(Bloomberg) — An inexorable sell-off in Chinese tech stocks continued in Hong Kong on Monday as lockdowns in Shenzhen, a key industry hub, heightened investors’ fears of geopolitical and regulatory risks.
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The Hang Seng Tech Index fell more than 8% during morning trading, with the sector once again leading losses in Hong Kong and China equities. The Golden Dragon Index, which tracks American Depositary Receipts of Chinese firms, fell 10% last week for two days in a row, something that has never happened in its 22-year history.
The fall followed a series of events that spooked investors, reminding them of regulatory uncertainty in both China and the US. The US Securities and Exchange Commission last week named its first batch of Chinese shares as part of a crackdown on foreign firms that refuse to open their books to US regulators, raising concerns about delisting risks.
In addition, Friday’s report showed taxi company Didi Global Inc. has suspended preparations for a planned listing in Hong Kong after failing to meet Beijing’s regulatory requirements. Equities are also being hurt by the growing Covid-19 outbreak in China, which is clouding earnings and economic growth prospects, as well as a potential move by Beijing on Russia that could spark a global backlash against Chinese companies.
“At this stage, we still view the tech space as highly vulnerable,” said Jun Li, chief investment officer of Power Pacific Investment Management, adding that the firm has been avoiding Chinese ADRs. “At this stage it is very difficult to assess the risk profile.”
The Hang Seng fell 4% on Monday, while China’s benchmark CSI 300 fell 2.1%, ending last week with a fall of more than 4%, the worst since 2008 during the National People’s Congress.
The story goes on
Both the Hang Seng Tech Index and the Nasdaq Golden Dragon Index lost over 60% of their peaks, respectively. On Monday, shares of Alibaba Group Holding Ltd. fell 8.4% in Hong Kong, while Tencent Holdings Ltd. headquartered in Shenzhen fell by more than 4%.
“We don’t see a major catalyst in the near term” for China stocks, although earnings results could cause some share price volatility, said Marvin Chen, strategist at Bloomberg Intelligence. “For a significant re-evaluation of Chinese technology, we may need to see a change in regulatory tone, and we didn’t get that at the recently concluded NPC meeting.”
Even during the debacle, traders on the mainland continued to buy up Hong Kong shares, though this was not enough to support stock prices. They have made a net purchase of Hong Kong shares via Exchange Connect every session since February 22nd.
Chinese bulls
A historic drop in tech stocks is baffling Chinese bulls, which have surged this year, as strategists bet on a recovery thanks to policy easing by the People’s Bank of China.
Strategists at Goldman Sachs Group Inc. moderated their optimism about Chinese equities a little, lowering their estimates of the value of the MSCI China index.
“We keep China overweight due to well-anchored growth expectations/targets, easing policies, undervalued valuations/sentiment and low investor position,” but lower our 12-month valuation target from 14.5x to 12x due to changes in global macroeconomic environment and higher geopolitical risks, strategists, including Kinger Lau, wrote in a note Monday.
The MSCI China Index has more than halved from its February 2021 peak. The figure is trading at about 9 times its 12-month earnings forecast compared to a five-year average of 12.6.
For some strategists, there is now a chance to add Chinese equities.
“Valuations are at historic lows and we continue to see them as good entry points for investors who may be shrugging off short-term volatility,” said Ivan Su, analyst at Morningstar Investment Management Asia Ltd. Probably just emotional. After all, nothing fundamentally changed in the core business.”
(Updates with China stock valuation. Alibaba’s spelling has been corrected in the earlier version.)
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