US-listed Chinese stocks back in play
Chinese stocks that are listed in the US have had a torrid year. Alibaba and NIO have lost over two-thirds in value and others including Pinduoduo, Bilibili and Tencent Music have lost over 80%. Even those at the mild end of the scale have suffered heavy losses, like JD.com which has seen over one-third of its value wiped-out over the past 12 months. Most of them now languish near multi-year or even all-time lows.
There are multiple reasons why Chinese stocks have come under pressure over the last 18 months. China’s regulatory crackdown on tech giants and firms with overseas listings has been the predominant threat, resulting in an overhaul of rules, multiple fines and raising the likelihood that they could be forced to dump their US listings. China’s stricter Covid-19 policies and lockdowns, twinned with troubles in the property market, have also hurt the economic outlook and contributed toward a slowdown in consumer spending.
But Chinese stocks are trading significantly higher before US markets open today. The Hang Seng China Enterprises Index, which tracks the performance of companies based in mainland China listed in Hong Kong, has lost almost half of its value since China’s regulatory crackdown started back in 2018 but the index soared over 12% today and that is feeding through to those with US listings. Below is an outline of the premarket moves being made by some of the biggest names today:
- Alibaba +19.5%
- NIO +19%
- Xpeng +18%
- Pinduoduo +33.9%
- Bilibili +30.4%
- Tencent Music +26%
- JD.com +23.8%
- Baidu +15.3%
- NetEase +16.9%
Why are Chinese stocks soaring higher?
It emerged this morning that China’s state council has pledged to stabilise financial markets following the recent rout and vowed to support overseas listings in a move that has removed some key uncertainties for Chinese stocks. Local news reports said the government has committed to addressing some of the key problems that have weighed heavily on the stock market, including the crackdown on tech companies and its ever-evolving view of overseas listings. This was combined with a co-ordinated move with China’s central bank and some key regulators that also said they would strive to stabilise capital markets.
The government has promised to draw a line under the regulatory crackdown on internet and tech companies and said this should end soon, which has allayed fears that it could go on for as years. That removes a key uncertainty for the tech-heavy Chinese stocks listed in the US.
There was also mention that regulators in both the US and China have made progress on the status of Chinese stocks listed on US markets, easing the threat that they could be forced to delist. The two countries are thought to be moving toward an agreement on a joint audit process that would satisfy both sides, and China is now accelerating the introduction of new rules for overseas listings to provide much-needed clarity for the market.
The government is also lining-up new policies to address the problems within the property market that have been underpinned by the crisis at Evergrande, including new rules on how to handle risk.
Overall, the move by the government has been welcomed by the markets as it aims to stem the heavy losses seen over recent years and demonstrates the government is willing to act. It has turned a number of companies that were gradually being seen as uninvestable into strong and undervalued recovery plays, demonstrated by the spike in prices today. The MSCI China Index currently trades at a valuation discount of around 36% compared to world equities, according to a report from Reuters this morning, which is twice as much as the 20-year average discount.
However, we could see them remain volatile as more information emerges over the coming weeks and months – the devil is always in the details - and investors remain cautious about the current environment amid rising interest rates and geopolitical tensions sparked by the Russia-Ukraine conflict, with China continuing to hold neutral ground to appease both Russia and the West.
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