The sharp drop in the value of Chinese tech stocks will be seen as a major buying opportunity for some investors, but they must exercise extreme caution. Fears are mounting over a regulatory crackdown by the Chinese government, which in turn is impacting the share prices of major Chinese tech stocks.
It has created three days of plummeting values for China’s tech giants, Tencent’s shares lost 10%, Alibaba dropped 7.7%, JD.com shed 8.9% and Meituan fell 17%.
Hong Kong’s Hang Seng benchmark was down more than 5% on Tuesday. Meanwhile, in mainland China, the CSI 300 index of Shanghai and Shenzhen-listed stocks lost 3.5%.
The sharp sell-off in Chinese and Hong Kong shares spilled over into European markets and Wall Street futures are pointing to a lower open.
China private education industry under scrutiny
The sell-off has been focused on China’s $100 billion private education industry following a leaked government memo highlighting incoming new, tougher severe regulations which will prevent companies in the sector accepting foreign investments, raising capital through the stock market, or teaching outside school hours, amongst other rules.
This tough new approach being taken by Beijing has spooked the tech sector which is already on high alert amid fears that the government wants more control over private enterprise.
The effect has been wiping hundreds of billions of market value from China’s largest tech giants. It is also having an impact on the prices of ETFs that are tracking the Chinese markets. These have typically been using indexes that have seen them lean heavily towards big China tech stocks and they are now taking a pounding as a consequence.
For example, big league long China equity ETFs are all generally down over 14% in the last three months. iShares China MSCI UCITS is down over 14.29% over three months at time of writing, according to TrackInsight data. But some China ETFs are suffering more heavily – Invesco Golden Dragon China has lost almost 30%.
The rout is also hurting some emerging markets technology ETFs, which also relied heavily on the China tech story to deliver passive returns. The EMQQ Emerging Markets Internet & E-Commerce UCITS has lost over 20% in three months and is well and truly in bear territory. It has an almost 60% allocation to China stocks according to TrackInsight, which is hurting its performance.
Is this a buying opportunity or a China value trap?
It can be expected that some investors will swoop in and view these events as a major buying opportunity; as a chance to top-up their portfolios within the booming Chinese economy.
They may have a point – these shares do look like bargains. However, investors must exercise extreme caution as the situation remains highly unpredictable and any further similar actions – or even suggestions – from Beijing will mean more, sustained volatility and sell-offs. It could be a long time until there is clarity.
Some investors may see this as an opportunity to allocate to active funds, especially as so many passive ETFs are floundering in this market. A good fund manager will help investors seize the opportunities and sidestep the risks by seeking out the inevitable winners and losers from the Chinese government’s possible regulatory crackdown.
As always, investors should be as diversified as possible in order to maximise returns relative to risk. This means geographical, sector and asset class diversification.
As China rolls out another round of regulatory tightening, global stock markets will be impacted, and investors must tread carefully to avoid unnecessary risks and to capitalise on the potential opportunities.