What happened
Chinese stocks were tumbling this morning after China's President Xi Jinping broke precedent over the weekend and secured a third term as the country's leader.
Xi's past government policies have been generally unfriendly toward technology companies, and investors are worried that policies enacted by the newly emboldened Xi could hamper tech stocks even further.
As a result, the share prices of Tencent Music Entertainment(NYSE: TME) dropped 8.3%, the commercial freight platform company Full Truck Alliance(NYSE: YMM) plunged 9.5%, and online education company New Oriental Education and Technology(NYSE: EDU) plummeted 20.5% as of 11:17 a.m. ET.
So what
The strong reaction from investors today comes amid the Chinese government's stricter stance toward technology companies over the past few years. The most recent crackdown came just over the summer, when a large group of Chinese tech companies was fined for disclosure violations.
Image source: Getty Images.
While many countries use governmental oversight of companies, China is particularly strict and enacted significant fines over the past couple of years for violations, including for data protection and antitrust rules. One particularly large fine was levied against Chinese e-commerce giant Alibaba last year for $2.8 billion.
The result of the Chinese tech crackdown has been billions of dollars worth of market value being wiped from tech companies based there.
Tencent Music, Full Truck, and New Oriental investors are worried that with Xi having secured another term in power, the Chinese government will continue strict policies against companies, which will curb their growth.
Those worries aren't unfounded, either. New Oriental cut 60,000 jobs at the beginning of this year as sales plunged in response to new rules about online tutoring. Last year the Chinese government put tight restrictions on online tutoring companies, essentially erasing most of the for-profit tutoring market, causing New Oriental's share price to fall 74% in just one month.
Full Truck Alliance and Tencent Music have faced their own hurdles with the Chinese government. Last year, the government opened up a cybersecurity probe into Full Truck. When that happens, companies aren't allowed to add new users. Also, last year, Tencent Music was ordered by the Chinese government to give up its exclusive music licensing rights, a huge blow to the largest music streaming service in China.
Now what
While there's been some recent hope that China will back away from some of its strict policies toward tech companies, the general sentiment among investors right now is worry.
China is still implementing its zero-COVID policy, which continues to bring companies and parts of the country to a standstill. That will likely continue to cause parts of the Chinese economy to slow down. Additionally, reports show that the current crop of political leaders in China, led by Xi, is not exactly pro-business.
Tencent Music, Full Truck, and New Oriental investors may want to proceed with caution with these stocks and likely prepare for more volatility as investors anticipate China's strict approach toward technology companies to continue.
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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool recommends New Oriental Education & Technology Group. The Motley Fool has a disclosure policy.
