China’s pressure makes tech companies think twice

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SvD Näringsliv

This column was first published in SvD Näringsliv, in Swedish, on April 10th, 2021.

The stock market rise for the American tech companies has reached new heights. In China, the exact opposite is happening – an involuntary power struggle has flared up with politicians. It has made the stock market debutants tune in to the assembly line.

China Nasdaq. That’s how the new tech exchange Star Market was introduced when it started in Shanghai in the summer of 2019. Already there and then two things stood out.

At the opening, they did not ring the usual bell. A gong was struck. And those who held the sticks were no less than the leaders of the Shanghai Party and the chairman of the Chinese Financial Supervision Authority. A sign as good as any of how difficult it can be to separate politics from business in the country.

That balance of power is further complicated by the great success of the Chinese tech companies. Take mobile payments as an example. The market is completely dominated by two players – Wechat from Tencent and Alipay from Ant Group, which was broken out from Alibaba. Together, they have a market share of 94.4 percent. A position that gives a lot of power in the Chinese economy.

It was therefore big news when Ant Group was to be listed for the world record sum of 37 billion dollars on Star Market last year – and suddenly canceled. 48 hours before the stock exchange premiere, the Chinese state had suddenly changed the rules on how much capital was deemed needed to run Ant Group’s operations. The uncertainty that arose forced them to postpone everything. Even today, there is no new plan for when the stock market debut can happen.

All this turned out to be the starting point for more caution. New figures released by the Financial Times showed that 76 Chinese companies canceled or postponed their IPOs on Star Market just last month. This is twice as many as in February, and means that the total number is over 180 companies since the start in 2019. The corresponding figure when Ant Group surprisingly pressed the pause button in November was only twelve.

There are several reasons for the cancelations, but it is mainly due to a sharp increase in control by the Chinese authorities. When Star Market was launched, it was promised as a a quick and easy way to the stock market. Instead it seems to have become the exact opposite, with demands that managers share their personal finances and account for all transactions that exceed a few thousand dollars. This has resulted in sharply increased listing costs and an increased complexity that tech companies like to avoid.

This makes things difficult for everyone involved.

The ambition of the Chinese state’s was to become the financial hub of Chinese tech companies in Shanghai. Several large domestic companies have admittedly been able to be traded on the stock exchange for a long time, but outside of China. Tencent, Alibaba and Baidu, for example, are all also listed in the US and constitute some of the 217 Chinese companies that were listed in the US last year. Together they were worth $2.2 trillion. But a law that Donald Trump introduced just at the end of his term – Holding Foreign Companies Accountable Act – can force companies to be delisted if they are controlled or owned by foreign states. Which many Chinese companies are – directly and indirectly.

What has unfolded is nothing more than a power struggle that is likely to be more public than the Chinese state would prefer. Jack Ma – the outspoken founder of Alibaba and Ant Group – made headlines around the world when he suddenly disappeared for a couple of months. According to media reports, Chinese President Xi Jinping is said to have personally ordered Jack Ma to cancel Ant Group’s IPO. When this did not happen, he forced it forward anyway, whereupon Ma had to take a few steps back. Or as the Wall Street Journal put it: “Jack Ma is getting a lesson about who is in charge.”

It is often said that what markets dislike most of all is uncertainty. This is true in China too. The charm offensive that was going to build a domestic Nasdaq has not had the intended effect. Because if the Chinese government can stop a $37 billion IPO overnight – what could they do to everyone else?

At the same time as the capital of the world’s stock markets is looming, Chinese tech companies are now becoming increasingly pressured. On the one hand, a hardening legal and foreign policy climate in the United States. On the other hand, an increasingly clear Chinese ambition to regain power and control in a rapidly growing tech industry.

Most likely, the Chinese state will emerge victorious from this battle. If you can get Jack Ma to dance to your tune, the rest of the country’s tech entrepreneurs will find it difficult to do anything else.

This column was first published in SvD Näringsliv, in Swedish, on April 10th, 2021.

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