Wall Street’s China Stock Rout Nears Dot-Com Crash Levels
Wall Street’s China Stock Rout Is Nearing Dot-Com Crash Levels
(Bloomberg) -- Only a year ago Chinese stocks in the U.S. were enjoying an unprecedented boom.
Now they’re mired in a 72% plunge that’s on the cusp of matching losses during the 2008 financial crisis -- and within spitting distance of the Nasdaq Composite Index’s 78% peak-to-trough slump during early 2000s dot-com bust. Alibaba Group Holding Ltd. alone has lost about $522 billion of value, the biggest wipeout of shareholder wealth worldwide.
The dramatic turnaround started last year after Xi Jinping cracked down on tech firms. Losses have accelerated amid concern Xi’s alliance with Russia’s Vladimir Putin will damage China’s global standing. The growing risk of Chinese firms delisting from the U.S. have also weighed on stocks. The rout has upended a raft of optimistic forecasts across Wall Street and raised questions about the viability of a market that has financed 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 principal of Brooke Capital Ltd. in Hong Kong.
The following is a breakdown of the bull and bear cases for U.S.-listed Chinese shares after their historic plunge.
Why to buy
Bulls point to China’s ambitious growth target and historically low valuations as reasons why the selloff may be overdone.
Earlier in March, Beijing announced a gross domestic product growth goal of about 5.5% for 2022, at the higher end of many economists’ estimates. The growth target suggests the credit cycle is on the upturn and the economy will likely start improving as early as the second quarter, Macquarie Group Ltd. economists Larry Hu and Xinyu Ji wrote after the target was set.
A Bloomberg Economics index shows China’s credit impulse -- which in October fell to the lowest in 10 years -- has started to reverse. The measure tracks the growth in new financing as a share of gross domestic product. This will be a year of “leveraging up,” the Macquarie analysts wrote.
Valuations are low. The Nasdaq Golden Dragon China gauge trades at 17.4 times projected earnings, down from about 52 times last year. The measure is cheaper than the S&P 500 Index for the first time in almost eight years.
“We stay overweight China on well-anchored growth expectations/targets, easing policy, depressed valuations/sentiment, and low investor positioning,” Goldman Sachs Group Inc. strategists including Kinger Lau wrote in note dated Monday. The analysts lowered their valuation target on changes in the global macro environment and higher geopolitical risks.
Why to sell
Bad news keeps piling up. U.S. officials say Russia has asked China for military assistance for its war in Ukraine. Traders worry that Beijing’s potential overture toward Putin could bring global backlash against Chinese firms, even sanctions.
The prospect of Chinese tech firms being forced to delist is adding to the sense of panic among investors. Last week, the SEC named its first batch of Chinese stocks as part of a crackdown on foreign firms that refuse to open their books to U.S. regulators. The newly identified firms could be subject to delisting from U.S. exchanges if they fail to comply with auditing requirements for three consecutive years.
“The concentration in tech in the bull market was so intense and funds have been so long growth tech stocks that you will find quarter-end retail redemptions will weigh heavily on the market,” according to Brooke, who has over 30 years of experience in investment management and has followed 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 by infections and one of the world’s highest death rates. Jilin province, adjoining North Korea and Russia, was sealed off.
This is likely to further weaken domestic consumption. Data this week will likely show retail sales increased just 3% year-on-year in the first two months, according to the median economist estimate.
What to watch next
U.S. and Chinese regulators are believed to be having “earnest” discussions with an aim to resolve the auditing dispute, Wang Sheng, head of the investment banking division at China International Capital Corp., said in an opinion piece published by the Economic Daily on Sunday. Wang said the regulators should be able to strike a deal. The newspaper is affiliated with the State Council, China’s cabinet.
Tencent Holdings Ltd. will report earnings next week after Alibaba posted the slowest revenue growth since it went public, underscoring how China’s crackdown on its technology sector is taking a financial toll on the e-commerce giant.
Tencent -- which was close to a $1 trillion market value last year -- slumped almost 10% on Monday, the most since 2011. The company’s shares are now worth $407 billion. Tencent faces a record fine after China’s central bank discovered its WeChat Pay had violated 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 sank the most since November 2008.
“The era of windfall profits by China’s mobile internet industry is over,” said Sun Jianbo, president 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 lower interest rates to stabilize growth, while weak credit data late last week fueled expectations of more easing. The one-year facility rate, which will be announced on Tuesday, was cut to 2.85% in January.
The PBOC has a limited window in which to ease policy, given the Federal Reserve’s liftoff on rate hikes later this week and rising inflation pressure as commodity prices surge. 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 recommend against taking a position in Chinese stocks.
“We still advise investors to stay away,” said Jun Li, chief investment officer at Power Pacific Investment Management. “It is very difficult to evaluate the risk profile.”
©2022 Bloomberg L.P.
