China vs. USA – The first cracks pt. II

China and US regulators further damage Chinese technology.

• Both the US and Chinese regulators have been busy this week and although they are on opposite sides both have made moves to further damage Chinese technology.

Chinese regulation

• The Chinese Ministry of Industry and Information Technology (MIIT) is now demanding that all of Tencent’s new apps, games, and updates receive approval before they are released.
• This comes after Tencent was accused of violating consumer interests with its content and means that Tencent’s releases will now be greatly slowed down.
• This is bad news for any industry where the content needs to be kept fresh and up to date in order to maintain user engagement and this will further hurt Tencent’s already flagging growth.
• It will also serve as a warning to Tencent’s competitors to tread more carefully and to self-censor or share the same fate.
• The official line on this latest move is that this is aimed at protecting users, but I suspect in reality this move fits squarely into what RFM and Alavan Independent have determined as Supervisory Category No. 6 – Social Stability (see here).
• The 6 Supervisory Categories define how the motivations of the CCP are implemented on the technology sector and No. 6 is all about ensuring that no content that could be seen as critical of the CCP or its stewardship of China is present in the public discourse.
• This is one of the risks of being a content company like Tencent, but I think that there is still worse to come.
• Tencent’s growth is now being almost singlehandedly driven by its fintech business that competes with Ant Group.
• Ant Group has been decimated by regulation and has been turned from a dynamic financial services innovator into a stodgy bank.
• At some point, the regulatory shadow will fall on this part of Tencent’s business and if it gets the same treatment, Tencent’s growth is very likely to collapse along with its share price.
• Hence, I think that the regulatory risk in Tencent remains far greater than Alibaba which is now much cheaper and may well grow faster as its regulatory issues are now behind it.
• Overall, this is another move by the regulator that will hamper innovation in the technology sector in China and potentially force more of its entrepreneurs and innovators overseas.
• The Chinese regulators are continuing to aid the US cause.

US regulation

• At the same time, the US has blacklisted a series of Chinese companies that are working on establishing a position in Quantum Computing.
• 27 more companies have been added to the entity list meaning that US companies cannot sell technology products to them without obtaining a license from the US government.
• This is pretty difficult to achieve and being on this list effectively cuts its members off from US technology exports.
• This is the first time that the US has targeted quantum computing and, in my opinion, this is not a big surprise.
• This is because RFM has identified quantum computing (see here) as one of the technologies where China has a good chance of being a global leader unlike its position in semiconductors.
• Consequently, anything that the USA can do to hamper and slow that progress will give it an advantage in the technology rivalry that RFM and Alavan Independent see playing out in the coming years.
• China has so far chosen a separate route to quantum computing (optical circuitry as opposed to superconductors) and so how this move will directly impact it is currently unclear.
• The stated reason for this move is to prevent quantum technology from benefitting the People’s Liberation Army (PLA) but I suspect this is more about slowing down the development of key technologies in China as much as it can.

Take-Home Message

• Although they are bitter rivals engaged in an ideological struggle, the US and China actions are having the same effect which is to hurt the Chinese technology sector.
• China is so far doing far more to damage its own sector than the US is and there are still some areas where the regulatory hammer has yet to fall.
• Consequently, the outlook for Chinese technology remains pretty difficult and sentiment is unlikely to improve for a while especially while China’s zero COVID strategy hampers the economy.
• The only stock I like in the Chinese technology sector remains Alibaba where the valuation has been crushed and sentiment is awful.
• It might be a long wait for a recovery.