Joseph Cherian,Jingyuan Mo,Marti G. SubrahmanyamandXiao Tingyi

Opinion | The swan song march? An update on China’s Big Tech crackdown

Our study on China’s measures on Big Tech firms in 2021 shows institutional investors had different beliefs from those in the retail-dominated equity market and remained unfazed by the crackdowns

It suggests there are financial market barriers that prevent investors from exploiting or arbitraging away the performance discrepancy between Chinese bonds and equities through buying one and selling the other

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Baidu office building in China. Photo: Shutterstock

Joseph Cherian,Jingyuan Mo,Marti G. SubrahmanyamandXiao Tingyi

Published: 8:00am, 25 Mar 2022Updated: 8:33am, 16 Apr 2022

The performance of the bond market versus the equities market in the aftermath of China’s tech crackdown in 2020 until last year diverged in a curious, significant way.

This bifurcation in performance started with the tech companies and subsequently broadened into other sectors. We documented these findings in our op-ed on September 10, 2021, where we analysed the impact of China’s Big Tech crackdown on security returns.

The government’s purported aim was to reduce inequities in wealth across the population, known popularly as seeking to achieve “common prosperity”. We showed that a few tech companies and indices, such as Alibaba and Pinduoduo’s bonds and equities, the Hang Seng TECH Equity Index, and the Hang Seng Markit iBoxx Offshore RMB Bond Non-Financials Index saw bond prices and bond indexes outperforming their equity and equity index counterparts handsomely over the measured sample period, from December 31, 2020, to August 18, 2021.

People visit Tencent’s booth at the World 5G Exhibition in Beijing on November 22, 2019. Photo: Reuters

We have since sought to analyse this puzzling dichotomy at a more granular level: we investigated whether investors’ beliefs about the series of government measures on the Big Tech firms evolved differently over time. We also examined the effect of the Chinese government’s Big Tech crackdown of 2021 on a somewhat larger subset of Chinese tech companies and focused our attention on four key event dates.

We conducted a more systematic “event study” on seven large Chinese firms listed on the US Stock Exchanges for which we obtained both equity and bond price data around the four event dates.

The companies we analysed were: Alibaba Group Holding (BABA), Meituan (MEITUAN), JD.com (JD), Baidu (BIDU), Hello Group (MOMO), Tencent Holdings (TCEHY), and Tencent Music Entertainment Group (TME).

We ran our analysis on a daily basis over a -20-day to +20-day window around the event date, using the cumulative risk-adjusted performance methodology. The events studied were chosen to highlight milestones in the Chinese government’s crackdown through its State Council and the State Administration for Market Regulation (SAMR) over a six-month period in 2021.

The event study was conducted in four ways:

Bond minus Equity cumulative risk-adjusted performance by event date for each stock;
Bond minus Equity cumulative risk-adjusted performance across all stocks for each event date;
Bond minus Equity cumulative risk-adjusted performance across all event dates for each stock; and
Bond minus Equity cumulative risk-adjusted performance across all seven stocks and event dates.