China’s tech giants have lost their trouble and may never get it back

China’s tech giants have lost their trouble and may never get it back

(Bloomberg) – At the trading points in New York and Hong Kong, the dynamic mood towards Chinese technology companies is unquestionable: With shares such as Alibaba Group Holding Ltd. and Tencent Holdings Ltd. to jump from the lows of many years, we are talking about a new bull the market is getting stronger.

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However, talk to executives, entrepreneurs and venture capitalists who are closely involved in China’s technology sector and a more disappointing picture emerges. Interviews with more than a dozen industry figures suggest that the outlook is not yet rosy, despite indications that the Communist Party’s crackdown on high technology is waning.

These experts describe an ongoing sense of paranoia and paralysis, along with a disturbing realization that the high growth rates of the last two decades are likely to never return.

Alibaba and Tencent are expected to achieve single-digit revenue growth in 2022, a disappointment after years of rapid expansion. A prominent startup founder said he would transfer money from these companies because of the attention it would attract. Another said his company was moving forward with the assumption that it was only a matter of time before officials doubled again.

A third Beijing-based businessman recently sold his stake in a tech unicorn and said he was reluctant to start a new business until there was more clarity about what the government would allow.

“China’s technological repression has happened. “There is no going back from this,” said the businessman, asking to remain anonymous for fear of retaliation. “Regulatory pressure on Chinese tech companies may be on hold for the time being, given the sluggish economy, but it is inconceivable that regulators in the country would loosen control of platform companies again.”

Read more: China weighs in on revival of Jack Ma ant IPO as repression eased

At first glance, China’s $ 1 trillion internet industry is finally emerging from a brutal account. The warring Ant Group Co. Jack Ma is ready to revive an initial public offering that had been derailed for some time. Dozens of new video games have recently got the green light for app stores. And after a sweeping data security investigation, Beijing may soon leave ride-sharing company Didi Global Inc. with a simple fine.

During teleconferences in recent weeks, top executives announced a new era in which they could once again focus on product development and profit making. Take Koolearn Technology Holding Ltd., an online education company that almost disappeared last summer when the government banned for-profit teaching companies. After its boost in e-commerce went viral on social media, the company’s shares doubled during a day of frantic trading on June 13th. Alibaba jumped 60% from its March low in Hong Kong, although the stock is still trading at about half its peak valuation in 2020 – a sign that investors have not yet priced a return to pre-recession booms. The Nasdaq Golden Dragon China Index of US-listed stocks rallied 52% from this year low, leaving the index around 60% below the high.

Beijing has “gradually begun to broadcast some policy signals,” Xin Lijun, head of retail at e-commerce giant JD.com Inc., told Bloomberg Television. But “a return to the old days of ‘riding a horse without holding the reins’ is not very likely.”

Read more: Tencent, Alibaba looks like Utilities after $ 1 trillion Drubbin

However, startup leaders have warned investors not to be too comfortable. After regulators canceled Ant’s IPO plans in 2020, causing global capital markets to shake up, the temperature change was unquestionable. Start-ups were avoiding money from big investors. Industry leaders were concerned about consolidating power. Billionaires like Ma were hiding.

Beijing has a long tradition of shrinking in the face of important events. The party’s upcoming congress this year – when Xi Jinping is expected to win an unprecedented third term – is about as important as it gets. Some worry that the government is only temporarily loosening the leash to save an economy devastated by coronavirus restrictions and high global inflation.

“I think there are some signs of regulatory easing, and honestly in recent years, we’ve seen some of this ‘barbaric growth,'” said Guo Changchen, founder of Xiamen-based Keeko Robot Technology. artificial intelligence training startup. “If there are regulations and these regulations are clear, then we can work for our development within this system.”

Read more about Big Tech repression:

  • China weighs in on revival of Jack Ma’s IPO as repression eased

  • Top technology dealership warns that China’s VC winter is not over

  • China is leading the global contraction in venture capital agreements

  • Billionaire Tencent emits disappointment as China slows

The founders say that a maze of government regulations enacted in 2021 has made their lives difficult. The rules govern everything from the platform economy to the types of entertainment allowed on social media. Control in almost every aspect of the industry has led to a creepy result. The US money, which disappeared during the crackdown, shows no signs of returning. JPMorgan was one of the Wall Street institutions that for a time called China a “non-investor.”

Aside from this year’s rally, China is still facing a drop in venture capital investment, despite being once a prime rival to Silicon Valley. The value of deals in the country fell by about 40% from a year ago to $ 34 billion in the first five months of 2022, according to research firm Preqin. Meanwhile, venture capital and private equity raised $ 6.2 billion, down more than 90% from the first five months of last year.

Even the obvious beneficiaries of the loosening of rules from China are facing a rocky climb. Although regulators fired Baidu Inc. for the release of new toys from April, the company has abandoned the development and publication of toys and has reduced its staff, according to a person familiar with the matter. This means that a planned game – “The Advancing Rabbit” – will probably never be released.

Of the 105 gaming companies that received new licenses in April, at least 11 are no longer operating properly, according to a Bloomberg News analysis of company files available on the Qichacha registry tracker. Some studios broke up their companies. Others destroyed their websites or reused them for things like job postings and rentals.

Creative choices are still heavily controlled. In February, Shanghai Lilith Games canceled a new mobile game after deciding that its anime-style graphics were unlikely to exceed regulatory standards, according to a person familiar with the matter. Chinese censors have a low tolerance for what they consider obscene images – such as the sexier or clearer iconography that is popular in Japanese anime.

“The suspension of licensing has led to layoffs and rationalization among game developers across the board,” said Jesse Sun, chief hunter of Shanghai-based Gamehunter. “It’s a dead end for many small and medium-sized studios.”

Why China continues to target its tech giants: QuickTake

Even in the best-case scenario, China’s once-imposing tech titans are now essentially utilities striving for single-digit growth. Many are afraid to follow the moonlight in an age of spasmodic knee adjustment.

Ant is unlikely to have the biggest IPO in history again. Didi withdrew its expansion abroad. Both Tencent and Alibaba say they will focus on safer, better-known bets, such as social media and e-commerce, and will gradually give way to uninterrupted sites such as fintech.

The founder of an agricultural startup said he recently asked an investor if his money was being counted as a “messy capital expansion”. Without specifying its scope, President Xi used the term to explain why regulatory oversight of technology tycoons is necessary.

“This investor could not answer,” recalls the founder. “In fact, no one knows the answer.”

(Adds details on the return on shares in the ninth paragraph)

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