Chinese stocks fell in recent days but then rebounded with unprecedented strength. For some investors, the recovery was almost as worrisome as the sell-off.
The turbulence follows a year-long decline that has already led to massive investor losses. The market value of American depositary receipts, Hong Kong and other Chinese stocks has evaporated by trillions of dollars as Beijing has implemented a series of regulatory measures and global appetite for riskier and faster-growing stocks has waned.
However, the turmoil reached a new climax this month as investors worried about whether China could be hit by a Russian-style financial lockdown, while more bad news about Covid-19 and regulatory pressure from Beijing and Washington surfaced.
In recent days, the market has been gripped by panic selling, one of the biggest episodes in the history of Chinese ADRs, said Tony Chin of Infini Capital Management Ltd.
“People were basically selling without a price cap — they just wanted to lower the risk,” said Mr. Chin, founder and chief executive of Infini, a hedge fund manager based in Hong Kong.
For international investors, much is at stake. Goldman Sachs analysts estimate that US institutions now own about $750 billion worth of Chinese stocks of all kinds, while many individuals also own US-listed Chinese stocks or exchange-traded funds.
The latest debacle began on March 10, after the US Securities and Exchange Commission provisionally named five Chinese companies whose audit documents it was unable to verify, in a move towards a possible delisting under the Foreign Companies Liability Act.
In itself, this was an additional step in the gradual separation of the American and Chinese markets. But it has prompted investors to revisit the big question of how investable Chinese stocks are, a question that exploded last year when Beijing liquidated out-of-school tutoring companies.
A few days earlier, Norway’s $1.4 trillion sovereign wealth fund sold Chinese shares in sportswear over forced labor concerns. And Moscow has just been frozen out of global finance for its attack on Ukraine when MSCI Inc. kicked the now “uninvestable” Russia out of its influential emerging market indexes.
“The fate of the MSCI Russia index painted a vivid — and terrifying — picture of what could happen in the event of a diplomatic breakdown between the US and China,” Robin Zhu, an analyst at Sanford C. Bernstein, later wrote to clients.
Goldman analysts estimate that Chinese tech stocks lost almost $2 trillion by the weekend from a peak of $3 trillion in early 2021.
Intense selling continued into the following week as news of rising Covid-19 cases and lockdowns in cities like Shenzhen added to the gloom. Analysts at JPMorgan Chase & Co. downgraded dozens of Internet stocks, saying the market’s focus has shifted to risk management “as global investors assess China’s geopolitical risks.”
An electronic screen in Hong Kong displayed quotes for well-known Chinese stocks on March 15th.
Photo: Paul Jung/Bloomberg News
And regulators have shown no signs of easing corporate China: The Wall Street Journal reported that Tencent Holdings Ltd. facing a record fine from the central bank. By the end of Monday, March 14, US ADRs had fallen an unprecedented 29% in three sessions. The sell-off in Asia continued on Tuesday, although US-listed equities recovered slightly.
Then in the middle of the week everything changed. On March 16, senior Chinese politicians stepped in to calm the market, with officials led by Liu He, President Xi Jinping’s top economic adviser, promising market-friendly policies and pledging to keep capital markets running smoothly.
“The Chinese government has never released anything so powerful to support the capital markets,” said Mr. Chin of Infini Capital.
The reaction was swift and harsh. S&P Global Market Intelligence data shows US-listed Chinese companies made $242 billion on the day, with the Nasdaq index jumping an unprecedented 33%. Blue chips traded like penny stocks: ADRs of Alibaba Group Holding Ltd. jumped a record 37%, with trading volumes only surpassing the listing day of the e-commerce giant.
“The market is completely volatile,” said Alexander Tavazzi, global strategist and chief investment officer for Asia at Pictet Wealth Management, speaking as the stock surged. “Prices are highly dependent on short-term supply and demand dynamics and to a lesser extent on fundamental factors.”
People walked past Tencent’s booth at an exhibition in Beijing last year.
Photo: Mark Schifelbein/Associated Press
The end result was something of a round trip: By the close on Friday, March 18, the Nasdaq Golden Dragon China index was about 3.4% higher than two weeks earlier, while the Hong Kong Hang Seng was down 2.3%. % for the same period. , show Refinitiv data.
The roller coaster ride demonstrates how Chinese equities remain dominated by politics and headlines, even as they play a growing role in international investor portfolios. While this is a familiar problem for emerging market investors, it makes them less attractive than companies that can be valued largely by their core business.
After the convulsions, investors struggle to understand how much has really changed.
The Chinese authorities have tried to reassure investors before, but the pressure does not last long. While one of the top regulators took action in July 2021 to reassure global financial firms following a training ban, the real estate sector was soon engulfed in crisis and another tech giant, Meituan, repeatedly came to the attention of officials.
As for the delisting, there are grounds for optimism. Many companies are or may be getting second listings in Hong Kong as another way to access global capital markets, while some companies, including major telecom operators, have already been delisted with little practical effect. Chinese officials have also repeatedly stated that they want to solve this problem.
Numerous investors also argue that there are no fundamental problems with investing in China, and the long pullback has made some stocks attractive.
“We strongly reject the notion that ‘China is unsuitable for investment’,” said Justin Thomson, chief investment officer and head of international capital at T. Rowe Price Group Inc. positives such as extremely low valuations and the possibility of further economic easing.”
People wear protective masks on the street in Hong Kong on March 15.
Photo: Paul Jung/Bloomberg News
Similarly, Konrad Saldana, senior portfolio manager for the emerging markets equity group at Neuberger Berman Group LLC, said a rude rejection of Chinese equities would be wrong and he still sees investment opportunities in some Internet companies as well as hardware and consumer goods. sectors. enterprises.
However, other issues that have weighed on Chinese equities seem more intractable. Markets around the world remain concerned about inflation, rising interest rates and global growth.
And the advantage China once enjoyed as a “first in, first out” of the pandemic is gone as it targets a relatively modest growth rate of 5.5% this year and experiments with adapting its zero-tolerance approach to Covid-19. .
A slowdown in China will weigh on consumption and earnings growth, while its real estate sector is yet to show signs of recovery, said Pictet’s Mr. Tavazzi, who has held no Chinese equities in his discretionary portfolio for about a year.
Restoring investor confidence may take some time. Mark Martirosyan is a director of Aubrey Capital Management Ltd., a global growth equity investment firm with a China-focused strategy.
At the end of 2021, he met with about 30 US institutional investors to introduce Aubrey. But most of those investors were concerned about further regulation of the business, and their sentiment has not changed since then, he said.
“People just don’t want to take risks, and that’s understandable,” he said.
— Serena Ng contributed to this article.
Write to Quentin Webb at [email protected] and Dave Sebastian at [email protected]
Copyright © 2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8