Beijing's economic blockade plunges the value of Chinese technology companies

The market value of technology companies in China, or what is called Internet companies, continues to decline, which puts pressure on their financial conditions and their ability to provide investments, whether for growth or even the continuation of activity as it is.

The companies' inability to finance their stock purchases in the financial markets has combined with the recent slowdown in growth in the Chinese economy.

And the markets had expected a huge jump in the economic activity of the second largest economy in the world at the beginning of this year, when China suddenly canceled all restrictions that accompanied the Corona epidemic crisis.

However, official Chinese data and figures in recent weeks indicate that the Chinese recovery is not as strong as the markets expected, and the economy can hardly achieve the official target for GDP growth of between five and 5.5 percent for this year 2023, up from the growth of the Chinese economy last year. 2022, at a rate of three percent, but it is about half less than the annual growth rates before the Corona epidemic crisis, when it was more than 10 percent.

This slowdown in growth increases the pressure on emerging companies and well-established big technology companies alike, and what multiplies the pressure is the massive selling of shares of these companies, whether listed on the "Wall Street" Stock Exchange in New York or registered in Hong Kong.

A report by the "Financial Times" indicates that investors are leaving heavily from Chinese technology companies after they were investing in them as a promising growth sector that brings them great profits.

Market Value Collapse

For example, the Chinese online entertainment company "Bilibili" had a market capitalization of $54 billion just two years ago and its shares on Wall Street were being bought by investors who expected their value to rise further. Now, the market value of the company registered on the "Nasdaq" index has reached only $ 6.5 billion, which prompted the company, which was facing the problem of debt service payments, to take harsh measures to reduce the cost.

The matter is not limited to emerging or small technology companies, but even major groups in China such as "Tencent" and "Alibaba", and despite the positive quarterly financial statements of these major companies, investors continue to sell their shares heavily and withdraw their money from them.

From January to date, Tencent Group's stock has lost 19 percent of its value, while Alibaba's stock has fallen by 29 percent in that period.

According to Capital IQ figures affiliated with Standard & Poor's, the 10 largest technology companies in China have lost about $300 billion of their market value since the start of the Corona epidemic crisis, at a time when the market value of their counterparts in the United States has increased by about $5 trillion. Investors withdrew their money from promising Chinese technology companies, according to the newspaper's report, due to the response of investors and funds to US pressure not to invest in China.

They fear, according to the Financial Times, that the conflict between the United States and China will escalate to the point of imposing harsh sanctions on Beijing, such as those imposed by America and the West on Russia last year over the war in Ukraine.

Western investors in Russian companies or those operating in Russia have lost billions of dollars as a result of the sanctions and the embargo, and therefore they fear that their investments in China will lose if they are subjected to similar sanctions, just as the current US sanctions on China prevent its ability to import technology such as that used in the chip industry. Electronic pressure negatively on the entire Chinese technology sector.

Mounting Pressure

Sequoia Capital is the latest investment fund to exit China, which last week announced plans to spin off its China unit from the rest of the group and become a standalone investment firm, in an apparent bow to escalating geopolitical tensions between China and the United States.

The third largest pension fund in Canada, the teacher pension scheme in Ontario, has investments in shares of “Tencent” and “Alibaba” with more than one billion dollars, but in their recent financial disclosure, the fund did not appear as one of the major investors in either company, and announced Finally, he announced a significant reduction in the staff of his Hong Kong office responsible for those investments.

American pressure and restrictions on investment in China lead to the flight of investments from technology companies, the Internet and others. Over the past year, quietly and without news, one of the largest American investors, Warren Buffett, head of the “Berkshire Hathaway” fund, sold half of the shares he owned in an industrial company. Chinese electric cars "BYD", not only that, but Buffett also bought a large share of the shares of the Taiwanese giant "TSMC" for the manufacture of electronic chips and then sold it immediately after assessing the company's position that makes it the center of the Chinese-American conflict.

According to IQ Capital, there are now 252 Chinese companies whose shares are traded on the stock exchange, whether in America or Hong Kong, whose market value is less than their total assets and financial consequences.

The future looks bleak, especially for Chinese internet companies, said Winnie Wu, head of China stock strategies at Bank of America.

The investment bank "JP Morgan" told its clients last year that the shares of Chinese Internet companies were "unfit for investment" with the increase of the United States sanctions on Beijing and restrictions on investment in Chinese companies, and it seems that the bank's expectations were correct to a large extent.

Chinese technology companies are suffering from these pressures, coinciding with the flight of capital, the collapse of their market value, and the slowdown in the growth of the Chinese economy, which makes them forced to adopt a policy austerity measures that affect its activity and the morale of its employees. For example, the "Alibaba" group spent almost half of its cash on buying back its shares in attempts to stop its decline, and it laid off about 24,000 of its employees last year to reduce the cost, and those companies should use their cash savings to meet their financial obligations from Due debts or installments and interest, leaving them in a difficult financial situation with no cash available and the difficulty of financing from the market.