(Bloomberg) -- Xi Jinping led a parade of officials this spring vowing to revive China’s economy, hoping to repair the damage wrought by years of Covid Zero and regulatory clampdowns. Some of the world’s biggest investors are selling anyway.
Two pioneering financiers of China’s private sector — and hence the country’s economic miracle — have signaled in recent days their intentions to continue their pullback from marquee investments in the country. European internet powerhouse Prosus NV registered more than $4 billion of stock in Tencent Holdings Ltd. for potential sale in Hong Kong, while news emerged that SoftBank Group Corp. is preparing to hasten its exit from Alibaba Group Holding Ltd. — the e-commerce leader that made Masayoshi Son’s name.
The moves accelerate the unwinding of some of the most lucrative bets in business history. While both Prosus and SoftBank declared their over-arching plans last year and are acting partly due to reasons outside their China outlook, the latest steps have dented investor optimism over a litany of recent promises from Beijing to welcome foreign capital and loosen its grip on the tech sector. Tencent slid the most in over two months Wednesday, while Alibaba wiped out as much as $13 billion of value on Thursday.
“Reported plans to lower exposure in Alibaba by SoftBank may reiterate the prevailing loss of confidence in Chinese tech firms by foreign investors, giving rise to concerns that more may do the same,” said IG Asia analyst Jun Rong Yeap.
The announcements did little to help China’s effort to mend its tattered image: that of a country that’s increasingly isolating itself from the West and hostile to private capital. Beyond the tech crackdown of 2021 and 2022, years of clashes over the treatment of ethnic minorities in Xinjiang, the quashing of political dissent in Hong Kong, and the status of Taiwan have stoked skepticism in the US and Europe about Chinese intentions.
It’s a dramatic reversal from past decades, when an increasingly open China produced a succession of corporate successes thanks in part to foreign dealmakers.
There may be more upside, though, given the positive outlook for the company’s fundamentals ahead.
“There will definitely be impact in the short term,” said Toyo Securities Asia analyst Gong Jingjie, referring to Alibaba’s move. “But in the longer run, we need to look at its fundamentals. It is undergoing an internal business restructuring. There could be positive impacts from more units getting listed. It has also been repurchasing stocks.”
Many analysts point to Alibaba’s plan to unlock value by splitting itself into six separate companies — its most aggressive move since antitrust regulators slapped a record fine on the company in 2021. Others point to potentially game-changing initiatives such as investment in artificial intelligence.
Last month, billionaire Alibaba co-founder Jack Ma — one of the country’s best-known corporate figures — returned to China after an overseas jaunt lasting more than a year. That was taken as a sign that China, if not exactly back to business as usual, was on its way back.
SoftBank founder Masayoshi Son famously invested about $20 million in Jack Ma’s Alibaba in 2000 and held through the dot-com bust and the Chinese company’s IPO in 2014. Naspers, Prosus’ parent, invested in Tencent in 2001 — before the iPhone was even invented.
But both Chinese companies have deteriorated markedly in the past two years. The two firms reported their first revenue declines ever in 2022 and are now eking out single-digit gains every quarter — a far cry from their swash-buckling days of consistent double-digit expansion and constant flow of startup deals.
The exits may also reflect the precarious nature of the global financing system. SoftBank and Prosus may have been selling down their biggest holdings in part to shore up its balance sheet, at a time the failures of Silicon Valley Bank and Credit Suisse and rising interest rates are draining liquidity and forcing investment houses to reward jittery LPs. Prosus has said it will use proceeds from Tencent shares sales to fund buybacks.
“After the global banking crisis and what happened to SVB in the US, it’s much harder to get loan financing in general,” said Steven Leung, executive director of UOB Kay Hian. “For those early investors in Chinese big tech firms, it might be the same case. Fundraising may have become more difficult for them as banks are becoming more cautious amid concerns over the banking crisis. So they have to accelerate cashing out from their existing holdings, before doing anything, including investing in new opportunities or buying back shares.”
--With assistance from Xiao Zibang and Adrian Leung.
©2023 Bloomberg L.P.
