What happened 

Chinese internet stocks were hit hard on Tuesday. By the close of trading in the U.S., shares of Alibaba Group (BABA 1.44%), Tencent Holdings (TCEHY 1.92%), and JD.com (JD -1.68%) were down 8.3%, 6.1%, and 5.6%, respectively.

So what

China's government is taking steps to reign in the power of its largest internet companies. China's State Administration for Market Regulation released a draft of rules designed to inhibit the ability of internet platforms to engage in monopolistic behavior. The rules are expected to apply to online retail marketplaces operated by the likes of Alibaba and JD.com, as well as digital payment platforms such as Tencent's WeChat. 

A downwardly sloping stock chart.

Chinese internet stocks sank on regulatory concerns. Image source: Getty Images.

Now what

China has long sought to support the growth of its homegrown internet leaders, so as to boost their ability to compete with their international rivals. However, in the process, companies like Alibaba and Tencent have become dominant within China. The Chinese government now appears to be turning its attention to fostering domestic competition.

Thus, Alibaba, Tencent, and JD.com could all face greater opposition as they look to expand within China in the coming years. Investors now must factor these risks into their outlooks for China's internet leaders. Their stock prices, in turn, are being adjusted downward by the market.