President Xi is obviously an aficionado of US anti-trust history. He knows all about the growth of US corporations in the decades following the Civil War and how some of these began to dominate the railroads, the nascent oil industry, finance and foodstuffs. Names like Philip Armour and the Swift brothers (who cornered the meat packing business and refrigeration) and Buck Duke (who did the same for tobacco) may be less well remembered now but others such as Andrew Carnegie, Cornelius Vanderbilt, JP Morgan and John D Rockefeller still resonate as the “robber barons” – men who gained prominence with industrial and commercial audacity and then turned it into dominance through the formation of cartels. In response to growing alarm at the monopoly power of these companies the Sherman Antitrust Act became law in 1890. As a result, behemoths like Standard Oil and American Tobacco were judged to be operating in restraint of trade and broken up.
As Messrs Ma and Ma (Pony and Jack) now account for 35% or thereabouts of the Chinese listed market through the companies they founded, Tencent and Alibaba, the analogy is clear. Of course it is arguable that their dominance goes much further into Chinese society than is captured in the market capitalisations of Alibaba and Tencent. The recent postponement of the listing of Ant Financial is a clear signal to these Chinese barons and others like them that Beijing is not happy with the way things are going. The immediate price movement of the stocks might suggest that the environment for Tencent, Alibaba et al. is going to get tougher.
So far this month Tencent is down 5% and Alibaba is off 12%, despite reporting a very reasonable set of results and the fact that all indications suggest 11/11 shopping frenzy looks like breaking all records again in China this month.
Antitrust guidelines for the platform economy have been issued by the Chinese Government with the purpose of banning certain practices that some of the bigger players use their dominance to impose on the market: preventing merchants from using multiple platforms, subsidising products to force smaller competitors out of a market and leveraging data and algorithms to conduct other chicanery, are all being targeted.
But haven’t we been here before? At the end of 2017 rumours started circulating that Jack Ma had gone missing, the conjecture being that he was now persona non gratia with Beijing. He reappeared as if nothing had happened. At the beginning of 2018 Tencent came into the spotlight as Beijing acted paternally for all the youth of China who were, it was argued, becoming addicted to their screens. Gaming regulation prompted the Tencent share price to tumble over 40%. The stock was duly derated but the profits kept rolling in, leading to a recovery in the share price in 2019 (although it is fair to say its record rating at the end of 2017 has not been seen since).
As we see in the West with recent governmental action against Facebook, Google et al, regulators the world over are faced with a very hard balancing act between the benefits of the internet and some of its more insidious effects and practices. It could be argued that China has steered a decent path hitherto: in terms of the competitive landscape a year or two ago you might have assumed that Alibaba and JD.com would remain a duopoly and then along comes Pinduoduo and takes 15% market share. Do you see that happening in the West any time soon?
The truth of the matter is that China needs its local champions. From time to time you should expect them to do “national service” for the greater good of China. That may entail a slap on the wrist. But will it lead in the immediate future to a fate such as befell Standard Oil or American Tobacco? We doubt it.
Governmental interference and regulation add a layer of complexity to investment but it is also well to remember that for all the headwinds suffered by some of the original robber barons, JP Morgan, Standard Oil and Carnegie Steel all went on creating value and being profitable investments for their shareholders for many years after the Sherman Act.
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