Due to geopolitical and macroeconomic risks, many international investors are in the process of reducing their exposure to the Chinese internet sector.
(Photo: Bloomberg)
Beijing In Hong Kong, China values fell again by almost seven percent on Tuesday. Good economic data from China slowed down the midday crash in the Hang Seng China Enterprises Index a bit. But the breather was short-lived.
Stock market activity in China “is currently almost exclusively dominated by political developments. Economic data only plays a secondary role,” emphasized Thomas Altmann from the investment boutique QC Partners. China stocks in the US also fell by more than 10 percent on Monday for the third trading day in a row.
The Nasdaq Golden Dragon Index, which includes 30 US-listed China stocks, has fallen more than 28 percent since Thursday. The Hang Seng Tech Index was down 23 percent. It is trading at its lowest level since its inception in 2020.
Analysts at JP Morgan Chase & Co. downgraded at least 10 Chinese Internet stocks, including JD.com, Alibaba and Tencent, to “sell” on Tuesday. They described China stocks as “uninvestable” in the short term.
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Due to rising geopolitical and macroeconomic risks, many international investors are currently in the process of reducing their exposure to the Chinese internet sector, leading to significant outflows. These are the top three reasons for the crash:
Worry about forced delisting
On Thursday, the US Securities and Exchange Commission asked five Chinese public companies listed in New York to submit detailed audit reports for their financial statements. Otherwise there is a risk of delisting. The five companies are the fast food group Yum China, which operates the branches of KFC and Pizza Hut in the People’s Republic, as well as the biotech companies BeiGene, Zai Lab and HutchMed and the technology company ACM Research.
The announcement triggered an outright sell-off in Chinese stocks in New York. China stocks in Hong Kong also suffered high price losses, especially those with double listings in the USA. The SEC’s request is based on the Holding Foreign Companies Accountable Act passed in 2020. The law requires foreign corporations to provide the US Internal Revenue Service (PCAOB) with access to audit reports and supporting documentation.
The US authorities give companies and their auditors a period of three years to comply with their disclosure obligations. With the announcement of the SEC last Thursday, the deadline for the five companies has expired. Experts assume that the US Securities and Exchange Commission will ask other Chinese public companies to provide more information in the coming weeks. The five were just the first to submit an annual report for 2021.
In China, companies and auditors have so far been prohibited from making this information available to foreign authorities. Tech companies in particular fear that sensitive information could fall into the wrong hands as a result.
Discussions are currently taking place between the USA and China on how the regulatory differences in the case of foreign IPOs by Chinese companies can be resolved. “We believe the two sides can reach an agreement that is in line with both countries’ laws and regulations and protects global investors,” China’s securities regulator said on Thursday.
Rising tensions between China and the US
But investors fear that an agreement could be delayed given the growing tensions between China and the US over the conflicting positions in the Ukraine war. In addition, the United States has threatened to extend possible sanctions to China if the People’s Republic of Russia supports it in the Ukraine war. China refuses to speak of a Russian invasion of Ukraine and has repeatedly condemned Western sanctions against Russia.
Since the beginning of the week, US allegations that Russia has asked China for military support in the war against Ukraine have caused additional uncertainty. The United States warned China of the consequences of supporting Russia. This raises concerns of further escalation and sanctions against Chinese companies.
>> Read also: US warns China not to help Russia economically or militarily
Economic problems in China
The political conflicts are also exacerbating China’s economic problems. The People’s Republic reported surprisingly good economic data for January and February on Tuesday: both retail sales and industrial production rose more than expected. But China’s Premier Li Keqiang warned on Friday of “downside risks”, “complications” and “uncertainties” for the Chinese economy.
To make matters worse, China is currently suffering the largest Covid wave since the pandemic first broke out in Wuhan two years ago. The number of new infections rose to more than 5,000 on Tuesday, more than twice as many as the day before. Several cities with over a million inhabitants are in lockdown, including the industrial location of Changchun in northern China and the tech metropolis of Shenzhen in the south.
Tommy Wu, China specialist at British analyst firm Oxford Economics, believes that the recent wave of the pandemic, along with China’s determination to stick to the zero-Covid policy, makes it “increasingly unrealistic” to exceed the recently published target of around 5, achieve 5 percent growth. The analysts at Morgan Stanley are even anticipating zero growth in the current quarter.
More: Ukraine war and corona fears cause prices in China shares to fall