After losing more than $1 trillion, Beijing appears to be warming to Chinese tech giants

Beijing’s regulatory crackdown on China’s tech sector began in late 2020, wiping more than $1 trillion from the country’s largest companies combined.

There are now signs that the central government is changing its stance on internet titans such as Alibabawhich could prove positive for Chinese tech stocks.

“The regulatory headwinds that we’ve had for the past two years … it’s going from headwinds to tailwinds now,” George Efstathopoulos, portfolio manager at Fidelity International, told CNBC’s Street Signs Asia on Wednesday.

On Tuesday, Alibaba announced a major restructuring aimed at splitting its company into six business units in an initiative “aimed at unlocking shareholder value and boosting market competitiveness.”

In the past two years, China’s government has often railed against the “disorderly capital expansion” of tech companies that have grown into large conglomerates. Part of Alibaba’s announcement noted that these fragmented companies could raise debt capital and even go public, seemingly going in the opposite direction to Beijing’s concerns.

Efstathopoulos said the move could mean the green light from senior echelons of the Chinese government.

“They have top leadership’s blessing for value unlocking and to me that’s fantastic indication that we’re now essentially moving away from regulation which isn’t the problem it was,” Efstathopoulos said.

Alibaba’s restructuring isn’t the only sign that Beijing could relax its tech-sector scrutiny. Jack Ma, the founder of Alibaba, seen publicly in China for the first time in months.

Some credit Ma with sparking the start of the tech crackdown in October 2020, when the billionaire made comments critical of China’s financial regulator. A few days later, Ant Group, Alibaba’s fintech subsidiary controlled by Ma, was forced to halt its massive dual listing in Hong Kong and Shanghai after regulators said it didn’t meet the requirements for an IPO.

The Chinese government then imposed huge antitrust fines on Alibaba and the food supplier meituanwhich introduces a range of regulations in areas from data protection to how companies can use algorithms.

Ma’s reappearance in Hangzhou, where Alibaba is headquartered, was taken as another sign of Beijing’s more positive attitude towards the tech sector and entrepreneurs.

“Jack just didn’t show up in Hangzhou because he was tired of traveling around. I think it was well orchestrated and fits with the government’s campaign to demonstrate that they are reducing the pressure on their private sector and welcoming the rest of the world,” Stephen Roach, a senior fellow at Yale University, told Tuesday CNBC’s “Squawk Box Asia”.

There have been further signs of regulatory easing in recent weeks.

The gambling sector was hit hard in 2021 as authorities became increasingly concerned about addiction among young people in China. Chinese regulators have frozen new game release approvals for several months. Last April, authorities started giving the green light to new games, mostly from domestic companies. This month, the video game licensing regulator gave its approval stamp to a number of foreign titles for release in China.

Meanwhile, Chinese ride-hailing giant Didi — one of the companies hit by the regulatory overhaul — announced plans to expand its business. Didi went public in the US in June 2021, but was subjected to a cybersecurity review by Chinese regulators within days of the listing. It was eventually delisted from the New York Stock Exchange and plans to launch in Hong Kong.

Over the past few days, foreign technology executives have been among them Apple Managing Director Tim Cook and Qualcomm CEO Cristiano Amon visited China and met with government officials.

In addition to warming up the domestic technology sector, China is also courting foreign companies. Its economy has been battered over the past two years, thanks in part to the country’s tough Covid policies and tightening of regulations. The government is now targeting economic growth of around 5% for this year.

To achieve this, it will need the help of private companies – including the technology sector.

“China faces both weak economic growth and increasing tech competition from the US. It’s quite a difficult position. So you need the economy to fire off all guns. Strict regulations for big tech platforms just don’t make sense at this point,” Linghao Bao, tech analyst at Trivium China, told CNBC via email.

While there are promising signs for investors, there is also reason for caution, warned Xin Sun, lecturer in Chinese and East Asian business at King’s College London.

Sun describes Alibaba’s restructuring as a move to “break up Alibaba’s business empire and reduce its enormous influence, which could potentially pose a threat to Chinese Communist Party rule.”

“After the restructuring, Alibaba’s organizational structure will be more decentralized and control over its assets, data and resources will be less concentrated. The party could then more easily exert stronger political control over each of the new entities,” Sun added.

He warns against too much optimism about China’s tech sector. While recent moves bring some regulatory certainty, many questions remain about how other tech giants might fare.

“In the short term, Alibaba’s restructuring could be perceived as routine government regulation and provide some regulatory certainty to the sector,” Sun said.

“Longer term, however, it raises more questions about the fate of other tech giants. Will Tencent, Meituan and ByteDance will also be dissolved? If so, do they make their own decisions or just await government orders? This uncertainty will continue to weigh on entrepreneurs and investors and erode their confidence.”