Why are China stocks dropping (again)
$TENCENT(00700.HK$ Tencent plunged below $400. $Alibaba(BABA.US$ Alibaba went below $80. The drop is not limited to Chinese tech stocks, the $CSI 300 Index(000300.SH$ CSI 300 which is made up of A shares, is down 15% ytd. The panda bear market is already here and what are some of the possible reasons for the recent plunge?
First, the ongoing war is weighing down not just on the Chinese stocks, but the global markets. The war worsened the inflation and consumers are now paying the price, literally. Sanctions are likely to slow the economy too. A stagflation scenario emerges and companies are going to make less money.
Eyes are also on China to see which side she leans on. China has refused to condemn Russia and business could continue between the two countries. If so, the US may get increasingly hostile against China and intensify the existing trade war, thereby hurting Chinese enterprises.
Second, China targets 5.5% GDP growth in 2022. This is lower than the 6% target in 2021 and on the backdrop of China's lower interest rates and fiscal stimulus. Investors may view this negatively as a sign of economic slowdown.
If inflation gets worse, China may need to raise rates and that would take away the boost she needs to hit the already lowered GDP target.
Third, China has just concluded the 'two sessions' and the scrutiny on tech companies in China has not diminished. In fact, the delegates suggested additional measures to curb video game addiction. Pony Ma must have found himself in a very hot seat.
The regulations have already taken a toll on the Chinese tech companies. Alibaba reported the slowest growth since its IPO while JD.com reported a loss in FY21. More regulations will affect the performances further.
Fourth, US Securities and Exchange Commission (SEC) has identified five Chinese companies for potential delisting from the US exchanges. The five were BeiGene, Yum China, Zai Lab, ACM Research and HutchMed. They have until 29 Mar to dispute.
This has intensified the fear of forced delisting of China companies and resulting in selloffs. Although Alibaba is already listed in HK and that the US shares could be converted to the HK ones, it has not stopped investors from dumping the stock, causing it to drop 10% after the SEC's announcement.
Fifth, DiDi's HK IPO has been halted as it has yet to get approval over data security from the Chinese regulators. The app remained suspended from the app stores.
Investors are fearful about being stuck in a limbo. On one hand, Chinese stocks are delisting in the US while on the other, some of them aren't able to list in HK. Some investors are likely to sell to avoid being caught in such situation.
Sixth, China's Covid outbreak is the worst in two years. 17 million in Shenzhen and 24 million in Jilin are in lockdown and there is fear that this might spread to the rest of China.
China has been on the Covid Zero policy and this outbreak puts it to the test. Would China drop this policy so as to maintain her track towards the GDP target? Or would she prefers the policy and forgo the economic growth? The uncertainty is roiling the markets.
Most importantly how should investors react?
Investors who believe in the growth of China and take a long-term approach should be patient with their holdings. The path for China to become the biggest economy in the world is not going to be a smooth sailing one and this period is just one of the many tough ones to come.
If you are thinking of buying China stocks, I would suggest your time horizon should be at least 5 years or more. This is not a time to bet on a rebound in the short term and hope to sell for a quick profit. We never know if the China stocks will sink further and if so, you will be forced to hold long-term. You will end up being stuck with a larger loss instead.
First, the ongoing war is weighing down not just on the Chinese stocks, but the global markets. The war worsened the inflation and consumers are now paying the price, literally. Sanctions are likely to slow the economy too. A stagflation scenario emerges and companies are going to make less money.
Eyes are also on China to see which side she leans on. China has refused to condemn Russia and business could continue between the two countries. If so, the US may get increasingly hostile against China and intensify the existing trade war, thereby hurting Chinese enterprises.
Second, China targets 5.5% GDP growth in 2022. This is lower than the 6% target in 2021 and on the backdrop of China's lower interest rates and fiscal stimulus. Investors may view this negatively as a sign of economic slowdown.
If inflation gets worse, China may need to raise rates and that would take away the boost she needs to hit the already lowered GDP target.
Third, China has just concluded the 'two sessions' and the scrutiny on tech companies in China has not diminished. In fact, the delegates suggested additional measures to curb video game addiction. Pony Ma must have found himself in a very hot seat.
The regulations have already taken a toll on the Chinese tech companies. Alibaba reported the slowest growth since its IPO while JD.com reported a loss in FY21. More regulations will affect the performances further.
Fourth, US Securities and Exchange Commission (SEC) has identified five Chinese companies for potential delisting from the US exchanges. The five were BeiGene, Yum China, Zai Lab, ACM Research and HutchMed. They have until 29 Mar to dispute.
This has intensified the fear of forced delisting of China companies and resulting in selloffs. Although Alibaba is already listed in HK and that the US shares could be converted to the HK ones, it has not stopped investors from dumping the stock, causing it to drop 10% after the SEC's announcement.
Fifth, DiDi's HK IPO has been halted as it has yet to get approval over data security from the Chinese regulators. The app remained suspended from the app stores.
Investors are fearful about being stuck in a limbo. On one hand, Chinese stocks are delisting in the US while on the other, some of them aren't able to list in HK. Some investors are likely to sell to avoid being caught in such situation.
Sixth, China's Covid outbreak is the worst in two years. 17 million in Shenzhen and 24 million in Jilin are in lockdown and there is fear that this might spread to the rest of China.
China has been on the Covid Zero policy and this outbreak puts it to the test. Would China drop this policy so as to maintain her track towards the GDP target? Or would she prefers the policy and forgo the economic growth? The uncertainty is roiling the markets.
Most importantly how should investors react?
Investors who believe in the growth of China and take a long-term approach should be patient with their holdings. The path for China to become the biggest economy in the world is not going to be a smooth sailing one and this period is just one of the many tough ones to come.
If you are thinking of buying China stocks, I would suggest your time horizon should be at least 5 years or more. This is not a time to bet on a rebound in the short term and hope to sell for a quick profit. We never know if the China stocks will sink further and if so, you will be forced to hold long-term. You will end up being stuck with a larger loss instead.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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AlharsonJordy : Hello. Im in china but I don’t how can I connect my bank account
Chillax guy : Useless China stocks
Macdonell J : NASDAQ is down more than 22% and S&P 500 down 20%. They're already in the bear market territory. What do you think how much more downside to go before we can smell a rebound?
High Profit Low Loss : Not investing in China stock’s currently. Monitor the situation closely for now.