Wall Street Money Is Beginning To Desert Chinese Tech Giants

China’s largest tech companies have lost $300 billion in market cap since the beginning of the pandemic, while their counterparts in America have added $5 trillion.

A case in point is Bilibili, the Chinese online entertainment platform, which experienced a significant decline in its market capitalization, dropping from $54 billion to around $6.5 billion within two years. This drastic fall has forced the company to accelerate debt repayments, putting its remaining cash at risk and necessitating drastic cost-cutting measures.

Bilibili’s struggles reflect broader challenges facing the Chinese tech industry. Overseas investors are divesting from even profitable internet giants like Tencent and Alibaba, showing hesitancy to support promising Chinese startups.

Sequoia Capital, a major venture capital firm, recently announced plans to separate its China business from its global operations, citing increasing geopolitical tensions between Beijing and Washington as a factor.

The flight of foreign capital is compounded by an uncertain economic recovery, which has deflated Chinese tech stocks that briefly saw a surge of optimism during the country’s post-pandemic reopening.

This downward trend has raised concerns among employees and investors who worry about the long-term impact of the depressed valuations of Chinese tech companies listed in New York and Hong Kong.

Amidst these challenges, some observers argue that China’s tech sector is facing cancellations and an underperforming economy. The previous controversial labeling of Chinese internet stocks as “uninvestable” by JPMorgan Chase now appears to have been a more prescient assessment, according to a Hong Kong-based equity analyst, quoted in the Financial Times.

The negative trend in the Chinese tech industry is impacting even cash-rich companies like Tencent and Alibaba, which have resorted to cost-cutting measures and share buybacks to preserve capital.

This relentless cycle of cost-cutting and declining salaries has taken a toll on employee morale and the v-shaped recovery Beijing was desperate for.

Despite positive financial updates, the stock prices of these internet giants have remained low, with Tencent shares down 19 per cent and Alibaba’s down 29 per cent from their January highs.

The situation is further complicated by the potential restrictions on US investment in China being considered by Washington, including export controls aimed at limiting China’s access to critical technologies such as advanced semiconductors.

As a result, major foreign investors, including Western pension funds, are retreating from Chinese tech investments in both private and public markets.

The prevailing downturn has prompted tech companies to focus on share repurchases and streamlining operations. However, the depressed valuations pose significant challenges for smaller, unprofitable companies such as Bilibili. These companies have had to implement cost-cutting measures, including layoffs and scaling back business lines, to strive for profitability.