Alibaba to Tencent, China’s tech giants lost their hubris and may never get it back

Fear and paranoia now cower a trillion-dollar Internet industry that once prided itself. Even if Beijing relents, the sector is a shadow of its former self.

On trading floors in New York and Hong Kong, the upbeat mood toward Chinese tech companies is unmistakable: With stocks like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. rebounding from multi-year lows, there is increasing talk of a new bull market.

Talk to executives, entrepreneurs and venture capitalists intimately involved in China’s tech sector, however, 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.

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These experts describe a continuing sense of paranoia and paralysis, coupled with the unsettling realization that the sky-high growth rates of the past two decades may never return.

Alibaba and Tencent are expected to deliver single-digit revenue growth in 2022, a disappointment after years of breakneck expansion. A prominent startup founder said he would spend money on those companies because of the attention it would attract. Another said his company is proceeding on the assumption that it’s only a matter of time before officials double down again.

A third Beijing-based businessman recently sold his stake in a tech unicorn and said he is reluctant to start a new company until there is more clarity on what the government will allow.

“China’s tech crackdown has happened. There is no coming back from that,” the businessman said, asking to remain anonymous for fear of reprisals. “Regulatory pressure on Chinese tech companies may have hit the brakes by now, given the sluggish economy, but it’s unthinkable that the country’s regulators would loosen their grip on platform companies again.”

At first glance, China’s trillion-dollar Internet industry is finally coming out of a brutal reckoning. Jack Ma’s beleaguered Ant Group Co. is about to revive an initial public offering that derailed long ago. Dozens of new video games were recently greenlit for the app stores. And after an extensive data security investigation, Beijing may soon let ride-sharing company Didi Global Inc. go with a simple fine.

During conference calls in recent weeks, top executives heralded a new era in which they could once again focus on building products and generating profits. Take for example Koolearn Technology Holding Ltd., an online education operator that almost disappeared last summer when the government banned for-profit tutoring companies. After its push into e-commerce went viral on social media, the company’s shares more than doubled during a single day of frenetic trading on June 13. valuation peak in 2020: a sign that investors are not yet pricing in a return to pre-crash boom times. The Nasdaq Golden Dragon China index of US-listed stocks has risen 52% from this year’s low, leaving the gauge 60% below its peak.

Beijing has “gradually started to put out some policy 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 the horse without holding the reins'”.

Still, startup bosses have warned investors not to get too comfortable. After regulators scrapped Ant’s 2020 IPO plans, sending shockwaves through global capital markets, the temperature change was unmistakable. Startups avoided money from big investors. Industry leaders grew nervous about the consolidation of power. Billionaires like Ma went into hiding.

Beijing has a long tradition of clamping down before major events. This year’s upcoming party congress, when Xi Jinping is expected to win an unprecedented third term, is as important as it sounds. Some worry that the government is simply loosening the leash temporarily to save an economy devastated by coronavirus restrictions and high global inflation.

“I feel like there’s starting to be some signs of regulatory easing, and honestly, in the last few years, we’ve seen some of this ‘barbaric growth,'” said Guo Changchen, founder of Keeko Robot Technology, a Xiamen-based company. Artificial intelligence education startup. “As long as there are regulations and those regulations are clear, then we can work on our development within this system.”

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 the platform to what kinds of entertainment are 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.”

This year’s stock market rally aside, China is still enduring a slump in venture capital investment, despite once touting itself as Silicon Valley’s main rival. The value of deals in the country fell about 40% from a year earlier 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, a drop of more than 90% compared to the first five months of last year.

Even the apparent beneficiaries of China’s easing of rules face a rocky climb. Although regulators gave Baidu Inc. the green light to release new games starting in April, the company has shelved its game development and publishing arms and cut staff, according to a person familiar with the matter. That means a planned game, “The Advancing Rabbit,” will probably never be released.

Of the 105 gaming 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 registration tracker Qichacha. Some studios dissolved their companies. Others have removed their websites or repurposed them for things like job listings and rentals.

Creative choices are still heavily guarded. In February, Shanghai startup Lilith Games canceled a new mobile game after deciding its anime-style graphics were unlikely to outperform regulators, according to a person familiar with the matter. Chinese censors have little tolerance for what they consider lewd imagery, such as the more sexualized or explicit iconography popular in Japanese anime.

“Licensing disruption has led to redundancies and simplification among game developers across the board,” says Jesse Sun, a Shanghai-based headhunter at consultancy Gamehunter. “It’s a dead end for a lot of small and medium-sized studios.”

Even in the best of times, China’s once boastful tech titans are now utilities achieving single-digit growth. Many are afraid to pursue goals in an age of knee-jerk regulation.

Ant is unlikely to do the largest IPO in history again. Didi has backed off its expansion abroad. And Tencent and Alibaba say they will focus on safer family bets like social media and online commerce, while gradually giving up leadership in arenas that haven’t been disrupted yet, like fintech.

The founder of an agricultural startup said he recently asked an investor if his money counted as “disorderly expansion of capital.” Without specifying its scope, President Xi has used the term to explain why regulatory oversight of tech moguls is necessary.

“That investor couldn’t respond,” the founder recalled. “In fact, no one knows the answer.”

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