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Chinese tech giants had their worst quarterly growth on record, because of Beijing’s zero-Covid policy

Chinese technology giants including Alibaba have observed slower-to-no-growth as China’s economy faces weakness because of Beijing’s zero-Covid policy.

Qilai Shen | Bloomberg | Getty Images

Chinese technology giants are coming off the trunk of these worst quarter of growth ever sold as a large slowdown in the world’s second-largest economy, stoked by Beijing’s strict Covid policy, took its toll.

In the next quarter of the entire year, e-commerce firm Alibaba posted its first ever flat year-on-year quarterly revenue growth and social media marketing and gaming company Tencent reported its first sales decline on record. JD.com, China’s second-largest e-commerce player, posted its slowest revenue growth ever sold, while electric vehicle maker Xpeng posted a wider-than-expected loss and also weak guidance.

Combined, these businesses have market capitalization greater than $770 billion.

In the June quarter, China saw a resurgence of Covid cases. China has stuck to its so-called “zero-Covid” policy, a strict group of measures including lockdowns and mass testing to support the virus. Major cities, including Shanghai, were locked down for a number of weeks.

China’s economy grew just 0.4% in the next quarter, and that impacted the effectiveness of the consumer in addition to spending from companies in areas like advertising and cloud computing.

Those headwinds fed to China’s technology giants.

“Retail sales decreased year-over year in April and could because of the resurgence of Covid-19 in Shanghai along with other major cities, and contains slowly recovered in June,” Daniel Zhang, CEO of Alibaba, said on the business’s earnings call this month.

Alibaba’s logistics networks in China were also affected, also it said a few of its cloud computing projects were delayed.

Tencent, who owns the WeChat messaging app and something of the world’s biggest gaming firms, also felt the impact of the zero-Covid policy. Its fintech services revenue grew more slowly than in previous quarters as fewer individuals were venturing out and which consists of WeChat Pay mobile payments service. The business’s internet marketing revenue also fell sharply as companies tightened their budgets.

JD.com fared well in the next quarter since it controls plenty of its logistics supply chain and inventory. However, it did see costs rise for fulfilment and logistics when confronted with lockdowns.

Electric carmaker XPeng said it expects to provide between 29,000 and 31,000 vehicles in the 3rd quarter. But that has been weaker guidance compared to the market expected. And also seasonal weakness, XPeng president Brian Gu said that “traffic in the stores are significantly less than what we’ve seen before because (of the) post-COVID situation.”

China’s internet giants enjoyed a boom through the pandemic as people considered online services such as for example shopping and gaming amid lockdowns. Which has made year-on-year comparisons harder. Now, the Chinese economy is facing several headwinds this season which has made the macroeconomic environment even tougher.

China’s technology sector continues to cope with a much stricter regulatory environment. In the last 2 yrs, China has introduced tougher policy in areas from gaming to data protection.

With growth rates falling more sharply than in previous years, investors are cautious on the outlook.

“What I find interesting is the way the narrative on the big tech companies … has changed: in early stages in the pandemic, COVID was likely to benefit the big online platforms at the trouble of ‘offline’ businesses, just as much of the economy will be stuck aware of little other choice than to look online and entertain themselves online,” Tariq Dennison, wealth manager at GFM Asset Management, told CNBC via email.

“The recent revenue and earnings dip hitting these big tech names reflects zero COVID concerns short-term, but additionally has many long-term investors, including myself, revising our estimates of the long-term growth prospects of the names.”

Dennison said that Tencent, Alibaba and JD.com previously sustained a lot more than 25% annual revenue growth and a long-term slowdown will be a concern.

“If this quarter is really a sign of a permanent slowdown to single digit growth rates, instead of only a temporary dip, that needless to say would have a substantial effect on long-term valuations of the shares,” Dennison said.

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