Wall Street’s Chinese stocks rout nears Dot-Com crash levels

(Bloomberg) — Just a year ago, Chinese stocks in the United States were enjoying an unprecedented boom.

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Now they’re mired in a 72% plunge that’s on course for matching losses during the 2008 financial crisis – and just steps away from the Nasdaq Composite Index’s 78% drop from peak to trough at the start. 2000s. Alibaba Group Holding Ltd. alone lost an estimated $522 billion in value, the largest loss of shareholder wealth in the world.

The dramatic turnaround began last year after Xi Jinping cracked down on tech companies. Losses have accelerated as Xi’s alliance with Russia’s Vladimir Putin will hurt China’s global standing. The growing risk of Chinese companies being delisted from the United States also weighed on stocks. The rout upended a series of rosy forecasts across Wall Street and raised questions about the viability of a market that has funded some of China’s most important companies.

The losses in Russia are having a “huge psychological effect” on portfolio managers, says Jonathan Brooke, founder and director of Brooke Capital Ltd. in Hong Kong.

The following is a breakdown of bullish and bearish cases for US-listed Chinese stocks following their historic plunge.

Why buy

The bulls point to China’s ambitious growth target and historically low valuations as reasons why the sell-off may be overdone.

Earlier in March, Beijing announced a gross domestic product growth target of around 5.5% for 2022, which is at the high end of many economists’ estimates. The growth target suggests the credit cycle is recovering and the economy will likely start to improve as early as the second quarter, economists at Macquarie Group Ltd wrote. Larry Hu and Xinyu Ji after setting the goal.

A Bloomberg Economics index shows that China’s credit impulse – which fell in October to a 10-year low – has started to reverse. The measure tracks the growth of new financing as a share of gross domestic product. It will be a year of “taking advantage,” Macquarie analysts wrote.

Valuations are low. The Nasdaq Golden Dragon China gauge is trading at 17.4 times projected earnings, down from around 52 times last year. The measure is cheaper than the S&P 500 index for the first time in nearly eight years.

“We remain overweight China on entrenched growth expectations/targets, policy easing, depressed valuations/sentiment and weak investor positioning,” wrote Goldman Sachs Group Inc. strategists including Kinger Lau. , in a note dated Monday. Analysts lowered their valuation target due to changes in the global macro environment and higher geopolitical risks.

Why sell

The bad news keeps piling up. US officials have said Russia has asked China for military assistance for its war in Ukraine. Traders fear Beijing’s potential overture to Putin could provoke a global backlash against Chinese companies, and even sanctions.

Chinese markets in turmoil as Russia joins risk list

The prospect of Chinese tech companies being forced to delist adds to the sense of panic among investors. Last week, the SEC named its first batch of Chinese stocks in a crackdown on foreign companies that refuse to open their books to US regulators. Newly identified companies could face delisting from US stock exchanges if they fail to comply with audit requirements for three consecutive years.

“The tech concentration in the bull market was so intense and the funds have been growth tech stocks for so long that you’ll find the end-of-quarter retail buybacks will weigh heavily on the market,” according to Brooke, who has more 30 years of experience in portfolio management and has followed the Asian stock markets since 1990.

China is also battling to maintain its Covid-Zero policy in the face of a growing omicron outbreak. Authorities locked down the city of Shenzhen on Sunday, after neighboring Hong Kong was overwhelmed with infections and one of the highest death rates in the world. Jilin province, neighboring North Korea and Russia, has been sealed off.

China locks down Shenzhen and entire Jilin province as Covid swells

This should further weaken domestic consumption. This week’s data will likely show retail sales rose just 3% year-on-year in the first two months, according to the economist’s median estimate.

What to watch next

U.S. and Chinese regulators are believed to be having “serious” talks in a bid to resolve the audit dispute, Wang Sheng, head of China International Capital Corp.’s investment banking division, said in an article. opinion published by the Economic Daily on Sunday. . Wang said regulators should be able to strike a deal. The newspaper is affiliated with the State Council, China’s cabinet.

Tencent Holdings Ltd. will release its results next week after Alibaba posted its slowest revenue growth since its IPO, underscoring how China’s crackdown on its tech sector is weighing heavily on the e-commerce giant.

Tencent – which was close to a market value of $1 trillion last year – fell nearly 10% on Monday, the most since 2011. Shares in the company are now worth $407 billion. Tencent faces a record fine after China’s central bank found WeChat Pay breached money laundering rules, The Wall Street Journal reported on Monday, citing people familiar with the matter.

Alibaba plunged 11%. A gauge of Chinese stocks in Hong Kong fell the most since November 2008.

“The era of windfall profits for China’s mobile Internet industry is over,” said Sun Jianbo, chairman of China Vision Capital Management in Beijing.

The China Securities Journal said in a front-page report Monday that the People’s Bank of China may cut interest rates to stabilize growth, as weak credit data at the end of last week fueled sentiment. expectations of further easing. The one-year facility rate, to be announced on Tuesday, was lowered to 2.85% in January.

The PBOC has a limited window to ease policy, given the Federal Reserve’s take off on rate hikes later this week and mounting inflationary pressure as commodity prices rise. Economists expect growth in China’s economy, the world’s second-largest, to remain subdued in the first quarter.

With so much to worry about, some fund managers advise against taking a position in Chinese equities.

“We always advise investors to stay away,” said Jun Li, chief investment officer at Power Pacific Investment Management. “It is very difficult to assess the risk profile.”

(Updated Alibaba loss in second paragraph, record fine reported by Tencent in 19th paragraph.)

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