Morgan Stanley cautions investors about Chinese tech stocks facing a regulatory crackdown

Morgan Stanley (NYSE: MS) has urged investors to be careful with Chinese stocks due to the country’s latest regulatory crackdown round on tech companies. In mid-January, the investment bank had cautioned Chinese internet stocks despite being bullish nine months before. The reason behind the caution was high valuations and credit tightening.

Morgan Stanley reiterates downgrade on Chinese MSCI stocks

The investment bank reiterates its early downgrade call on Chinese stock stocks to equal weight, implying they will perform in line with other emerging markets stocks. The downgrade was in those stocks under the MSCI China index, including mainland china listed A-share and Hong Kong-listed offshore shares.

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Morgan Stanley’s Asia chief and emerging equity strategist Jonathan Garner said:

“What we are seeing, I think, is that the anti-trust regulation is proving sort of much deeper and more long lasting than we had thought. In addition, we have this new focus on, data security and that’s data security, not just in relation to Chinese national security, but also the way in which these super apps use data in, China.”

There is increasing concern about regulatory scrutiny on China after authorities announced a cybersecurity review on Didi at the beginning of the month. Chinese authorities asked app stores to remove the ride-hailing company’s app from their stores days after Didi’s US IPO. According to regulators, the ride-hailing app had illegally collected personal data. The cybersecurity review has since been extended to three other US-listed Chinese companies.

Chinese tightening supervision of tech companies

China recently commenced a crackdown on the collection and use of personal data. In June, the country passed legislation defining rules on collecting, storage, processing, and transferring data. Notably, the law will become effective from September.

Last week Chinese regulators said that they are strengthening supervision on offshore-listed Chinese companies and tightening rules on data security management by the firms. As a result, any company with over one million users should undergo a cybersecurity review prior to listing abroad. Garner said:

“And in last week, again, a very high level, document, launched in relation to the whole process of listing Chinese companies onshore and offshore. So there’s a high degree of uncertainty as to how this affects the investment landscape and the growth in internet space in China.”