Tencent shares dropped 10% last night as Wall Street Journal reported the Chinese tech giant could be facing a record fine for violating money laundering rules. This has combined with the general bearish sentiment of the China tech sector as the government continues its regulatory tightening.

Money laundering

The mobile payments service run by Tencent, WeChat Pay, allowed the transfer of funds for illicit purposes like gambling. Tencent also failed to fully comply with rules around checking the identity of merchants and individuals as well as the source of their funds, the newspaper said.

A probe into potential money-laundering would open a new front in Beijing’s sweeping crackdown on the internet industry, an effort that’s already wiped out hundreds of billions of dollars in arenas from ride-hailing and e-commerce to online education.

Crackdowns

The Chinese government has been after their internet industry in an attempt to crackdown potential money laundering. This has led to hundreds of billions of dollars being wiped out of companies valuations. Ride-hailing, e-commerce and online education companies have all been affected. Tencent has come off fairly unscathed so far, unlike the names of Alibaba and Meituan. However, this latest action could lead to increased pressure on the company as the focus turns to them.

Short trade?

Although Tencent shares have lost 37% in the last month, this latest momentum could lead to continued downside. The sector is already a fragile one with the decisions of the governments and world conditions don’t seem like any big money will be pouring into these anytime soon.

Earnings are due on March 23rd. Alibaba and JD both reported slowed growth which was obviously not taken well by investors. Alibaba reported the weakest figures since 2014.

All of this does bode well for a short trade.

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