China Cracked Down on Big Tech Companies. Now It Needs Them

(Bloomberg Businessweek) -- The regulatory crackdown on Big Tech that started in China in late 2020 sent stocks reeling. Over the past year, tech companies have lost as much as $2 trillion in market value, the equivalent of 11% of China's gross domestic product, estimates Goldman Sachs Group Inc. Lately, Beijing seems to be relenting a bit. At an April Politburo meeting, the government vowed to support the healthy growth of platform companies. Is it time for investors to give Chinese tech another look?

As the country races to contain the fast-spreading omicron variant with citywide lockdowns, the government is starting to find Big Tech useful. Companies such as Alibaba, JD.com, and Meituan have built efficient distribution systems, sourcing fresh produce from farmers and recruiting armies of migrant workers to make speedy deliveries. When millions of Chinese can no longer go out shopping, Big Tech comes in handy. According to the Shanghai government, internet companies have dispatched about 20,000 riders to fill 2.5 million grocery orders a day, on average, for its 25 million residents, who've been in a full lockdown since April 1.

Nonetheless, the dynamic between Big Tech and the government remains uneasy. As far as the state is concerned, with generous tax treatments, tech companies had it easy for years. While China's standard corporate income tax rate is 25%, internet companies have been paying a lot less. Those that qualified as high-tech enterprises enjoyed a 15% rate, and an even more generous 10% was awarded to companies deemed to produce essential software. Others had to pay a lot more. According to Bernstein Research, in 2019, state-owned high-end alcohol makers such as Kweichow Moutai Co. and Wuliangye Yibin Co. contributed 61% and 45% of their gross revenue, respectively, to the state. Alibaba Group Holding Ltd. and Tencent Holdings Ltd. each paid only 4%. Smaller e-commerce companies such as Pinduoduo Inc. and JD.com Inc., which were at the bottom of Bernstein's list, made almost no contribution.

So the government has no problem asking tech companies to make sacrifices now. Case in point, Big Tech's grocery delivery services during city lockdowns are likely provided at a steep loss. Hiring riders is expensive. Often, delivery workers can't go home at the end of their day, because the government wants to minimize traffic in and out of residential areas. As a result, e-commerce businesses have to provide housing, or they risk unflattering media reports of homeless riders sleeping under bridges at night.

Along with demanding that tech companies pay more taxes, the government also from time to time asks them to provide essential services that profit-oriented businesses would normally shy away from. What kind of valuation multiple do Chinese tech companies deserve? Are they still growth stocks, or are they becoming boring utilities that provide basic necessities for households? Bottom-fish China tech at your own risk.

Ren is a columnist for Bloomberg Opinion.

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