As China shakes up regulations, tech companies suffer

The Exchange spent a little time on Friday ruminating on the impact of then-rumored regulation in China targeting its edtech sector. News that the Chinese government intended to crack down further on the education technology market hit shares of public, China-based edtech companies. It was a mess.

Then over the weekend, the rumors became reality, and the impact is still being felt today in the global markets.

But there’s more. China is also bringing new regulatory pressure on food-delivery companies and Tencent Music. More precisely, we’ve seen successive market-dynamic-changing moves from the Chinese government in the last few days, coming as 2021 had already proved to be a turbulent environment for China-based technology companies.

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Today we have to do a little bit of work to understand precisely what is going on with the various regulatory changes. Why? Because the Chinese venture capital market is a key player in the global venture scene. And Chinese startups have gone public on both Chinese, Hong Kong and U.S. exchanges; there’s a lot of capital tied up in companies impacted today — and possibly tomorrow.

For startups, the regulatory changes aren’t a death blow; indeed, many Chinese tech startups won’t be affected by what we’ve seen thus far. And upstart tech companies in sectors less likely to be targeted by central authorities may become more attractive to investors than they were before the regulatory onslaught kicked off. But on the whole, it feels like the risk profile of doing business in China has risen. That could curb the pace at which capital is invested, cut valuations and lower interest in the Chinese startup market from private-market investors able to invest globally.

Let’s parse what’s changed, examine market reactions and then consider what could be next. We want to better understand today’s Chinese startup market and what its new form could mean for existing players and future performance.

Changes

The edtech clampdown did not start last week. China’s edtech sector started to rack up penalties and fines in June, which led to what the Asia Times called “warning bells” in the sector. From there, things went from penalties to punishing regulatory changes.