China tech stocks slump as nation issues draft competition rules

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China’s latest moves to tighten its grip on internet giants helped trigger a fifth consecutive day of selling in the nation’s bellwether technology stocks.

The Hang Seng Tech Index dropped 3.1%, after the market regulator issued draft rules banning unfair competition among online platform operators. Alibaba Group fell nearly 5% and was the biggest point-drag on the benchmark Hang Seng Index, which closed 1.7% lower. Losses accelerated in afternoon trade as China issued separate rules to protect key network facilities and information systems, effective next month.

Baidu and NetEase fell more than 5% while Tencent dropped 4.1%. The declines followed Monday’s selloff in Chinese online game firms in the wake of state media criticism of the sector.

The wide-ranging proposals released Tuesday come after the tech-industry ministry launched a campaign last month aimed at rooting out a raft of problematic behaviour. It follows moves by Beijing to rein in the country’s internet leaders in areas from antitrust to data security and ride-hailing.

The draft covers protections for intellectual property and brand reputation as well as a ban against using algorithms or fake reviews to promote goods and services. Alongside expressly prohibited behaviors like forced exclusivity arrangements, companies will also not be permitted to use technical means to interfere with the operations of rival platforms or maliciously render those services incompatible with their own.

The latter could force giants like Tencent and Alibaba to dismantle their walled-off ecosystems that had prevented users from accessing one company’s services from the other’s platforms.

"Investors are concerned that regulatory reform is far from over and that policies will continue to be introduced," said Alvin Ngan, analyst at Zhongtai Financial International. "With risk appetite low, investors are thinking 'sell it first'".

On mainland markets, the CSI 300 Index fell 2.1%, with declines led by health care and consumer staples shares. In the weeks following a ban on profits in China’s tutoring sector, stocks have gyrated on state media warnings on everything from gaming addiction, alcohol and e-cigarettes to over-marketing of infant formula.

Mainland investors dumped another HK$4.7 billion ($603 million or R9 billion) worth of Hong Kong stocks on Tuesday, the fourth consecutive day of net selling of the city’s shares, according to data compiled by Bloomberg. The HSI Volatility Index jumped 11%, the most in three weeks. The Hong Kong dollar traded at its weakest level in 17 months.

China’s uncertain regulatory environment continues to cast a shadow on the tech sector. US filings showed that other funds joined George Soros’s investment firm in dumping China-based companies with listings in the US in the second quarter.

-With assistance from Olivia Tam, Fran Wang, Jeanny Yu and Amy Li.

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