The current year has seen a massive wave of regulatory pressure by the Chinese government on key strategic sectors of its economy. Beijing has tightened regulatory scrutiny on its budding private refiners sector before ramping up pressure on tech titans such as Alibaba Inc. (NYSE:BABA)and Tencent Holdings (OTCPK:TCEHY). The wave of crackdowns has, in a matter of months, knocked off tens of billions of dollars from China's pivotal tech sector, but proven to be a huge bonanza for China's clean energy sector.
Shares in Chinese clean energy companies have been rallying hard as investors rotate into clean energy, betting that Beijing will continue to support the fast-growing sector as it gives Big Tech the cold shoulder.
After choppy trading in the first few months of the year, China's CSI New Energy Index has soared 55% over the past three months, a period that coincided with the crackdowns.
In sharp contrast, Hong Kong's Hang Seng Tech Index is down 12% over the period, while the KraneShares CSI China Internet ETF (NYSEARCA:KWEB) has plunged 57% after peaking in mid-February. KWEB invests in stocks of Chinese companies operating across information technology, software and services and IT services, with Tencent, Alibaba, and JD.com Inc. (NASDAQ:JD) its three biggest holdings.
China funds that focus heavily on green energy themes have easily outperformed other Chinese broad-based strategies in the first half of the year, with Kai-Kong Chay, senior portfolio manager for Greater China Equities at Manulife in Hong Kong, telling the Financial Times that his firm is most bullish on the renewable energy sector, especially companies in the supply chain of solar energy.
Teapots in trouble
In a dramatic reversal of fortunes, in June, Beijing announced huge cutbacks in import quotas for the country's private oil refiners. According to Reuters, China's independent refiners were awarded a combined 35.24 million tons in crude oil import quotas in the second batch of quotas this year, a 35% reduction from 53.88 million tons for a similar tranche a year ago.
The big reduction came as part of government crackdown on private Chinese refiners known as teapots, which have become increasingly dominant over the past five years. The move is intended to allow Beijing to more precisely regulate the flow of foreign oil as it doubles down on malpractices such as tax evasion, fuel smuggling, and violations of environmental and emissions rules by independent refiners.
The crackdown is also intended to claw back control of China's crude refining sector from private refiners to state-owned refineries. And it's reminiscent of its earlier crackdown on big tech operations that were getting dangerously powerful and seen to be threatening party politics.
China's teapots have been steadily grabbing market share from entrenched state players such as China Petroleum and Chemical Corporation (NYSE:SNP), also known as Sinopec, and PetroChina Co. (NYSE:PTR) ever since Beijing partially liberalized its oil industry in 2015. Teapots currently control nearly 30% of China's crude refining volumes, up from ~10% in 2013.
China's national oil companies (NOCs) are likely to emerge as the biggest winners thanks to stricter emission standards and growing climate activism as we reported here.
The axe has fallen even harder on China's sprawling tech sector.
The sector has been hit with a massive regulatory storm ever since Alibaba Group founder Jack Ma criticized his country's government last year for what he called excessive regulations. Beijing hit back by cancelling the much-anticipated IPO of Ma's Ant Group—the world's largest fintech—before putting the company through a "rectification" process and announcing it would henceforth "prevent the disorderly expansion of capital."
Well, it turns out that Beijing authorities were not bluffing, if ongoing developments are any indication.
Over the past few months, sweeping crackdowns across diverse sectors of the Chinese economy have been sending shockwaves across global financial markets, with American investors finding themselves in the firing line of some of the hottest sectors.
First off, Beijing cracked down on the crypto space, curbing bitcoin mining due to concerns of excess speculation and warning financial institutions against offering crypto services.
Regulators then turned their sights on Chinese ride-hailing giant Didi Global Inc. (NYSE:DIDI) for alleged data security violations before China's antitrust administrator ordered Tencent Music Entertainment (NYSE:TME) to give its exclusive music-licensing rights for online music.
Lately, Beijing has cracked the whip over China's expansive online gaming sector, with Tencent Holdings and XD Inc. (OTCPK:XDNCF) among the targets after a publication controlled by the Chinese government described online games as "spiritual opium" and "electronic drugs'’according to multiple reports.
Meanwhile, their U.S. videogame peers Activision Blizzard (NASDAQ:ATVI), Electronic Arts (NASDAQ:EA) and Take-Two Interactive Software (NASDAQ:TTWO) have been caught in the crossfire due to fears about their high exposure to the Chinese market.
Activision has significant exposure to the Middle Kingdom through its Call of Duty franchise; EA's latest SEC filing shows that $3.2 billion of its overall fiscal 2021 revenue of $5.6 billion was from international sources, while 39% of Take-Two total $813.4 million during the last quarter was from international markets.
By Alex Kimani for Oilprice.com
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