*Written August 5th, 2021
The battle against online gaming has taken on many forms, yet most objections are inconsequential and share the same opinionated roots. However, on the stock market these targeted attacks can land heavy blows on investors’ accounts. On August 2nd, investors felt that pain when Tencent, NetEase, and other Chinese companies listed in the U.S experienced sudden falls in share prices following an unexpected announcement from China’s state-sponsored media.
Economic Information Daily, a mouthpiece for the PRC, issued a low blow to the online gaming community calling the pastime “opium” in a volatile article. After initially dropping 10%, Tencent (OTC:TCEHY) managed to close only 6% down with NetEase (NTES) down 8% by close. For a gaming company as massive as Tencent, the drop was shocking.
Although the article was quickly taken down and the reference to “opium” removed, the message remains. The PRC government has a long history of criticizing video games for their effects on youth, but both conglomerates already enforce strident measures on young players. Luckily, most of the revenue generated from China’s gaming industry comes from players 18 years or older. Still the risk associated with investing in China’s volatile market should give anyone pause, especially with additional restrictions being placed on US investors.
While the final count will likely be a matter of litigation, the Biden administration has banned investment in almost 60 Chinese companies. Already, major players like the China National Offshore Oil Corp (0883.HK), Hangzhou Hikvision Digital Technology Co Ltd (002415.SZ), and Huawei Technologies Ltd (HWT.UL) have been affected by both former President Trump’s and President Biden’s bans.
Despite a significant lobbying campaign launched by Huawei and TikTok’s parent company ByteDance in the April-June quarter, Biden announced his hardline stance against Chinese companies operating in the defense or surveillance sectors through an Executive Order signed on June 3rd. However, the criteria provided in the President’s order is vague enough that – depending on how aggressively the administration pursues it – more companies could be impacted.
With the ban in effect as of August 2nd, the SEC has begun asking Chinese companies for additional disclosures before going public in the US. This restriction on share selling plans is a result of not only Biden’s Executive Order, but Beijing’s well known attempts to strong-arm its tech companies – particularly those going public on the NYSE.
Beijing’s crackdown on private businesses continues to rattle international investors following Didi’s (DIDI) collapse so soon after listing. Alibaba Group Holding Ltd (BABA) is one such victim, impacted by last week’s stock market sell-off which decimated the market value of several Chinese tech companies to the tune of billions of dollars. Despite quarter earnings up 34% from last year, Alibaba fell short of some expectations and is going to great lengths to reassure investors with a $10 billion share repurchase plan.
As dramatic as these events are, President Biden’s ban is not expected to notably affect the market since the rising tensions between China and the US are widely known – allowing investors ample time to adapt. Still investors have up to 12 months to divest their holdings if they haven’t already done so. Meanwhile Beijing’s powerful restrictions over its tech sector are cause for concern. The ripple effects of these policies could threaten Alibaba (BABA), Tencent (TCEHY), JD (JD), Baidu (BIDU), and Nio (NIO), which all have shares listed in the US.
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