China’s stock indices have lost about 15% since their February peak, and high-flying tech stocks are down by about a quarter, as gauged by the popular China Internet exchange-traded fund KWEB. Even in a bear market, Chinese tech outperformed the NASDAQ 100 by about 8% year on year.
Is this a buying opportunity, as Citigroup analyst Alice Yap argued today in a research note? Or is the light at the end of the tunnel the headlamp of the oncoming express?
We agree with Citigroup, but with a caveat.
There are four reasons for the plunge in Chinese tech stock prices.
- When US tech stocks fall, Chinese tech stocks take a hit as well;
- China has announced anti-trust measures to bar monopoly practices by giants like Alibaba and Tencent;
- The Securities and Exchange Commission is tightening accounting standards for Chinese companies listed on US exchanges that investors fear might lead to de-listing; and
- The political confrontation between Beijing and Washington escalated after Biden’s election and might lead to mutual escalation of economic restrictions.
The last item on the list is the least predictable. The new administration is shaky and uncertain, and anxious to assert itself. Biden looks like a weak president, and his top appointees are positioning themselves for power by signaling to domestic constituencies.
Their tone towards China is confrontational, and China in turn is overplaying its hand. The consumer boycott of Western brands like Nike and Marks & Spencer’s might be a prelude to harsh measures to push American companies out of the lucrative Chinese market.
China, moreover, is smarting over America’s ban on sales of high-end computer chips fabricated in Taiwan using American intellectual property. In Beijing’s eyes, this unprecedented assertion of extraterritorial control is an outrageous abuse of power.
It will slow down (but not stop) China’s digital revolution, and China’s crash efforts at semiconductor self-sufficiency will cost the country perhaps 1% of GDP for the next ten years.
China may retaliate in a big way. And the US may retaliate in turn.
We don’t think this is the likeliest outcome. Biden’s big tech constituency wants more access to China’s market. America’s dependency on China imports, moreover, would make a trade war devastating. During 2020, imports from China came to a fifth of total US manufacturing GDP.
But while a major round of retaliation may not be likely, it’s not impossible.
The rest of the list doesn’t worry us. Beijing doesn’t want to kill the goose that lays the golden eggs. Its tech giants are key to its Fourth Industrial Revolution strategy, and the anti-trust measures it has adopted are sensible.
And, as Citigroup argues, the Biden Administration is simply going through the motions of putting into effect legislation passed under Trump.
Chinese companies don’t need American funding; they can find all they need in Hong Kong.
So we agree with Citigroup that names like Alibaba, Tencent, JD.com and Baidu are strong buys at present levels.