China’s efforts to keep its economy and markets stable include an indication that it is prepared to interrupt the tech crackdown that has plagued the sector for 18 months. But the move, which sparked a rally on Friday, is the latest acknowledgment from policymakers of the country’s intense economic pain, meaning the turning point for Chinese equities has not yet arrived.
KraneShares CSI China Internet
exchange-traded fund (KWEB) rose more than 10% to $29.05 Friday, with widespread stocks such as
(ticker: 700.Hong Kong) up 11% to HK$377.40 and
Alibaba Group Holding
(BABA) up 12.5% to $102.25. China’s top internet regulator is expected to end the crackdown that is plaguing the sector next week, according to The Wall Street Journal.
Citing people familiar with the situation, the paper said proposals on the table include delaying the implementation of new rules that would limit the time young people spend on their phones, and a push to push the biggest tech companies to that extent. get them to sell a 1% stake to the government as it has in companies like ByteDance, which owns TikTok.
These are the latest efforts by top Chinese officials to amplify soured investor sentiment and reverse the blow to the economy, which has been battered by the crackdown on the real estate sector. Its strict zero-covid policy has shut down Shanghai for about a month, further hurting the economy and even affecting businesses like companies like
(AAPL), which warned that sales could hit $8 billion in the current quarter.
But investors should be cautious, at least until there is more clarity about the lockdowns. “It’s a huge red flag that the underlying state of the economy is terrible,” said Rory Green, head of China and Asia Research at TS Lombard. Barron’sand notes that the latest reassurances are even stronger than those in March by top economic adviser Liu He.
For, among others, Alibaba, Tencent and
(BIDU) — and the MSCI China index that continues to be heavily weighted toward these companies — is the change in tone of Chinese officials, including their willingness to work with U.S. regulators and allow some audit disclosures to avoid delisting Chinese companies, welcome news. But it’s still not enough for a sustained move higher.
Greater clarity about how new rules will be enforced could reduce volatility in technology stocks, said Winston Ma, an adjunct professor at New York University Law School, author of “The Digital War-How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace”, and former director of China Investment Corp.
But money managers are still cautious. Chinese internet stocks bounce because they’re incredibly cheap, so even a dash of good news can send them up 10% to 20%, “but this isn’t even registering in the long-term charts,” said Nick Niziolek, portfolio manager of Calamos Evolving World Growth. “I’m hopeful this is the turn, and we’re adding margin exposure to reduce our underweight in the country, but overall conviction is low.”
To make profits in the internet sector more sustainable, Green says the economy must stabilize and the Securities and Exchange Commission must respond to China’s attempts to compromise – and that is still a big question mark. In addition, it’s unclear whether China will allow companies it considers sensitive, such as state-owned companies or companies with a wealth of data, such as Alibaba, to comply with disclosure requirements, Green added.
A few weeks ago, the US auditing watchdog said speculation about an agreement between the Chinese authorities and the Public Company Accounting Oversight Board was premature.
The conditions for a compromise could be difficult as bipartisan support for a tougher stance on China will increase in the midterm elections. Americans’ unfavorable opinion of China hit an all-time high of 82%, according to a just-released Pew survey, which found that more Americans view China as a competitor or enemy than a partner.
But more important for Chinese equities in general is the precarious state of the Chinese economy, even as Beijing increases its stimulus measures to keep the economy above the 4% growth rate needed to create enough jobs, let alone close. of the 5.5% target that strategists have reached even before the Covid lockdowns.
That puts Chinese President Xi Jinping in a difficult position in a pivotal year as he looks for a third bid in the 20e party congress. “He’s really stuck, with the need for Covid Zero and avoiding a real humanitarian disaster with their health situation and vaccination coverage and the political need to meet the growth target. They haven’t missed the mark in the last 15 years and rarely get to the bottom of the range,” says Green.
Take advantage of the incentive, with policymakers increasing infrastructure spending to create jobs and fuel growth, offering coupons to buy devices and even cash to get vaccinated. They are also easing restrictions on the real estate market, a key growth engine. But the stimulus isn’t as effective with the drag created by the lockdowns, leaving even those not incarcerated with spending money, especially on real estate.
What could indicate a more sustainable turnaround for Chinese stocks, especially those traded onshore? See how Beijing is dealing with Covid. “If Beijing fails with all its resources and experience to tackle the Olympics and it moves more towards Shanghai-style lockdowns, then it’s another big red flag,” said Green.
A positive signal would be if Beijing follows the path taken by Shenzhen, which managed the outbreak with a lockdown of just a few weeks. That is in contrast to Shanghai, which has been in lockdown for a month, leaving the residents of the richest city in the country looking for medicines and food. That could cushion Chinese equities and turn them around if the stimulus picks up.
Write to Reshma Kapadia at email@example.com