(Bloomberg) – On the trading floors of New York and Hong Kong, the mood is brightening towards Chinese tech companies: with stocks like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. that rise above multi-year lows, there is talk of a new bull as the market intensifies.
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Yet talk to executives, entrepreneurs and venture capitalists intimately involved in China’s tech sector and a more pessimistic picture emerges. Interviews with more than a dozen industry players suggest the outlook is still far from rosy, despite signs that the Communist Party’s crackdown on big tech is softening around the edges.
These insiders describe an ongoing sense of paranoia and paralysis, as well as an unsettling realization that the dizzying growth rates of the past two decades are unlikely to ever return.
Alibaba and Tencent are expected to post single-digit revenue growth in 2022, a disappointment after years of meteoric expansion. A prominent startup founder said he would pass the money on to these companies because of the attention it would attract. Another said his company assumed it was only a matter of time before officials doubled down again.
A third Beijing-based entrepreneur recently sold his stake in a tech unicorn and said he was hesitant to start a new venture until there was more clarity on what the government will allow.
“China’s technological crackdown has taken place. There is no going back from this,” the entrepreneur said, asking to remain anonymous for fear of reprisal. “Regulatory pressure on Chinese tech companies may have dampened for now, given the sluggish economy, but it’s unthinkable that the country’s regulators will loosen their grip on platforms again.”
Read more: China mulls reviving Jack Ma’s Ant IPO as crackdown eases
On the face of it, China’s trillion-dollar internet industry is finally coming off a brutal balance sheet. Ant Group Co., beleaguered by Jack Ma, is set to relaunch a long-derailed initial public offering. Dozens of new video games have recently been approved for app stores. And after an extensive data security investigation, Beijing may soon let ride-sharing company Didi Global Inc. off the hook with a simple fine.
In conference calls over the past few weeks, top executives have heralded a new era in which they can once again focus on building products and making profits. Take Koolearn Technology Holding Ltd., an online education operator that nearly disappeared last summer when the government banned for-profit tutoring companies. After its e-commerce push went viral on social media, the company’s shares doubled in a single frantic trading day on June 13. Alibaba jumped 60% from its March low in Hong Kong, although the stock is still trading at around half its peak valuation in 2020 – a sign that investors are not yet expecting a return to boom times before the repression. The Nasdaq Golden Dragon China index of U.S.-listed stocks rose 52% from this year’s low, leaving the gauge about 60% below its peak.
Beijing has “gradually started to send out political signals,” Xin Lijun, head of retail at e-commerce giant JD.com Inc., told Bloomberg Television. But “a return to the bygone days of ‘riding without holding the reins’ is not very likely.”
Read more: Tencent and Alibaba look like utilities after $1 trillion from Drubbin
Still, startup chiefs have warned investors against getting too comfortable. After regulators scrapped plans for Ant’s 2020 IPO, sending shockwaves through global financial markets, the change in temperature was unmistakable. Startups avoided big investor money. Industry leaders grew nervous about consolidating their power. Billionaires like Ma went into hiding.
Beijing has a long tradition of repression before important events. The upcoming Party Congress this year – when Xi Jinping is set to win an unprecedented third term – is about as important as it gets. Some fear the government is temporarily loosening the leash to spare an economy devastated by coronavirus curbs and high global inflation.
“I feel there are starting to be signs of loosening regulations, and honestly, over the past few years we’ve seen some of this ‘barbaric growth,'” said Guo Changchen, Founder of Keeko Robot. Technology, a Xiamen-based company. start of artificial intelligence education. “As long as there are regulations and those regulations are clear, we can work on our development within this system.”
Learn more about the Big Tech crackdown:
China mulls reviving Jack Ma’s Ant IPO as crackdown eases
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China leads global contraction in venture capital deals
Billionaire Tencent expresses frustration during China’s slowdown
The founders say a maze of government regulations introduced in 2021 has made life difficult for them. The rules govern everything from the economics of platforms to the types of entertainment allowed on social media. The scrutiny of virtually every facet of the industry has had a chilling effect. American money, which disappeared during the crackdown, shows no signs of returning. JPMorgan was among the Wall Street institutions that for a time called China “uninvestable.”
Aside from this year’s stock market rally, China is still suffering a drop in venture capital investment, despite once being touted as Silicon Valley’s main rival. The value of deals in the country fell about 40% from a year ago to $34 billion in the first five months of 2022, according to data from research firm Preqin. Meanwhile, venture capital and private equity funds raised $6.2 billion, down more than 90% from the first five months of last year.
Even the apparent beneficiaries of the relaxation of rules in China face a difficult climb. Although regulators gave Baidu Inc. the green light to release new games starting in April, the company has suspended game development and publishing activities and cut 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 game companies that have obtained new licenses since April, at least 11 are no longer operating normally, according to a Bloomberg News analysis of company records available on the Qichacha registry tracker. Some studios have dissolved their companies. Others have taken down their websites or repurposed them for things like job postings and rentals.
Creative choices are still tightly controlled. In February, Shanghai-based Lilith Games canceled a new mobile game after deciding its anime-style graphics were unlikely to pass regulators, according to a person familiar with the matter. Chinese censors have a low tolerance for what they consider obscene imagery – such as the more sexualized or explicit iconography popular in Japanese anime.
“The licensing suspension has triggered layoffs and downsizing among game developers at all levels,” says Jesse Sun, headhunter at Gamehunter, a Shanghai-based consultancy. “It’s a dead end for many small and medium-sized studios.”
Why China Keeps Targeting Its Tech Giants: QuickTake
Even at the best of times, the once swaggering Chinese tech giants are now effectively single-digit growth utilities. Many are afraid to pursue moonshots in an age of knee-jerk regulation.
Ant is unlikely to pull off the biggest IPO in history again. Didi has slowed its overseas expansion. And Tencent and Alibaba say they will focus on safer, more familiar bets like social media and e-commerce while gradually ceding the lead in yet-to-be-disrupted areas like fintech.
The founder of an agricultural startup said he recently asked an investor if his money constituted a “disorderly expansion of capital”. Without specifying its scope, President Xi used the term to explain why regulatory oversight of tech moguls is necessary.
“This investor could not respond,” recalls the founder. “Actually, no one knows the answer.”
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