HONG KONG, October 31, 2022 — A record sell-off of China stocks has revealed investors’ fears over the country’s largest companies after Xi Jinping secured his third term as the country’s most powerful leader.
Hopes for signs that China’s down-beaten tech sector would revive and that an opening of China’s borders would boost the economy were apparently dashed by the Chinese Communist Party’s national congress. The twice-a-decade event culminated in Xi tightening his grip on the country’s highest decision-making body, the Politburo Standing Committee, presenting a lineup notable for a lack of reform-minded top leaders.
Chinese tech companies listed in Hong Kong and New York suffered from heavy selling on the first trading day after the congress concluded. The Nasdaq Golden Dragon China Index, which tracks major Chinese companies traded on U.S. exchanges, fell as much as 20% that day. In Hong Kong, the Hang Seng Tech Index sank more than 9.6%. Overall, the indexes have dropped more than 45% and 47% this year. Shares in Alibaba Group Holding, perhaps China’s best-known tech company, at one point fell below the $68 price of its IPO in 2014.
Chinese equities have usually performed well shortly after the conclusion of party congresses, at which top leadership transitions take place, reflecting market expectations that incoming leaders would prioritize growth, according to a recent note by Goldman Sachs.
However, the investment bank noted this time the incoming leaders could arguably be more focused on ideology and politics, while the retiring policymakers appear more economy and market-minded.
Lorraine Tan, Morningstar’s director of equity research in Asia, said the sell-off reflected disappointment in the new makeup of the standing committee, which suggests a continued cautious approach to dealing with COVID.
“This points to greater risk for slower economic growth, with consumer spending to remain soft,” she said. “As such, earnings estimates are likely to be notched lower for 2023.”
The lack of supportive policies for tech companies and signs of a more state-led approach for the economy in Xi’s speech concerned investors, said Brian Tycangco, an analyst of Asian stock markets at U.S. investment research company Stansberry Research. Growing tension between the U.S. and China in a variety of fields — such as Washington’s attempts to hobble the growth of the Chinese semiconductor sector and disputes between the two countries over auditing of U.S.-listed Chinese companies — strengthens the headwinds, he said.
The factors came together “at the worst possible time,” Tycangco said. “The degree and intensity of the sell-off [on Oct. 24] would appear to indicate a deterioration of confidence among international investors when it comes to China equities.”
China’s tech stocks, which did well early in the COVID pandemic as demand for online services soared, have been hard hit since late 2020, when regulators began to apply more scrutiny and derailed plans for a mega IPO by Ant Group, Alibaba’s fintech affiliate. Some 50 popular U.S.-listed Chinese stocks including Alibaba, Pinduoduo and JD.com have lost a combined $1.4 trillion in market capitalization since their peaks in February 2021.
Oct. 24 was also the moment when foreign investors turned net sellers of Chinese stocks this year, via a trading link between the mainland and Hong Kong. Since the link was established in 2014, all years have ended with net inflows into Chinese stocks.
Global investors have been selling because they have “no confidence” in the Chinese leadership, which lacks officials with strong financial backgrounds, said Steven Tam, research director at Hong Kong-based Fulbright Securities.
However, some market participants said they see investors coming in to buy on the dip.
Brendan Ahern, New York-based CIO for KraneShares, said its $4 billion KraneShares CSI China Internet ETF has had more than $1.5 billion of net inflow so far this year. “We have not seen investors pulling out but rather using the lower level as an entry point,” Ahern said.
Mainland investors are more optimistic than their foreign peers. The CSOP Hang Seng Tech Index ETF on Oct. 24 recorded $61.8 million of inflows — the fourth largest on a single day this year. The majority of the money came from mainland investors via the trading link between Hong Kong and China.
Hao Hong, chief economist at Grow Investment Group, said there is “no doubt” China’s tech stocks are still investable, with demand for internet services and goods still strong.
“In addition,” Hong said, “Chinese tech stocks are very cheap now, and their earnings are still increasing anyway. But the Chinese tech stocks have been cheap for a long time, and you can’t buy them just because they’re cheap.” Hong added that uncertainties remain regarding regulations.
“I think it is likely that foreign investors will continue to pare down their China holdings given the perceived risk of slower growth,” Morningstar’s Tan said. “Global equities are relatively cheap now. … Given the plethora of opportunities globally, investors will probably want to assign a deeper risk premium to the China names before jumping back in.”
Mom-and-pop investors in Hong Kong who used to rush to subscribe to Chinese tech companies’ IPOs are less convinced about a big bounceback for tech names, said Joe Yip, Hong Kong-based head of financial products public distribution for Vontobel.
Compared with market dips in March and September, less money was flowing into products betting on stock price rises, Yip said.
Frank Bi, a Hong Kong-based lawyer at Ashurst specializing in advising Chinese tech companies on their offshore listings, said the market drawdown “certainly suppresses valuations” of tech companies looking for IPOs.
Investors will have far more questions of companies planning for an IPO, Bi said — for example over risks stemming from regulations including data protection or how companies would deal with the threat of sanctions amid geopolitical tensions. “Companies will only have a harder time answering these questions going forward,” he said.
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Source: Nikkei Asia reported the story.
