Wall Street's China stock rout nearing dot-com crash levels

[HONG KONG] Only a year ago, Chinese stocks in the US were enjoying an unprecedented boom.

Now they are mired in a 72 per cent plunge that is on the cusp of matching losses during the 2008 financial crisis - and within spitting distance of the Nasdaq Composite Index's 78 per cent peak-to-trough slump during the early 2000s dot-com bust.

Alibaba Group Holding Ltd alone has lost nearly US$500 billion of value since mid-February, the biggest wipeout of shareholder wealth worldwide.

The dramatic turnaround started last year after Xi Jinping cracked down on tech firms. Losses have accelerated amid concern that his alliance with Russia's Vladimir Putin will damage China's global standing. The growing risk of Chinese firms delisting from the US have also weighed on stocks.

The rout has upended a raft of optimistic forecasts across Wall Street and raised questions about the viability of a market that has financed some of China's most important companies. The losses in Russia are having a "huge psychological effect" on portfolio managers, says Jonathan Brooke, founder and principal of Brooke Capital Ltd in Hong Kong.

Earlier in March, Beijing announced a gross domestic product growth goal of about 5.5 per cent for this year, at the higher end of many economists' estimates. The growth target suggests the credit cycle is on the upturn and the economy will likely start improving as early as the second quarter, Macquarie Group Ltd economists Larry Hu and Xinyu Ji wrote after the target was set.

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A Bloomberg Economics index shows China's credit impulse - which in October fell to the lowest in 10 years - has started to reverse. The measure tracks the growth in new financing as a share of gross domestic product. This will be a year of "leveraging up", the Macquarie analysts wrote.

Valuations are low. The Nasdaq Golden Dragon China gauge trades at 17.4 times projected earnings, down from about 52 times last year. The measure is cheaper than the S&P 500 Index for the first time in almost eight years.

Goldman Sachs Group Inc. strategists including Kinger Lau wrote in note dated Monday: "We stay overweight China on well-anchored growth expectations/targets, easing policy, depressed valuations/sentiment, and low investor positioning."

The analysts lowered their valuation target on changes in the global macro environment and higher geopolitical risks.

Bad news keeps piling up. US officials say Russia has asked China for military assistance for its war in Ukraine. Traders worry that Beijing's potential overture toward Putin could bring global backlash against Chinese firms, even sanctions.

The prospect of Chinese tech firms being forced to delist is adding to the sense of panic among investors. Last week, the SEC named its first batch of Chinese stocks under a crackdown on foreign firms that refuse to open their books to US regulators. These firms could be subject to delisting from US exchanges if they fail to comply with auditing requirements for three consecutive years.

Brooke of Brooke Capital said: "The concentration in tech in the bull market was so intense and funds have been so long on growth tech stocks that you will find quarter-end retail redemptions will weigh heavily on the market."

China is also battling to maintain its Covid-Zero policy in the face of a growing Omicron outbreak. The authorities locked down the city of Shenzhen on Sunday, after neighbouring Hong Kong was overwhelmed by infections and one of the world's highest death rates. The lockdown is likely to further weaken domestic consumption.

"The era of windfall profits by China's mobile internet industry is over," said Sun Jianbo, president of China Vision Capital Management in Beijing.

The China Securities Journal said in a front-page report on Monday that the People's Bank of China may lower interest rates to stabilise growth, while weak credit data late last week fuelled expectations of more easing. The one-year facility rate, which will be announced on Tuesday, was cut to 2.85 per cent in January.

The PBOC has a limited window in which to ease policy, given the Federal Reserve's liftoff on rate hikes later this week and rising inflation pressure as commodity prices surge. Economists expect growth in China's economy, the world's second largest, to remain subdued in the first quarter.

With so much to worry about, some fund managers recommend against taking a position in Chinese stocks. "We still advise investors to stay away," said Jun Li, chief investment officer at Power Pacific Investment Management. "It is very difficult to evaluate the risk profile."

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