China’s preferences now seem clear. It wishes to see capital raised on its own exchanges, within its purview and on the terms that it dictates. The effects of this on financial markets are likely to linger. China itself may be the biggest loser.
Start with the effect on the market value of tech firms outside China. The tech-heavy Nasdaq index also sold off in response to the rout of Chinese tech stocks, because the latest episode signalled that investing in technology carries regulatory risk. In America Joe Biden’s administration has also sought to strengthen oversight of big tech, by beefing up antitrust. But trustbusting in America takes place in a legal context. There is a body of jurisprudence that limits how far the authorities can go in clipping the wings of tech giants, even those making profits many find obscene: Alphabet, Apple, Facebook and Microsoft all reported a record second-quarter haul this week. If Chinese rivals are mired in red tape, that is all to the good of big tech in America.
And the clampdown will indeed harm Chinese tech. Investors who piled in during recent years have this week been pummelled in public markets. Private American capital is also tied up in Chinese startups. The value in those ventures is now, in effect, frozen. The route to an IPO for a young Chinese firm—the reliable way for venture capitalists to get their money back—now borders on perilous. A lot of Chinese firms have raised money abroad in vehicles known as variable-interest entities, which are essentially synthetic shares. This route may now be blocked for ever. And venture capitalists will surely be charier about backing Chinese tech startups, however promising.
Still more worrying is that any investment, even in an onshore non-tech firm, is now at risk from arbitrary rule changes. That will raise the cost of capital for Chinese firms. China’s securities regulator hastily convened a meeting with international bankers this week to reassure them that only education-based firms were being targeted. It suggests that China’s policy brass, having startled markets, have realised that they may have miscalculated.