On July 8^th 2021, a ruthless bloodbath was witnessed on Chinese tech stocks in broader Hang Seng Index sending it’s ripples across stocks trading in the Asia-Pacific financial markets.  

 

In the afternoon trade in the Hong Kong stock market, shares of Tencent, Alibaba, and Meituan plunged 3.74%, 4.13% and 6.43% respectively. The heavy weight plunge also brought the Hang Seng Tech index to 7,321.98, a 3.71% drop on an index that represents the 30 technology giants with highest stock market exposure.

 

Japan’s Nikkei 225 and Topix Index witnessed 0.88% and 0.9% decline, respectively. The Kospi in South Korea closed at 3,252.6 with a decline of 0.99%. MSCI’s broadest index of Asia-Pacific shares recorded a 1.6% slump.

 

Major Chinese shares also bear the brunt of the bloodbath on Chinese tech stocks. The Shanghai composite fell to 3,525.50, taking a heavy 0.79% punch while the Shenzhen component collapsed to 14,882.90, a 0.382% decline.

 

The Trigger Behind the Recent Chinese Tech Stocks’ Drop

 

The resurface of regulatory fears is cited as the cause of the recent drop in Chinese tech stocks.

 

And, why do investors fear the new Chinese regulations on its tech companies?

 

During recent years, technology giants like Tencent, Alibaba and Baidu have grown into some of the world’s most valuable companies mostly through the loopholes of the feeble Chinese regulatory framework.

 

But since 2017, China’s foggy digital technology regulatory landscape has begun to transform when Cybersecurity Law was passed by the Chinese government.  On June 10, 2021, the Data Security Law (DSL) was implemented by China with new rules on the collection, storage, process, and transfer of data by the technology companies in the country. To grant more control for users over their data, a Personal Information Protection Law is also underway in legislation procedure.

 

Data drives the technology industry and economic growth in the digital age. Chinese regulators keep a keen eye on the supervision of the domestic tech firms listed overseas, mainly because of data security and cross-border data leaks.

 

Beijing’s focus has very much been on the regulation of financial technology and to crack the monopoly of these technology players. The recent announcement of Beijing to step up the regulation over the Chinese listings in the U.S. stock market brought a heavy blow on tech companies.

 

Chinese authorities, citing antitrust and data security concerns, have been bringing strict restrictions on its native technology giants over the last few months. The nullification of $34.5 billion worth listing of Ant Group and an antitrust penance worth $2.8 billion on Alibaba are some noteworthy events.

 

On Friday, 2nd of July, Didi Chuxing, a Beijing based ride hailing giant, was brought under regulatory investigation alleging that the company carried out illegal collection and usage of personal data. The Cyberspace Administration of China (CAC), rumoured to be a watchdog of Chinese President Xi Jinping, ordered the removal of Didi’s mobile application from Chinese app stores.

 

All these fateful events happened just four days after the shares of Didi had been ushered to the New York Stock Exchange, raising $4.4 billion in an Initial Public Offering that took the value of the company at $67.5 billion. On 6th of July, the regulatory action brought a massive decline of nearly 20% on Didi shares.

 

To add fuel to the fire, on Monday, 5th of July, CAC initiated a cybersecurity probe into Boss Zhipin, a US listed company, and Full Truck Alliance.

 

On 8th of July, all these perilous events gradually culminated as an abrupt collapse of the value of Chinese tech stocks in broader Asia-Pacific financial markets including Hang Seng Index. 

 

The Good Investment Opportunities Hiding Behind the Recent Crash of Chinese Tech Stocks

 

“Predicting the future is difficult”, says Alexander Davey of HSBC Global Asset Management. He urges the investors to look at the valuations of the tech companies with discipline. “The timing is more important than the nerve of the investor. Fundamentally, it is a very strong business (technology)”, Davey concludes.

 

The boom and bust on the price levels is just the noise. The dubious concern over increased Chinese regulatory scrutiny is going to linger on for a short period. According to Alexander Davey, the technology companies with strong fundamentals offer buying opportunities whenever their stock prices drop amid investor fears.

 

In today’s Information Age, technology drives the future of every enterprise. The technology stocks with strong fundamentals and their derivatives are highly performing assets in every portfolio.

 

Pros And Cons of Investing in Chinese Technology Financial Assets

 

Every financial market crash offers greater investment opportunities only an investor with the right mindset can spot and profit from. Here, Alpha Capital brings to light some of the risks and rewards of picking Chinese technology financial assets to your portfolio.

 

Pros

 

The Unique Macroeconomic Situation in China

 

The prominent US based online platforms like Google, Facebook, Twitter, and YouTube are banned in China. This unique macroeconomic situation keeps the door of the Chinese market wide open for local online companies that provide services like ecommerce, entertainment, social media, and online content.

 

The lower penetration of most Chinese tech companies offers a lot of potential for growth. Today, China leads the world in online payments and is better equipped to transform itself to a cashless society than other countries in the world. The Chinese tech companies have developed more diversified revenue streams that can be more defensive in the future than their Western counterparts. Moreover, an unprecedented rate of growth of China’s middle class set the growing user base for these online services.

 

Greater GDP Growth and Impressive Infrastructure

 

According to the World Bank, China showcased 10% average GDP growth since 1978 representing nearly 19% of the world’s population. The infrastructure development in China is expected to continue at its current phase past 2030.

 

Growing Disposable Income

 

The growing Chinese middle class increases the rate of disposable income in the country. IPOs issued by many rapidly growing Chinese tech companies on US exchanges provided them with the access to global investors that drove large chunks of investment capital to China.

 

Today, the Chinese tech giants may not be garnering enough media attention like Silicon Valley tech giants do, but in the near future, chances are high that the most valuable company in the world might be one of these Chinese tech giants.

 

Cons

 

Trade Wars and Communist Regime

 

Like some of the prominent global tech companies are banned in China, certain Chinese tech companies like Huawei and online services like TikTok have been banned in several other countries. This along with the ongoing trade wars between the U.S. and China poses investment risk in Chinese tech companies. The totalitarian, communist regime also raises concerns on the long-term economic growth of the country and its relationship with the world economy.

 

Low Standards in Bookkeeping and Accounting

 

Low bookkeeping and accounting standards in China is a fertile ground for Ponzi Schemes, insider trading and financial frauds. This situation demands greater attention from the investor to conduct an in-depth study of the fundamentals of the tech company he plans to invest in.

 

 

Justin Raj

 

Alpha Research