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EXPLAINER: Risks underlie tumbling Chinese company shares

by Mary Sewell

BEIJING — Foreign shareholders in China’s tech companies are learning what its entrepreneurs have long known: The ruling Communist Party’s decisions about what is good for the economy can hurt your business.

The stock prices of internet giants Tencent and Alibaba and ride-hailing service Didi tumbled after President Xi Jinping’s government launched anti-monopoly and data security enforcement actions against them. Also, this week, the share prices of Chinese education companies fell after news reports that for-profit activity might be banned in core school subjects.

The crackdown on some of China’s biggest private-sector success stories prompted warnings about a “war on capitalism.” But regulators say the opposite is true. They say they are protecting the public, smaller companies, the financial system, and competition. The crackdowns are positive because they are suitable for Chinese SMEs,” or the small and medium-size private enterprises that are the bulk of the private sector, Michael Every of Rabobank said in a report.

WHY IS THE COMMUNIST PARTY DOING THIS?

This year, the ruling party declared anti-monopoly enforcement a priority, especially for tech companies that dominate e-commerce, social media, and entertainment and are expanding into finance, medical services, and other areas.

Party leaders worry Tencent Holding Ltd., Alibaba Group, and other industry leaders can abuse their dominance to keep out competitors, raise prices, or force suppliers to grant them favorable terms, hurting rivals.

The ruling party worries about the mountains of customer information gathered by e-commerce, ride-hailing, social media, and other companies. Party leaders also have social goals, including shielding children from harmful material online and promoting access to education.

WHY ARE SHARE PRICES TUMBLING?

Chinese leaders warned in December a crackdown was coming but said nothing about what activity might be targeted. That shook confidence in Chinese stocks traded in New York, Hong Kong, or London.

More competition usually leads to lower prices, better service, and more economic growth. But for individual companies, shareholders worry competition squeezes profit margins and requires more spending on product development, marketing, and other activity. Investors also worry that the crackdown signals Xi’s government wants to control the companies more tightly, possibly limiting their growth potential.

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