Beijing’s regulatory blitz drives China stocks to new lows

State-controlled Xinhua News Agency provided few details about the law other than that it would require China-based Internet platforms to establish “robust personal information protection compliance systems.” But the report, which follows a drumbeat of other state media reports and official statements suggesting authorities mean to severely limit the ability of Internet companies to collect and analyze personal data, sent investors in China shares scrambling for the exits.

The Hang Seng Tech Index, which tracks the 30 largest tech firms on the Hong Kong exchange, sank 2.5% on news of the law’s passage. The Hong Kong–traded shares of Internet bellwether Alibaba Group Holdings dropped 3%, while food delivery giant Meituan lost 9%. Online health providers took an even bigger hit, with Ping An Healthcare and Alibaba Health Information Technology tumbling 14.5% and 13% respectively.

The retreat in Hong Kong is part of a worldwide rout in China shares across the board. Nasdaq’s Golden Dragon China Index, which tracks 98 of China’s largest U.S.-listed firms, has plunged 52% since February. But the China CSI 300, a benchmark of companies trading on China’s domestic exchanges in Shenzhen and Shanghai, also has surrendered 18% over the same period.

Beijing’s crackdown on China’s tech sector began last November when Chinese leaders pulled the plug on the $37 billion initial public offering of Ant Group, a digital payments colossus cofounded by billionaire Jack Ma. In the months since, the regulatory blitzkrieg has spread to scores of other sectors—not just online commerce and digital payments, but also ride-hailing and transportation, video games, online tutoring, digital insurance, and entertainment.

This week’s selloff gained momentum Tuesday when China’s State Administration for Market Regulation (SAMR) announced new draft rules surrounding anticompetitive practices and data handling. A draft directive stipulates that Internet platforms must not “disrupt market competition and fair transactions.”

That same day Chinese President Xi Jinping signaled that the state is contemplating measures to redistribute the vast wealth accumulated by China’s tech tycoons and other entrepreneurs. State press accounts of a key economic planning committee Xi chairs suggested the era in which China allowed, as former leader Deng Xiaoping put it, some people to “get rich first,” is giving way to a new ethos in which the priority was “common prosperity.”

On Thursday, another state body, China’s Ministry of Industry and Information Technology (MIIT), rebuked 43 apps, including Tencent Holding’s WeChat messaging app, for illegally transferring user data.

Then on Friday, the specter of regulatory reprisal fell over liquor companies, cosmetics manufacturers, and online pharmacies as a flurry of state media commentaries called for stricter consumer protections in those sectors. Distillers have been in the doghouse since last week when authorities deplored the role of spirits and a culture of “forced drinking” in the case of an Alibaba employee who alleged that she was pressured to drink until she passed out by a manager who then raped her. The shares of online pharmacies plunged after the state-controlled People’s Daily called for increased scrutiny of prescription drugs sold over the Internet.

The state’s new enthusiasm for intervening in private markets has left many investors fearful that regulators will stymie innovation, particularly in the nation’s tech sector. The market’s collapse has prompted investors, unsurprisingly, to embrace “cataclysmic narratives,” says Paul Krake, founder of investment research firm View from the Peak. The wealth destruction seen in recent weeks “should challenge our conventional thinking around the Chinese tech sector and [its] extraordinary gains in the past decade…and liquidation in such a scenario is utterly justified.”

Chinese Internet stocks are now in an “air pocket driven by the lack of transparency surrounding regulation [for tech firms],” says Brendan Ahern, chief investment officer of KraneShares. “Markets hate uncertainty—which the multifaceted nature of [Beijing’s] implementations has created,” he says.

Investor cash is now flowing to China-free funds. In August alone, the $1.2 billion iShares MSCI Emerging Markets ex-China ETF has garnered nearly $305 million of new investment—the largest monthly inflow since its founding four years ago.  

The growing concern about investing in U.S.-listed Chinese shares has likely also played a role “in the resilience of the major U.S. Equity indices this week,” says Michael O’Rourke, chief market strategist at JonesTrading. “We suspect the reason for the U.S. Resilience is that managers liquidating their China holdings are rotating the capital right back into the major U.S. Indices to maintain equity exposure until better investment opportunities emerge.”

Tencent, which released its second-quarter earnings Thursday, is among the biggest companies caught in Beijing’s new regulatory dragnet. The company reported that quarterly revenue grew at the slowest pace since 2019, indicating waning growth under Beijing’s new dictates, and promised to contribute $7.7 billion, slightly more than its quarterly profits, to the state’s new income redistribution effort.

Company president Martin Lau didn’t mince words and warned investors that “more regulations [are] coming in the near future.”

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