China’s tech firms in limbo amid COVID resurgence, US scrutiny

2022 is not looking any easier to many Chinese tech companies. The slew of new cyberspace regulations introduced over the past year or so, from anti-competition rules to restrictions on the use of algorithms, has prompted internet outfits of all sizes to reshape their business models and monetization strategies, dampening investor confidence.

New challenges that emerged at the beginning of 2022 have already spooked investors. The Hang Seng China Enterprises Index, an index for Chinese stocks listed in Hong Kong, plunged 7.2% on Monday, the biggest drop since November 2008. Shares of tech giants — including Meituan, Alibaba, Tencent and Pinduoduo — have cratered over the last week.

One macro risk that is causing investor panic is the resurgence of COVID-19 cases in China. The country has been recording several thousand infections a day in the last few days, an insignificant number compared to the rest of the world, but the worst it has dealt with in two years.

Shenzhen, a major manufacturing hub and home to tech giants like DJI, Tencent and Huawei, has entered a one-week citywide lockdown. Foxconn, a major iPhone assembler, has paused productions in the southern city of 20 million people.

New outbreaks in Changchun have disrupted China’s automotive supply chains. The city in northeastern province Jilin is home to state-owned FAW Group, which is a joint-venture partner for Volkswagen and Toyota in China. Both Volkswagen and Toyota have halted production at their car plants in the city.

A new wave of coronavirus has also hit Shanghai, which houses Tesla’s gigafactory, but hasn’t shut down the city’s business activities yet.

If lockdowns don’t seem too damning for internet firms because the industry is well prepared for work-from-home, then the return of U.S. regulatory scrutiny may explain why many Chinese tech stocks have slid to their one-year low recently.

Last week, the U.S. Securities and Exchange Commission named five Chinese companies that could be delisted from U.S. markets. The action was backed by a Trump-era law that requires foreign firms to turn over audit information to establish that they are not controlled by a foreign government.

American depositary receipts (ADR) of Chinese companies are stuck between a rock and a hard place. Washington demands visibility into the books of U.S.-listed foreign firms, but China bars audit firms from transmitting documents overseas. This has long been a sticking point for U.S. and Chinese financial regulators.

Beijing last year also tightened restrictions on what data companies can transfer outbound, prompting a regulatory crackdown on Didi following the Chinese ride-hailing giant’s hasty initial public offering in the U.S.

Heeding delisting risks and geopolitical tensions between China and the U.S., many Chinese tech firms, including the largest ones like Alibaba, and NetEase, have pursued secondary listings in Hong Kong. The SEC’s move last week to name the five Chinese ADRs has clearly revived investor concerns and will hasten the pace of more Chinese firms seeking alternative market listing.