After a more than $1 trillion rout, Beijing appears to be warming to Chinese tech giants
Beijing’s regulatory crackdown on the Chinese tech sector began in late 2020, wiping off more than a combined $1 trillion from the country’s biggest companies.
There are now signs that the central government is softening its stance towards internet titans like Alibaba, in a move that could prove positive for Chinese tech stocks.
“The regulatory headwinds that we had in the past two years … that’s now becoming from a headwind to a tailwind,” George Efstathopoulos, portfolio manager at Fidelity International, told CNBC’s “Street Signs Asia” on Wednesday.
On Tuesday, Alibaba announced a major reorganization, looking to split its company into six business units, in an initiative “designed to unlock shareholder value and foster market competitiveness.”
Over the past two years, China’s government has often railed against the “disorderly expansion of capital” of tech firms that have grown into large conglomerates. Part of Alibaba’s announcement noted that these splintered businesses could raise outside capital and even go public, seemingly heading in a contrary direction to Beijing’s concerns.
Efstathopoulos said that the move could indicate a green light from the upper echelons of the Chinese government.
“You have senior leadership blessing for unlocking value, and, to me, that is a fantastic indication where we are now essentially moving from regulation not being the issue that it was,” Efstathopoulos said.
Jack Ma’s return
Alibaba’s restructure isn’t the only sign that Beijing could be easing up its scrutiny of the tech sector. Jack Ma, the founder of Alibaba, returned to public view in China for the first time in months.
Some credit Ma with sparking the start of the tech crackdown in October 2020, when the billionaire made comments that appeared critical of China’s financial regulator. A few days later, Ant Group, the financial technology affiliate of Alibaba that was controlled by Ma, was forced to scrap its massive Hong Kong and Shanghai dual listing, after regulators said it did not meet the requirements to go public.
Following this, the Chinese government doled out huge antitrust fines to Alibaba and food delivery giant Meituan, introducing a slew of regulation in areas from data protection to the way in which companies can use algorithms.
Ma’s reappearance in Hangzhou, where Alibaba is headquartered, has been read as another sign of Beijing’s more positive view toward the tech sector and entrepreneurs.
“Jack just didn’t show up in Hangzhou because he was tired of traveling around. I think it was well orchestrated and fits with the government’s campaign to demonstrate that, you know, they are relaxing pressures on their private sectors and are welcoming the rest of the world,” Stephen Roach, a senior fellow at Yale University, told CNBC’s “Squawk Box Asia” on Tuesday.
Economic growth in focus
There have been further signs of regulatory easing over the past few weeks.
The gaming sector was hard hit in 2021, as authorities grew concerned about addiction among young people in China. Chinese regulators froze the approval of new game releases for several months. Last April, authorities began to green light new games, mainly from domestic firms. This month, the video game licensing regulator gave its stamp of approval to a batch of foreign titles for release in China.
Meanwhile, Chinese ride-hailing giant Didi — one of the companies caught up in the regulatory overhaul — announced plans to expand its business. Didi went public in the U.S. in June 2021, but found itself subjected to a cybersecurity review by Chinese regulators within days of listing. It eventually delisted from the New York Stock Exchange and plans to float in Hong Kong.
Over the last few days, foreign technology executives including Apple CEO Tim Cook and Qualcomm CEO Cristiano Amon visited China and met with government officials.
Jack Ma, founder of Alibaba, reappeared in the public view in China for the first time in months. Alibaba then announced a huge reorganization of its business. Experts see the move as a signal that the Chinese government is softening its stance toward tech giants after a crackdown that began in late 2020.
Jean Chung | Bloomberg | Getty Images
In addition to warming to the domestic tech sector, China is also courting foreign business. Its economy has been battered over the past two years, thanks in part to the country’s strict Covid policies and regulatory tightening. The government now aims for around 5% economic growth this year.
To achieve that, it will need the help of private businesses — including the tech sector.
“China is facing both weak economic growth and rising tech competition from the U.S. It’s a pretty tough position to be in. So they need the economy to fire on all cylinders. Tough regulations on big tech platforms just doesn’t make sense at this juncture,” Linghao Bao, tech analyst at Trivium China, told CNBC via email.
Is China tech out of the woods yet?
While there are promising signs for investors, there is also reason to be cautious, warned Xin Sun, senior lecturer in Chinese and east Asian business at King’s College London.
Sun describes the Alibaba reorganization as a move to “break up Alibaba’s business empire and to reduce its huge influence that could potentially pose a threat” to the Chinese Communist Party’s rule.
“After restructuring, the organizational structure of Alibaba will become more decentralized, and the control over its assets, data and resources will be less concentrated. The Party could then impose stronger political control over each of the new entity more easily,” Sun added.
He cautions against too much optimism around the Chinese technology sector. While the latest moves bring some regulatory certainty, many questions remain about how other tech giants might fare.
“In the short run, Alibaba’s restructuring might be perceived as the routinization of the government regulatory actions and provide some regulatory certainty for the sector,” Sun said.
“In the long run, however, it raises more questions about the fate of other tech giants. Will Tencent, Meituan, and ByteDance be broken up too? If so, do they make their own decisions or do they just wait for the order from the government? Such uncertainty will keep weighing on entrepreneurs and investors, undermining their confidence.”
Taiwan plays a critical role in the AI chip revolution and the global semiconductor industry, the chief executive of the Taiwan Stock Exchange told CNBC in an exclusive interview.
Sherman Lin, chairman and CEO of Taiwan Stock Exchange Corporation attributed the strong gains on the Taiwan Weighted Index to “the AI revolution.”
“It is just because [of] the high demand of the high-end chip, and also the server supply chain. That’s why our stock market is going up,” he said.
The Taiex has risen 27.93% in the last 12 months, but gave up some gains on Friday after most major markets in the region sank amid rising Middle East tensions.
Much of Taiwan’s dominance in the global semiconductor industry can be attributed to Taiwan Semiconductor Manufacturing Co, the world’s largest contract chipmaker that produces advanced processors for clients like Apple and Nvidia. TSMC is the main manufacturer of Nvidia’s powerful AI processors.
“I think this is a lot of attraction for investors … So it means, actually, Taiwan plays [a] very crucial role in AI supply chain and also the semiconductor industry,” said Lin.
Taiwan’s chip dominance
In 2023, Taiwan led advanced chip manufacturing technology, including 16- or 14-nanometer and more advanced processes, with 68% global capacity share, according to TrendForce data. This was followed by the U.S. (12%), South Korea (11%), and China (8%), the data showed.
Taiwan also held nearly 80% market share in extreme ultraviolet generation processes, such as 7-nanometer and more advanced technology, said TrendForce. The smaller the nanometer size, the more powerful the chip is. EUV tools are critical in the production of the world’s most advanced processors.
“We have very good fundamentals of ICT industries. So we can have the strength to facilitate, leveraging the success of the ICT and technology industries, new economy business,” said Lin.
Quake and geopolitical risks
Earlier this month, Taiwan was hit by its strongest earthquake in 25 years. TSMC said construction sites were normal upon initial inspection, though workers from some fabs were briefly evacuated. Those workers subsequently returned to their workplaces.
“Taiwan shows very good resilience … I understand that some listed companies that report to the TWSE – they had very little impact on their productions,” said Lin.
“The kind of the challenge for Taiwan is the testing for our business continuity plan. We actually did quite well. And we refreshed, we responded really quickly. So you can see in the capital market, you can see the adjusted rebound quite soon,” said Lin.
“Right now, it’s still in the uptrend in the capital market after the earthquake.”
On the outcome of the U.S. elections and military conflicts, Lin said such situations “will always affect some capital markets” as well as the Taiwan market.
“But [as] you can see, it will go back to the fundamentals. So I think Taiwan has good fundamentals, [has] resilience and [responds] quickly. I am pretty confident about our capital markets,” said Lin.
Technology
Dutch minister confident ‘crown jewel’ chip firm ASML will stay in Netherlands after threat to leave
A top Dutch government minister said he’s confident the country’s coveted chip-equipment maker ASML will remain in the Netherlands following threats from the company to move its operations abroad.
Steven van Weyenberg, the Netherlands’ finance minister, told CNBC’s Karen Tso on Thursday that he isn’t worried by ASML’s statements threatening to leave the country. The company has since walked back the comments.
In a January call with investors, ASML CEO Peter Wennink said: “The consequences of limiting labor migration are large, we need those people to innovate. If we can’t get those people here, we will go somewhere where we can grow.”
His comments followed controversial plans by the Dutch to scale back tax breaks for highly skilled migrants and limit the number of foreigners who can attend Dutch universities.
ASML is core to the world’s semiconductor supply chain. The company makes extreme ultraviolet lithography (EUV) machines, which are critical to the semiconductor industry for manufacturing integrated circuits.
EUV machines generate an incredibly short wavelength of light in large quantities to print small, complex designs on microchips. The EUV light is created with tiny explosions of molten tin happening at extreme speeds and then bounced off mirrors that ASML says are the flattest surfaces in the world.
“I think many people, many countries would love to welcome ASML, but I think they’re strongly embedded in the Netherlands,” Van Weyenberg told CNBC Thursday.
The minster said he had been involved in discussions between the cabinet and ASML last month concerning the firm’s plans to grow in the Netherlands and whether there were enough roads, houses and skilled people from abroad to foster that growth.
“I’m very optimistic about ASML’s future and that it will be within the Netherlands,” he said.
ASML logo is seen at the headquarters in Veldhoven, Netherlands June 16, 2023.
Piroschka Van De Wouw | Reuters
The Dutch government last month launched a campaign dubbed “Operation Beethoven” in an attempt to address ASML’s concerns and convince them to stay in the Netherlands, Reuters reported.
The semiconductor-equipment maker has since ruled out a complete departure from the Netherlands, but the company remains unhappy with its home country’s approach to fostering growth.
“There is a considerable gap between the concerns of industry, and what we think is necessary, and what politicians think,” ASML CEO Peter Wennink told reporters after a meeting with the Dutch government in March, according to Reuters. If ASML can’t grow in the Netherlands “it can do so elsewhere”, he reportedly said.
Though the Dutch are still working to appoint a new government, plans previously approved by Parliament to cap the number of foreign students and scrap the skilled-migrant tax break have upset several businesses in the country, including ASML and Dutch chipmaker NXP.
More than 40% of ASML’s 23,000-strong workforce in the Netherlands are not Dutch.
The Netherlands has previously seen some of its multinational firms ditch its shores for greener pastures. In 2021, for example, oil major Shell decided to move its corporate headquarters and tax base to London from Amsterdam.
Meanwhile, Unilever, the Anglo-Dutch consumer goods firm, in 2020 moved forward with a plan to unify its headquarters in London, ending a hybrid structure that saw the firm dual-headquartered in both the U.K. and the Netherlands.
Britain’s high-growth technology firms have gripes of their own, however, in terms of how the government is encouraging foreign investment into tech startups, as well as the hiring of foreign labor following the country’s Brexit vote.
‘Crown jewel’ of Dutch economy
ASML has also been caught up in geopolitical tensions between the U.S. and China. In January, the company was barred by the Dutch government from exporting some of its tools to China.
The trade block was imposed after the U.S. government tightened export controls on advanced semiconductors and chipmaking tools to China in October, building on previous rules.
Van Weyenberg said the Dutch government was cooperating with ASML and the U.S. on chip export controls on China.
“ASML is one of the crown jewels of the Dutch economy,” Van Weyenberg said. “They are really one of the basis of our growth model.”
“We want to support them, we actually help them to grow in the Netherlands. And I think there is a great future for them ahead also complying with all the rules that are on the playing table,” he added.
But he also warned that global fragmentation caused by fractures in the world economy puts a small and open economy like the Netherlands at risk.
He added that from a security risk perspective, “we have to also look at China and make sure they play by the same rules.”
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