China tech stocks rebound on hopes that regulatory ‘peak’ has been hit

Chinese tech stocks are turning higher, a year after Beijing kicked off a crackdown on the sector by blocking the record $37bn initial public offering of Jack Ma’s Ant Group.

Equity benchmarks tracking the biggest names in China’s internet sector have notched double-digit gains since hitting lows in early October. The Nasdaq Golden Dragon China index has climbed by 18 per cent, while Hong Kong’s Hang Seng Tech index has jumped more than 13 per cent.

Analysts have become more positive, with HSBC this week upgrading its outlook for Chinese equities, saying investors were “too bearish” on the country’s stocks.

But the prospect of further curbs still hangs over the sector, leaving a yawning gap between China’s tech and the broader market. The benchmark CSI 300 index of large Shanghai- and Shenzhen-listed stocks is down about 5 per cent this year despite recent shocks to Chinese markets and economic growth, whereas big tech groups listed in Hong Kong and New York have fallen more than 20 per cent.

“The peak intensity may have already passed us . . . but regulation in the space will be ongoing because it’s not about the regulation of the internet,” said David Choa, head of Greater China equities at BNP Paribas Asset Management. “These [regulatory moves] are part of bigger actions on the overall economy.”

Analysts say the regulatory wrath that intensified in early July, after ride-hailing group Didi Chuxing listed in New York, means big tech companies including Alibaba and Tencent are unlikely to soar to pre-crackdown highs imminently.

Line chart of Equity benchmark performance year to date (indexed to 100) showing Top Chinese internet stocks remain far below the broader market

Choa said some of the rally probably came from investors closing out the gains they made from bets against Chinese tech. But he added that recent events, such as a lower-than-expected fine on food delivery group Meituan and the re-emergence of Ma in Hong Kong and Spain, “have led the market to think that maybe the worst is behind us”.

Ma’s criticism of financial regulators was widely credited with scuppering the IPO of Ant, the fintech and a sister company of Alibaba, last November and fostering the first wave of the regulatory clampdown.

That has left Alibaba’s shares among the hardest hit, down about 45 per cent since regulators cancelled Ant’s listing, while rival Tencent is down about 16 per cent. The two groups have been repeatedly targeted by regulators due to their vast influence in areas ranging from social media to payments processing and personal finance.

Line chart of Share price change since October 28, 2020 (%) showing Tech crackdown's impact uneven a year on from Ant's failed IPO

But investors have been quicker to return to companies with less sprawling operations. Gains at games-focused NetEase, for instance, have left its shares 20 per cent higher over the same period, despite new restrictions on access to online gaming for minors.

Alexander Treves, head of emerging markets and Asia Pacific equities investment specialist at JPMorgan Asset Management, said gaming was one of the most attractive segments of Chinese tech, which still had many companies with “good business models and long-term growth prospects that have more than factored in any of the pain from regulation”.

But he added it was “too early to say” that tech groups were no longer under scrutiny from Beijing and that valuations were unlikely to easily climb back to the levels common before the Didi’s listing. Shares in the ride-hailing company are still 37 per cent below their IPO price.

“Any investor in China needs to be aware the regulators are a fact of life,” he said.

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