How China’s stock market drop affects tech companies

Unless you’ve been living under a rock recently, you’re probably aware that all is not well in China’s stock markets. After hitting an all-time high in mid June, China’s markets have dropped by nearly a quarter, shedding in excess of US$3 trillion (yeah, that’s trillion with a T) in value.

China has been quick to respond to the drop, halting IPOs, cutting interest rates, lowering reserve requirements, and pumping billions of stimulus dollars into the markets to bring prices back up. That has bumped markets up a bit, although whether these measures are a cure or just a stopgap remains to be seen. But how is all of this affecting the tech industry?

Stock prices are down, no matter where you’re listed

For tech companies listed in China, the signs aren’t great. The government’s measures have helped prop up stock prices, but this is disproportionately affecting state-owned enterprises. Private tech firms are much worse off. If you need evidence of that, look not at the Shanghai Composite Index but rather at the ChiNext Index, a NASDAQ-style board of the Shenzhen Stock Exchange that features mostly high-tech and internet firms. Despite the government’s recovery measures, it has continued to drop. Here’s what has happened to the value of many of China’s domestically-listed tech firms over the past year:

But the news isn’t much better for China’s tech companies listed abroad. Chinese tech companies listed on the US markets have virtually all seen their stocks plummet over the last week as investors fear China’s market issues will affect their domestic business. Many of China’s foreign-listed tech firms have seen double-digit drops in their share prices.

Foreign-listed tech companies that planned to delist and re-list in China are now in purgatory

As China’s markets rose over the past year, an increasing number of US-listed Chinese companies announced plans for buyouts that would allow them to de-list from the US exchange and then do an IPO in China to take advantage of its bull market. But now that China’s market has collapsed, many of these plans have fallen through.

For example, web security firm Qihoo 360, which is listed on the NYSE, annouced a planned buyout last month at the price of US$77/share. But the Chinese market drop and the subsequent drop of US investor confidence in Chinese tech firms has caused Qihoo’s value to slide all the way down to around US$58/share (as of this writing). Other tech companies with buyout plans like E-House have seem similar slides, and what happens next isn’t clear.

For one thing, it’s unclear whether the private investors backing these companies to buy out will still be willing to do so at their proposed rates after their share prices have dropped so significantly. It’s also not clear how many of China’s tech companies will still want to go through with their buyouts now that it’s clear the grass isn’t necessarily greener on China’s markets. Thus, it’s likely that some of the buyouts will fall through. But even if they don’t, China has suspended all new IPOs for the moment, so a company that did successfully privatize and de-list in the US still couldn’t relist in China.

So what’s going to happen with these companies? Nobody really knows. It depends on how China’s markets react going forward. But for the moment, assume that basically all of the buyout plans are on hold.

Fintech startups may be in trouble

Over the past few months, a ton of new finance tech startups have sprung up or raised funding, offering online and mobile investment platforms in an attempt to capitalize on the increased interest in China’s domestic markets as stock prices rocketed up. Many of these startups would have died anyway – the market can only support so many mobile investment platforms – but their demise will be accelerated by this drop in the markets, which is going to be a nightmare in terms of user acquisition. Existing investors already have their preferred investment platforms, and the markets are rough enough at the moment that most new investors will steer clear. So who, at this point, can a new investment app add to its userbase? Until the markets recover, the answer might be nobody.

No new IPOs

As previously mentioned, all IPOs on the Chinese market are frozen for the moment. International IPOs are still possible, but with tech stocks down all across the board, planning one right now would be foolish. As a result, Chinese tech firms that had been planning to list on either market are now likely pushing back their plans to wait and see how the market rebounds (assuming that it does).