Don’t fight Beijing. That was the investment mantra behind the brutal, prolonged sell-off in Chinese tech stocks that began in late 2020. This belief is also why they have rallied so strongly in recent weeks: a definite change for the better in the tone of China’s top politicians.
In the longer term, some important uncertainties still hang over the market. Namely, whether a return to the heady growth and cash generation of the days before the crackdown is really possible. Based on the evidence so far, the answer still seems likely to be no.
The rally in Chinese tech stocks over the past few weeks has been phenomenal. Kraneshares CSI China Internet Exchange Traded Fund, which tracks Chinese offshore technology listings, had its worst week ever in the week ended March 11, posting a 19% decline. It then rallied 29% the week after — its best weekly performance.
The crucial turning point was a supportive message from a meeting of policymakers chaired by China’s economic czar Liu He. While no specific policies were announced, the tone was music to investors’ ears, particularly the suggestion that any policies that could affect the market should first be checked with financial regulators. Soothing words on the general crackdown by regulators and the risks of delisting facing US-listed Chinese companies also helped.
This is a signal that policymakers probably don’t want the market to go lower — definitely not in the stomach-churn manner that preceded the abrupt reversal. Economic stability is a political priority in 2022 as President Xi Jinping is likely to seek a landmark third term as Communist Party leader this fall. It helps that Chinese stocks are already trading at historically low levels. Hong Kong’s Hang Seng Index is trading at 8.6 times expected earnings, compared to a 10-year moving average of 10.3, according to S&P Global Market Intelligence.
Share buybacks could also provide support in the coming months. Alibaba increased its share buyback program to $25 billion from $15 billion last week. This corresponds to around 8% of the market value. Smartphone maker Xiaomi said last week it would buy up to $1.3 billion worth of its own stock. Goldman Sachs said the cash-to-market cap ratio for companies in the MSCI China non-financials index hit a record 23%.
But over the long term, the fundamentals of the consumer internet sector may actually have shifted. Alibaba and Tencent both reported the slowest growth since their IPOs in their latest earnings reports. In other words, the kind of massive cash generation that can fund large buybacks in the future could become more difficult. For now, investors appear to be pricing in a less rosy future: even after the recent rebound, many Chinese tech stocks are still worth less than half of their peak values.
The market has likely found a bottom in the short term. Returning to the glory days is another matter.
write to Jacky Wong at firstname.lastname@example.org
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Appeared in the print edition of March 29, 2022 as “Chinese Tech Stocks Stage A Comeback”.
https://www.wsj.com/articles/chinese-tech-stocks-are-back-their-glory-days-arent-11648469530?mod=rss_markets_main Chinese tech stocks are back. Their glory days are not.