Chinese Technology Stocks Plunge, Suggesting US Sanctions Might Accelerate

Tencent in Trump administration's crosshairs
August 8, 2020 Updated: August 9, 2020

News Analysis

President Donald Trump’s executive order to ban Chinese apps TikTok and WeChat caused waves in the financial markets. While sanctions over the popular video sharing app TikTok was widely discussed in the past few weeks, a ban of WeChat—and potentially its parent, Tencent Holdings Ltd.—and beyond may be more impactful.

News of the Trump Administration’s ban on WeChat in the United States sent Tencent shares plunging as much as 10 percent in Hong Kong on Aug. 7 before recovering and closing the session down around 5 percent. In other words, Trump’s order wiped $35 billion from Tencent’s enterprise value.

While WeChat has 1 billion users worldwide, its presence in the United States is minuscule and its usage is largely confined to Chinese expats and business owners looking for a quick way to communicate with their Chinese vendors. So the $35 billion in value decrease is hardly commensurate with WeChat’s U.S. business.

Tencent isn’t the only Chinese technology giant feeling the pain. Alibaba Group—which is traded on the New York Stock Exchange—declined 5 percent as well, wiping $36 billion from its market value. NetEase, a Chinese communication and video game company traded on the Nasdaq exchange, fell 3.2 percent on Aug. 7. SOHU, another Chinese internet company traded on Nasdaq, dropped 7.1 percent. 

Tencent’s Extensive US Holdings

In speaking with a Hong Kong-based trader, who wished to remain anonymous, the volatility in Tencent’s shares is due to the initial vagueness of Trump’s executive order and fears that the ban’s scope could reach beyond WeChat to Tencent itself, which is far more impactful than a ban on WeChat.

The order states that all transactions “related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States, with Tencent Holdings Ltd. … or any subsidiary of that entity” would be barred.

To mitigate further speculation, the White House on Aug. 7 clarified that the executive order only blocks WeChat transactions and doesn’t involve other Tencent holdings at this time, according to a report by the LA Times

Tencent is one of the world’s biggest technology firms and has a web of affiliations in the United States mostly in the form of minority ownership stakes in companies, investments in startups, and partnerships for the Asian market. 

The company has extensive ownership stakes in U.S. video game companies. Riot Games, the Los Angeles-based developer, publisher, and e-sports organizer, is owned by Tencent. Riot Games is known for developing League of Legends, an online multiplayer game released in 2009 and is one of the most popular e-sports franchises.

Tencent has minority stakes in Epic Games, the North Carolina-based developer and publisher of the popular title Fortnite, and major game publisher Activision Blizzard. In addition to video games, Tencent is also active in the music business with small ownership stakes in Spotify and Universal Music Group.

Scrutiny Over Chinese Companies

Nonetheless, the massive price movement and volatility in Chinese shares and U.S. policy trends towards Chinese companies means further actions against Tencent and others cannot be ruled out.

Recent U.S. actions against TikTok and a potential sale to Microsoft was triggered by concerns of data security, espionage, and censorship of U.S. users by the app’s China-based developer ByteDance.

India had taken initiative to ban 59 Chinese apps in June, and has drawn up a new list of another 275 Chinese apps it is investigating for user privacy and national security concerns. This new list being considered by New Delhi includes some very high profile apps which are also popular in the United States, such as AliExpress, PubG (PlayerUnknown’s Battlegrounds), apps run by Chinese consumer electronics company Xiaomi, and video games published by NetEase.

The Trump Administration could also examine companies and products already on its “black list,” which contains firms that are barred from purchasing U.S. technology.

League of Legends players last year discovered that its online chat system censored the term “Uyghur,” an ethnic minority group residing in Xinjing that is currently facing persecution by the Chinese Communist Party. Riot Games acknowledged the error and apologized to its users.

Zoom, the popular online meetings service, could also be caught in the crosshairs for its transgressions. Zoom was founded by Chinese-born American entrepreneur Eric Yuan but has been mired in controversy for “mistakenly” routing international call data through its China-based servers.