Why Baidu fell nearly 20% in July

What happened

Actions of Baidu (NASDAQ: BIDU) recorded a 19.6% loss last month, according to data provided by S&P Global Market Intelligence, following a regulatory crackdown on many Chinese tech companies.

So what

The saga technically began in November last year, when China’s State Administration for Market Regulation began setting new rules to combat internet monopolies. While the intention was apparently aimed at names like Ali Baba and Tencent, as the search engine performing the vast majority of web searches in China, Baidu is not immune to any new regulatory headwinds.

Things have gotten harder and harder since then, with sweeping changes in corporate disclosure requirements, data security measures, and more scrutiny of public offerings. Even video games have not escaped recent regulatory interest from China. All of these directly or indirectly affect Baidu and its well-diversified portfolio of technology companies, as well as projects outside of its core research activity. These interests include artificial intelligence, autonomous vehicle applications and technology.

Image source: Getty Images.

As for the bulk of the July pullback for Baidu shares, blame the Chinese ridesharing company, however. DiDi Global (NYSE: DIDI). Shortly after completing its IPO for a listing on the NYSE in early July, the Chinese Cyberspace Administration and Department of Public Safety sent a small army of employees to DiDi headquarters to conduct an on-site investigation into the process of collecting and storing customer information. This move appeared primarily to be an effort to send a message to DiDi and any other tech player resisting the new government rules; domestic investors have certainly interpreted it as such.

Now what

It’s tempting to assume that regulatory crackdown can’t do more damage than it has already done. Baidu’s 20% drop in July is only part of a larger 43% drop from February’s peak, reflecting weakness in many other Chinese tech stocks.

But the consensus assessment is that things could indeed get worse before they get better. The crackdown in many ways suggests that the Chinese government is slowly positioning itself for increased and continued surveillance of the Chinese tech industry. That doesn’t necessarily mean that the government’s priority is to eliminate clear market leadership, to be clear. However, this is a prospective result of a more restrictive environment.

The sheer uncertainty of the move makes all of these stocks, including Baidu, difficult to own until it’s clear that China’s State Administration for Market Regulation is loosening up. It could be a bit longer.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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