It was not too long ago that the inclusion of at least one or more Chinese technology stocks was considered by many as a must-have in a well-diversified portfolio. And it’s not hard to see why. China has the second largest economy in the world, with a US $14.7 trillion GDP as of 2020, according to WorldBank, and has a large population of over 1.4 billion people.
The growth rate of these Chinese tech giant companies was tantalising due to the strong domestic consumption numbers, which were given attractive valuations on the US exchanges. Hence, news of the Chinese government pulling the plug on Alibaba’s financial services arm, Ant Group’s IPO, in November 2020, came as a big surprise to investors. Had the IPO gone through, it would have been the world’s largest IPO at US $34.5 billion, with a valuation that would have been larger than any Chinese state bank.
That started with what is now seen as a year-long cold winter for Chinese technology stocks. Regulatory crackdowns have severely affected stock valuations due to the uncertain political environment. KranesShares CSI China Internet UCITS ETF (KWEB), the largest China equity ETF listed in the United States, which represents Chinese internet companies, plunged over 80% from its peak in February 2021 to its lows in March 2022. Currently, it is still down by around 70% from its peak, as of June 2022.
While investors are still shunning Chinese technology companies, developments within China might suggest a relook. With the fundamentals of these giant tech companies still in-tact and growing, we look to understand if now is the time to pick up these heavily beaten-down stocks.
Crackdown Was A Necessary Evil To Ensure The Stability And Future Growth Of The Tech Industry
These crackdown measures were not intended by the government to stifle the growth of large technology companies, but rather were meant to safeguard consumer interests and ensure the sustainable growth of the sector.
The new regulations have helped to safeguard consumer merchants by promoting fair market practices, which is crucial for long-term sustainable growth. For example, as technology firms like Tencent and Alibaba gain market share, their dominance over consumers and businesses could become overbearing in their daily lives. And if there’s a lack of a regulatory framework to govern these companies, it could lead to consumers and merchants being treated unfairly by these tech giants. For example, the anti-competitive practice of picking “one from two” forces online merchants to choose only one platform as their exclusive distribution channel. While this may benefit the e-commerce platform and its shareholders, it comes at the expense of consumers and online merchants. Hence, these regulatory actions are seen as a preventive measure to ensure market abuse by these tech giants.
Moreover, if left unchecked, the current practice would also reduce competition from other players in the sector, which could impede innovation in the industry going forward. As such, a healthy dose of regulation is not entirely unjustified or unreasonable. In fact, it could serve to position China for further sustainable long-term growth in the future.
Crackdowns Are Nothing New, They Have Happened To Other Industries In The Past
| Regulatory Crackdown In The Past | |
| 2008 | Dairy Industry |
| 2012 | High-end catering |
| 2015 | Shadow Banking /P2P |
| 2018 | Gaming |
| 2021 | Technology, Real Estate, Private Education |
The current regulatory crackdown on the technology, real estate, and private education sectors is nothing unusual or new.
The Chinese Communist Party (CCP) has taken regulatory actions in the past whenever a particular sector steps out of line. For example, in 2008, China faced a milk scandal due to the melamine found in infant formula, which resulted in a crackdown on the dairy industry. In 2012, China’s crackdown on corruption and on the wastage of public funds on luxury catering affected high-end catering companies.
In 2015, China’s banking regulator, the CRBC, placed tougher restrictions on thousands of online peer-to-peer (P2P) lenders operating in the country as a way to weed out the bad seeds. The 4-year campaign resulted in a reduction in the number of P2P platforms to just 29 online lending platforms by June 2020, down from the 6,000 at its height in 2018.
In March 2018, China put the brakes on its gaming industry when it shifted the games licensing body from the State Administration of Radio, Film, and Television (SARFT) and the Ministry of Culture to the National Press and Publication Administration (NPPA). Even when the 9-month freeze was lifted, regulations still remained tight with gaming time restrictions on minors under 18.
The Chinese Stock Market May Improve Going Forward
The year-long regulatory measures have affected both the Chinese stock market and the Chinese Tech firms. However, the end might be in sight in the second half of 2022. The following are some of the reasons why we could see a turnaround in Chinese technology stocks.
Reason 1: Chinese Equities May See A Turnaround In 2022 With Stronger Policy Backing To Stabilise The Market
| Date | Central Economic Work Conference Keywords / Phrases | MSCI China Returns (%) |
| 2011 | Stabilise growth, adjust economic structure, control inflation | -18.2 |
| 2012 | Growth amid stability | 23.1 |
| 2013 | Improve the quality and efficiency of growth | 4.0 |
| 2014 | Reforms and growth stability | 8.3 |
| 2015 | New Normal – from high to medium speed, from quantity to quality | -7.6 |
| 2016 | SOE reforms | 1.1 |
| 2017 | Proactive fiscal and prudent monetary policies | 54.3 |
| 2018 | Deleveraging | -18.8 |
| 2019 | Supporting growth | 24.0 |
| 2020 | Stability remains top priority | 30.0 |
| 2021 | Regulatory tightening | -22.0 |
Source: Lion Global Investors December 2021
The keywords used during China’s annual Central Economic Work Conference (CEWC) meetings usually set the national agenda for the following year. This would in turn affect the key performance indicators of local Chinese governments. For example, we can observe that in years where the focus was on economic reforms and policy tightening, such as in 2021, 2018, and 2015, the Chinese equity returns were negative. However, when positive keywords were used to emphasise growth, such as in 2019, 2017, 2014, and 2012, the Chinese equity returns were positive.
Which is why it is interesting to note that in 2021’s CEWC, the committee’s message, which was chaired by CCP General Secretary Xi Jinping, was that of stability. The conference directed government departments at all levels “to take responsibility for stabilising the macroeconomy” and that “all stakeholders should actively introduce policies that are conducive to economic stability, and policy efforts should be carried out appropriately.”
This could be interpreted as a sign that the CCP might ease up on its regulatory crackdowns as it looks to boost the economy to achieve its projected GDP growth target of 5.5% in 2022.
Reason 2: Introduction Of Digital Yuan Is One Of China’s Plans To Promote The Development Of A Digital Economy As Part Of Its 5-Year Plan (2021 To 2025)
As announced as part of its 14th Five-Year Plan (2021 to 2025), China aims to grow its core digital economy industries to 10% of its GDP by 2025, up from the current 7.8% in 2020. The plan also includes a pledge to open up its service sector, explore measures to widen market access for new business models in the digital economy, and promote globalised development for emerging services such as data storage and cloud computing.
Furthermore, the plan highlighted China’s intention to continue promoting the healthy growth of the platform economy, encourage companies to step up the integration and sharing of data, products, and content, and expand services such as online healthcare.
Further evidence of the strong support by the Chinese government for digitalisation and technology, could be witnessed by the recent introduction of the e-CNY, also known as the digital yuan. It is a digitalised version of China’s legal currency, the renminbi (RMB), and is issued by China’s central bank, the People’s Bank of China (PBOC). Currently, it has been rolled out to over 23 Chinese cities and is meant to be used mainly for high-frequency, small-scale retail purchases and transactions.
Such policies and efforts show that the Chinese government is supportive of the growth of the technology industry rather than trying to supress it.
Reason 3: Vice-Premier, Liu He, Calls To A Quick End To Investigations On Platform Companies And Reaffirmed US-China Relationship, Reassures The Market
Vice-Premier, Liu He, who is China’s trade envoy and third in the party ranking, gave a speech at the State Council’s Financial Stability and Development Committee on March 2022. Given his prominence in the party leadership, the market closely monitored the intent of his speech for hints on the CCP’s actions.
He urged for more concrete action to be taken to bolster the economy in the first quarter of the year. He also cited the good working relationship between the Chinese and US regulatory bodies and that the Chinese government will continue to support various enterprises that seek listings in the overseas markets. He also called for the relevant departments to improve the established plans to govern the platform economy sectors through standard, transparent, and predictable regulation, including completing the rectification work on large platform companies as soon as possible.
In response to his speech on 16 March, the relevant authorities also echoed the same messages, causing the Chinese market to rebound by at least 50% from the March 2022 lows. This could signal that the Chinese market may have bottomed out.
Reason 4: The COVID Lockdown In Chinese Cities Was Lifted On 1 June 2022, But Zero COVID-19 Policy Still Remains To Be A Concern
China recently lifted its covid lockdown on Shanghai; its commercial capital of 25 million people, on June 1 after a two-month-long shutdown as covid cases hovered back to near zero. This was cheered by the markets as a sign of the country’s returning to normalcy.
China, unlike other countries, adopts a Zero-Covid strategy, which involves controlling and suppressing to contain virus transmissions levels to near-zero levels. And while it has administered over 3 billion doses of COVID vaccines so far, a large number of its elderly population, who fear the side-effects, remain unvaccinated.
Therefore, should the Chinese government either double down on its vaccination campaign to reach out to the vulnerable group or change its stand on the zero Covid policy, it may well to serve as a catalyst for the market as the risk of uncertainty will be reduced. While the risk of further lockdowns in the future is still probable, for now at least, it’s back to business as usual.
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