China’s crackdown on the country’s big tech titans and their billionaire founders is raising concerns about U.S.-listed Chinese stocks. Kim Parlee speaks with Haining Zha, Portfolio Manager, TD Asset Management, about the broader implications.
Print Transcript
- I want to start with-- put this in context. There has been a crackdown on a number of tech giants by the Chinese government. I believe regulators pulled Ant's IPO. Then they slapped Alibaba with a multi-billion-dollar fine. But DiDi seems the most hands-on and the most extreme. So what are you seeing here?
- Right. Just to give you some background, DiDi is basically the Chinese counterpart of Uber. And it has about 80% market share in the ride-hailing market. And people are actually anticipating robust performance out of its IPO.
But two days after the regulatory announcement, its share is already down 30%. It is a very interesting and special case, in the sense that the DiDi app was taken directly off the App Store, which is very rare and probably the strongest regulatory action we have ever seen. And from that, we can almost infer that DiDi didn't fully clear with domestic regulators before its IPO.
And we can even see traces of that from the IPO timeline. We can see it first filed with SEC on June the 10th. And by June the 30th, it has already started trading. It does feel a little bit rushed. And, of course, it triggered [INAUDIBLE] concern on the data security and data sovereignty issue.
- So is this, then, is this a DiDi issue? Or do you see this is a-- more and more scrutiny happening with Chinese-listed companies?
- It's more likely to be a DiDi issue. Because usually, in cases like Alibaba and Tencent, the companies were put under investigation, but at least they can continue their normal course of business. Their app was still in the App Store. But it was obviously not the case in DiDi's case.
- Let me ask you-- we are seeing, though, I say more interest and more regulations, I would say, coming out for all types of companies, not just tech companies right now. And I've read that it's extending beyond the tech sector in China. So what are you seeing with that?
- Right. As you noted, the regulation change is not limited within the tech sector. So since the start of the year, we've seen many significant changes across many different sectors. For example, in the K-12 education service sector, the government rolled out the new measures aiming to reduce the burden for students and working families.
And also in health care, the government has already conducted several rounds of centralized procurement, aiming to lower the health care cost. And also in real estate, the government established clear red lines for real estate developers, aiming to control their leverage and put a lid on housing prices. So, yeah, I would say the changes are across the board.
- Can you maybe give us some context as to why those changes are happening? What is the government trying to achieve maybe in terms of, from a democratic, or from a government standpoint in terms of helping people? And at the same time, what companies are going to be affected by these kinds of changes?
- Right. On the surface, for each sector, the objective is slightly different. For example, for the tech sector, it's all about antitrust to level the playing field. In the health care sector and also in education sector, it's about the well-being of the average family.
But across all of these action, there is actually one overarching theme. That is, if the actions can benefit the majority at the cost of a small group of vested interests, then the government will do it to try to restore the balance. Because the government's view is that if left unchecked, then the capital's only goal would be to make more money, regardless of the externality it would cause to the society.
For example, in the tech space, the tech company, in order to achieve higher revenue growth, they might be motivated to abuse their power to engage in anti-competitive behavior. And for the health care sector, pharmaceutical company, in order to maintain higher drug price, they might even choose to spend more on marketing rather than lower drug costs.
So in the end, small business are worse off, households are worse off, which is against the government's vision.
- So let me ask you this. As they make these changes and increase, I'll say, scrutiny, depending on where they are, for the greater good, I'll put, of its citizens, what does that mean for the companies and for the investors? We've seen a pretty significant pullback in a number of Chinese companies. Is this an opportunity? Or is this a cost that will be borne that investors need to be aware of?
- Right. So a handful of companies this year, their share price performance really suffered. For example, in the after-school tutoring service space, two companies, for example, TAL Education and New Oriental Education, year to date their share price has been down around 70%. Of course, this is a bit of hit to the investor confidence.
But that's not surprising, because in the short term, investor confidence is always highly correlated with price movement. But if we look at some of these companies, for example in the tech space, they are really high-quality business with solid fundamentals. So I would be less worried about their long-term prospects.
- I guess it just really depends on the active management side. You have to know which ones you're talking about. Haining, we're out of time. Thanks so much for joining us.
- My pleasure. Thank you.
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- Right. Just to give you some background, DiDi is basically the Chinese counterpart of Uber. And it has about 80% market share in the ride-hailing market. And people are actually anticipating robust performance out of its IPO.
But two days after the regulatory announcement, its share is already down 30%. It is a very interesting and special case, in the sense that the DiDi app was taken directly off the App Store, which is very rare and probably the strongest regulatory action we have ever seen. And from that, we can almost infer that DiDi didn't fully clear with domestic regulators before its IPO.
And we can even see traces of that from the IPO timeline. We can see it first filed with SEC on June the 10th. And by June the 30th, it has already started trading. It does feel a little bit rushed. And, of course, it triggered [INAUDIBLE] concern on the data security and data sovereignty issue.
- So is this, then, is this a DiDi issue? Or do you see this is a-- more and more scrutiny happening with Chinese-listed companies?
- It's more likely to be a DiDi issue. Because usually, in cases like Alibaba and Tencent, the companies were put under investigation, but at least they can continue their normal course of business. Their app was still in the App Store. But it was obviously not the case in DiDi's case.
- Let me ask you-- we are seeing, though, I say more interest and more regulations, I would say, coming out for all types of companies, not just tech companies right now. And I've read that it's extending beyond the tech sector in China. So what are you seeing with that?
- Right. As you noted, the regulation change is not limited within the tech sector. So since the start of the year, we've seen many significant changes across many different sectors. For example, in the K-12 education service sector, the government rolled out the new measures aiming to reduce the burden for students and working families.
And also in health care, the government has already conducted several rounds of centralized procurement, aiming to lower the health care cost. And also in real estate, the government established clear red lines for real estate developers, aiming to control their leverage and put a lid on housing prices. So, yeah, I would say the changes are across the board.
- Can you maybe give us some context as to why those changes are happening? What is the government trying to achieve maybe in terms of, from a democratic, or from a government standpoint in terms of helping people? And at the same time, what companies are going to be affected by these kinds of changes?
- Right. On the surface, for each sector, the objective is slightly different. For example, for the tech sector, it's all about antitrust to level the playing field. In the health care sector and also in education sector, it's about the well-being of the average family.
But across all of these action, there is actually one overarching theme. That is, if the actions can benefit the majority at the cost of a small group of vested interests, then the government will do it to try to restore the balance. Because the government's view is that if left unchecked, then the capital's only goal would be to make more money, regardless of the externality it would cause to the society.
For example, in the tech space, the tech company, in order to achieve higher revenue growth, they might be motivated to abuse their power to engage in anti-competitive behavior. And for the health care sector, pharmaceutical company, in order to maintain higher drug price, they might even choose to spend more on marketing rather than lower drug costs.
So in the end, small business are worse off, households are worse off, which is against the government's vision.
- So let me ask you this. As they make these changes and increase, I'll say, scrutiny, depending on where they are, for the greater good, I'll put, of its citizens, what does that mean for the companies and for the investors? We've seen a pretty significant pullback in a number of Chinese companies. Is this an opportunity? Or is this a cost that will be borne that investors need to be aware of?
- Right. So a handful of companies this year, their share price performance really suffered. For example, in the after-school tutoring service space, two companies, for example, TAL Education and New Oriental Education, year to date their share price has been down around 70%. Of course, this is a bit of hit to the investor confidence.
But that's not surprising, because in the short term, investor confidence is always highly correlated with price movement. But if we look at some of these companies, for example in the tech space, they are really high-quality business with solid fundamentals. So I would be less worried about their long-term prospects.
- I guess it just really depends on the active management side. You have to know which ones you're talking about. Haining, we're out of time. Thanks so much for joining us.
- My pleasure. Thank you.
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