The rally in China’s tech stocks is fading fast
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A DIZZYING rally in China’s technology stocks is fading fast as growth concerns take centrestage despite a string of better-than-expected earnings.
The Nasdaq Golden Dragon China Index had fallen 16 per cent from a January high through Friday to approach a bear market, with its 63 members losing a combined US$190 billion in market value during the period. Alibaba Group led the decline, even after the firm reported better-than-expected quarterly profits.
The losses reflect the broader caution surrounding Chinese assets as long-standing concerns return to the fore after a rally fuelled by the reversal of strict Covid curbs. Regulatory risks have resurfaced following the disappearance of a high-profile tech dealmaker while the shooting down of an alleged spy balloon has worsened US-China tensions.
“Suddenly there are just so many factors to worry about,” said Paul Pong, managing director at Pegasus Fund Managers. “Cost control did help their past earnings, but margin-eroding price wars are intensifying in China,” he said, adding that highly volatile names are under pressure from global risks such as US rate hikes.
On Monday (Feb 27), the Nasdaq Golden Dragon gauge rose 1.3 per cent, outpacing gains in the broader US market. The recently weaker sentiment should be viewed in the context of a more than 80 per cent jump from an October trough as China’s economy reopened and optimism grew that a crackdown on the sector was drawing to a close.
Even solid corporate earnings have failed to allay investor concerns. Of the nine Chinese technology companies that have reported quarterly results, five delivered revenue or profit beats, including Baidu, Alibaba and Vipshop Holdings. Among the firms slated to release their earnings by end-March are JD.com, Bilibili and Trip.com Group.
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Geopolitical risks are high on investors’ list of worries after the US shot down a China balloon it alleged was used for spying. In addition, US Secretary of State Antony Blinken has said that Beijing was considering supplying Russia with weapons for its war in Ukraine, in a move that is likely to further inflame tensions.
Add to that this month’s sudden disappearance of dealmaker Fan Bao, which has sent chills through the country’s business elite, and has raised fresh doubts about whether President Xi Jinping’s crackdown on the private sector has run its course.
“Although the earnings season is off to a positive start, with beats from Alibaba and Baidu, markets look to be pricing in more risk as geopolitical concerns, higher Fed rates, and industry competition impact valuations,” said Marvin Chen, an analyst at Bloomberg Intelligence.
There are also stock-specific factors at play. For Alibaba, its potential investments in new business opportunities may temper the effectiveness of cost-control efforts, Morgan Stanley analysts including Gary Yu wrote in a note last week. Baidu’s target to break even in its AI (artificial intelligence) cloud business is later than expected, while its ChatGPT-style bot will boost near-term costs in the absence of a clear strategy by the firm to turn in a profit, said Macquarie Capital analyst Esme Pau.
Some investors are similarly unimpressed. Jennison Associates isn’t looking to restore its position on big Chinese tech firms to previous levels given the slowing growth outlook and rising regulatory risks. “A lot of these companies are very dependent, and may be even at the whim, of Chinese government policymakers,” said Raj Shant, portfolio specialist at Jennison. “And it’s hard to say that anybody really knows what those policymakers are actually thinking and what their priorities are.” BLOOMBERG
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