Big Tech’s Big China Trouble Makes Investors See Red

China — a market with hundreds of millions of consumers, a burgeoning middle class, with the attendant discretionary income — proves an irresistible lure for Big Tech firms hailing from China itself and abroad.

And beyond Big Tech, for any number of other firms focused on commerce and enabling the transactions and apps tied to that commerce.

But there are trade-offs. For the companies seeking a foothold in the country — or for Chinese firms looking to raise money in the United States — there are privacy issues with which to contend, new regulations about data, and no end of scrutiny about everyday business practices.

As reported in The Wall Street Journal on Tuesday (July 6), China is aiming to boost its oversight of homegrown firms that are going public, or want to go public, on U.S. exchanges.

And: the regulatory scrutiny of U.S. firms seeking to make inroads into China continues.

For what we might term “outbound efforts” — that is, Chinese companies looking to raise capital and have the cachet of listing abroad — there are new guidelines in place that tie into “data security, cross-border data flow and other confidential information management.” And, per reports in the state-run news agencies, there have been “profound changes in the economic and financial environment.”

As a result, there have been continuing reviews of data security for companies like Didi Global, which went public last month, and other companies that have gone public stateside. Ant Group, famously, was slated to go public last year, but was halted in its IPO tracks by the government, which wanted more information on financial activities and imposed stricter capital requirements.

But the latest round of oversight hints at some (perhaps) punitive intent. In a move that echoes the actions taken toward Ant, as noted in this space, the Cyberspace Administration of China recently told local app-store operators to remove the rideshare outfit Didi Global from their platforms. The government is reportedly concerned about servers and whether sensitive data (on users) may be at risk for exposure.

We use the word punitive in two senses of the word: It’s punitive to the companies like Didi that are kicked off some of their conduits for reaching end consumers (and it’s rough on their reputations).

“This is deeply unfair to investors,” Brock Silvers, chief investment officer at Hong Kong-based private equity firm Kaiyuan Capital, told Bloomberg. “And as a crucial matter of market integrity, China’s regulators should cease allowing companies to list while under investigation.”

But by taking such steps after the listings on exchanges, the impact is harmful to the U.S. (and other) investors snapping up the shares only to see those holdings buffeted by negative sentiment.

CNBC reported that in an interview, David Roche, president and global strategist at Independent Strategist, said it’s “too risky” to own Chinese technology stocks, as things are heated on the geopolitical stage.

“There are a lot of issues to do with politics. There are a lot of issues to do with the availability of technology, which personally I don’t want to take those risks in a portfolio at the present time,” Roche told CNBC.

Bumpy Road For US Firms? 

It’s no secret, too, that there’s cross-border intent, too, for U.S. firms to make further inroads into the U.S. markets. Apple may be exhibit number one, as it depends on China as a prime market for iPhone sales, and where the country contributes double-digit percentage points to the top line. As reported last week, iPhone sales in China were up 16 percent in June amid discounts and promotions.

Elsewhere, earlier this year, reports surfaced that PayPal is planning to launch a wallet in China that will focus on cross-border payments. But it’s important to note that wallet would not directly compete with local firms Alipay and WeChat. PayPal has planted a flag, fully, in China, with its 100 percent stake in the country, having bought all of GoPay, the payments platform. The payments networks such as Visa and Amex have been angling to gain more traction in China, with clearance to introduce products and services and process transactions there.

But the bumpy road looms — evidenced by the fact that some of the biggest companies in tech are threatening to cut off service in China, even as they may (at a high level) view China, and Hong Kong, as attractive opportunities. Facebook, Twitter and Google are among the marquee names companies threatening to quit offering services in Hong Kong if authorities’ proposed changes pass. The changes mandate that the companies would be held responsible if data are shared maliciously.

“The only way to avoid these sanctions for technology companies would be to refrain from investing and offering the services in Hong Kong,” the companies said in a June 25 letter from Singapore’s Asia Internet Coalition, as recounted here. The new Data Security Law will take effect in the fall, and firms will have to share more data with the government (the private sector, then, becomes fair ground for increasing government control).

The saber-rattling may get more intense. The current Biden administration has put in place reviews, and step up efforts, to identify risks in supply chains (such as are tied to semiconductors). The administration has also broadened its list of Chinese firms that are off limits for U.S. investment, boosting a list that had taken shape during the Trump administration. The order takes effect next months, indicating that things are going to get more heated.