China’s Crackdown on Its Technology Companies
China’s technology stocks were hit hard in July as Chinese government started to crackdown on its tutoring/education companies.1 KraneShares CSI China Internet Fund (Ticker: KWEB), an ETF that tracks China’s internet-related companies, plunged 28 percent in July. U.S.-listed Chinese tutoring/education company stocks were nearly annihilated with many down more than 70 percent for the month. Even the top two Chinese technology stocks, Tencent ($588 billion market cap) and Alibaba ($531 billion market cap) registered sharp losses.
Tutoring/education is not deemed a critical industry by the Chinese government and stands in the way of a critical national policy – encouraging families to have more babies. In 2015, China abandoned its then 35-year old one-child policy to allow two children per family. In June of this year, they moved the number up to three children per family and they are considering removing all limits on children for families in recent weeks. Despite its repeated efforts to encourage more babies, most families are reluctant, citing high expenses to raise children and singling out high tutoring/education costs for children. Partly due to the culture and partly due to competition and peer pressure, Chinese families spend a lot of money on tutoring/education for their children such as after-class learning. To profit from this huge demand, many technology start-ups were formed in recent years, utilizing online technology and even AI. This has further pushed up tutoring/education costs for families. China hopes to use the crackdown to cool off the tutoring/education market and lower the educational costs for families. Next on the crackdown list will likely be real estate companies, as high housing costs are another major for reason parents are reluctant to have more children.
The crackdown is likely to extent to other “soft” technology like social media and e-commerce companies. China’s leadership is primarily run by tech-bureaucrats with strong science and engineering backgrounds. They support “hard” technology companies similar to Intel and IBM that produce “real” things, as opposed to “soft” ones like Facebook and Amazon that are more social or consumption focused. In fact, they dislike the latter group, as they believe not only do these companies not produce “real” things, but they could potentially cause social instability.
1 “Why China Is Cracking Down Now on After-School Tutors,” Bloomberg News, July 25, 2021, https://www.bloomberg.com/news/articles/2021-06-09/why-china-s-cracking-down-now-on-education-tech-firms-quicktake
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