China Readies Strict Data Privacy Laws. What It Means For Investors.

China dealt its big Internet companies yet another hit on Tuesday, unveiling details on measures to limit unfair competition and plans for what could be the world’s strictest data privacy laws .

Shares of China’s technology giants have slumped as Beijing has unleashed a wave of regulatory measures since last fall that look to reset rules for these Internet behemoths. The KraneShares CSI China Internet exchange-traded fund (KWEB) fell 1.4% on Tuesday and is down nearly 41% so far this year. That’ s a steep decline but even more stark in contrast to U.S. Internet stocks, with the First Trust Dow Jones Internet ETF (FDN) up 13% year-to-date.

The latest draft of regulations call for Internet companies to not implement or assist in unfair competition, targeting behaviors like controlling user traffic and using algorithms to influence users’ choices and blocking competitors’ products. Also targeted: Fabricating or spreading misleading information that damages rivals’ reputations and marketing practices that incentivize fake reviews on products.

Officials are also working on privacy laws that would require companies and individuals handling Chinese citizens’ data to minimize data collection and seek prior consent. If that sounds a lot like the sources for Internet companies’ supercharged growth, that’s partly the concern for investors, who are reassessing expectations. “For China’s technology firms, the era of free data collection and usage in China – ‘freely’ —with no consent, ‘free of responsibilities’—with no liability, and ‘for free’ is over,” says Winston Ma, former head of North America at the China Investment Corp., China’s sovereign wealth fund, and an author of The Digital War – How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace. “Companies like Alibaba, Tencent and ByteDance will have to rethink their business models and how they collect data.” Officials also said they plan to implement regulations aimed at protecting critical infrastructure information operators Sept. 1—the latest indication that the regulatory push isn’t over. Investors expect more regulation ahead. “It’s how China works. The Central committee makes a decision and carries it out. That means there will be continual pressure for regulation to create a more level playing field and [regulators] looking for anomalies that are not good for the majority of the people,” veteran emerging markets investor Mark Mobius told Barron’s. Mobius, who now heads Mobius Capital Partners, has been underweight China versus the benchmark, valuations, and regulatory risk, preferring places like India instead. Data is a top concern for Chinese policymakers—but also others globally. “If you want to name one huge global risk it’s the cloud and interconnectivity,” Mobius says. Mobius still sees opportunity in China, with some of the regulatory measures creating a better longer-term outlook in what he says is a huge and growing market that just can’t be ignored though his focus is outside of the behemoths and more at smaller companies that can be tomorrow’s giants. “What is leadership’s objective? Their objective is to become greater than the US. How do they do that? Deng Xiaoping reached the conclusion that the only way to be greater is to copy the US and create a market economy. They are moving toward a market economy with a level playing field with a certain degree of regulation where they want enterprises growing,” he says. That’s not to say there’s no risk: “Of course, at the end of the day, their Achilles’ heel is the one-party state,” Mobius adds. “It hasn’t hurt China up to now because it allowed the market economy to grow at a rapid pace in a freeway. The degree to which they do not allow this to happen is where they would have a problem.” And that’s the risk that is making some wary. In a webinar with clients, TS Lombard strategists Larry Brainard and Andrea Cicione described the recent moves as an inflection point as Xi Jinping tries to strengthen the party, tackle inequality, and grapples with tensions with the U.S. and efforts to build up China’s domestic hardware ecosystem. That approach will have implications on long-term valuations, with the strategists concerned what they see as an erratic crackdown could send risk-takers and innovators to the sidelines. For investors, that makes a passive approach even riskier, with the strategists saying stock-picking was the only way to invest in China at the moment because of the lack of uncertainty created by different regulators within China unleashing measures, the strategists added.

This article was originally shared by Barron's

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