “common prosperity” last summer, there’s been a lot of talk on whether China has turned anti-capitalist. That’s the wrong question. What’s happening now is that when the economy slows, Beijing will sift through every corner of the society looking for cash cows. Big Tech — from Alibaba to Tencent — happens to be more profitable than the rest. As such, they will be asked to contribute to the common good. Big Tech is not off the hook until the campaign against Covid becomes a distant memory.
Bloomberg
