China’s big tech crackdown: Smart money will look for opportunities elsewhere, say experts

From the peak five months ago, Chinese tech and consumer internet sector has lost nearly a trillion dollars in market capitalisation and most of these companies are listed in Hong Kong or via the ADR route and very few are listed in the mainland Chinese market. These tech/ internet companies are also under scrutiny. A trillion dollars is almost equal to the entire marketcap of Alibaba, Meituan and PDD put together.

So, what does it mean for IPOs and start-ups in other regions?

The Chinese internet space is very important for China’s economy and equity markets because the Chinese tech and internet space by some estimates contributes 40 percent to China’s GDP, and has a weight of 40 percent in the MSCI China Index and 15 percent in the MSCI EM index.

Hence, it begs the question – whether this fall in tech and consumer internet businesses is a global phenomenon? The answer is a no. The Nasdaq composite is up around 14 percent year to date and pretty much at a new record. So, what is happening in China is very centric to that country.

So, what is really going on here? The Chinese government has acted against some of these tech giants, and also tightened rules on data security and overseas listings. Many such tech companies are also facing anti-trust investigations. For example, some of them like Didi have been taken off the app store. This has been well publicized, but a lot more has happened. The Chinese government action is basically aimed at protecting the common man and preventing excessive power in the hands of a few giant companies.

So, what is the implication of all this? The big unknown is - is the Chinese regulatory tightening temporary or more permanent in nature? A lot will depend on it. For investors, what does this mean - will they start looking at consumer tech businesses elsewhere - that is outside China, and does India make the cut?

In India, for example, will businesses like Zomato fit the bill neatly? Similarly, in Indonesia, for example, for the third-largest e-commerce company there, Bukalapak, there wasn’t huge investor interest, but now it has an IPO lined up.

The other thing to ponder upon is, will the China episode be used as a cautionary tale everywhere? Recent appointments in the Biden administration tell us that US antitrust is coming back with a special focus on big tech. So, there are a lot of questions, but not many answers.

To discuss this further, CNBC-TV18 spoke with Avinash Gupta, former Head of Sales, Bank of America Merrill Lynch, and now an independent market advisor, along with Richard Harris, Port Shelter Investment Management.

When asked if he saw a regulatory risk similar to what is happening in China, taking place in India, Gupta said, “India is at a very nascent stage right now, where regulation is concerned. Although we are a reasonably well-regulated market and the numbers that China, US are talking about has gone beyond control. So, whilst we are reasonably well-regulated, these kind of measures and controls are a long way off, where the Indian markets are concerned."

Gupta is of the clear view that investors will definitely look at these kinds of businesses outside China. He said, money finds opportunity and if Chinese markets are becoming tough, smart money all over the world will look at other opportunities. There is ample liquidity and massive opportunity, so people should dive in. There is a lot of money waiting on the side-lines, said Gupta.

Harris is of the opinion that the market is being held up due to a gush of liquidity and if one wants opportunities to invest, one shouldn't look at valuations.