Until very recently, Chinese tech companies were doing well for themselves. Alibaba and Tencent saw their share prices soar in late 2020 and early 2021, while ride sharing giant Didi was preparing for an initial public offering on the New York Stock Exchange.
Then it all came crashing down. Ant Group’s, a financial affiliate of Alibaba, IPO was cancelled by the Chinese government in November 2020. Didi came under investigation for cybersecurity reasons following a disastrous IPO on the NYSE in June 2021, and Tencent shares tumbled after state media branded online gaming as a “opium” in August of the same year.
With all this happening in just under a year, it is understandable that investors have lost confidence in the potential growth of the Chinese tech industry.
What is changing in China?
It is difficult to point to a single occurrence as being the main factor to the instability of Chinese tech stocks but at first glance, it appears that the Chinese government is looking to rein in these technology companies.
Greater oversight of foreign capital in the country’s companies
The Chinese government has moved to ensure that local tech companies fall in line and avoid doing anything to jeopardise national interests. Even if it means advising companies against IPOs on foreign stock exchanges. Didi launched an IPO on the NYSE, despite being advised against it by Chinese financial regulators. The IPO failed to gain traction, and the company soon found itself under a full cybersecurity investigation and its app being temporarily banned in China.
The official reason for the investigation is due to the way that Didi was handling Chinese user data and the risk of giving outside third parties access to sensitive data stored on Didi’s servers.
Anti-monopoly measures
China is looking to increase competition in the local market by giving space to smaller companies. At the moment, tech companies are virtually in charge of the entire digital market. Alibaba controls 50% of e-commerce that happens in China (JD.com controls another 25%) and Didi Chixung controls the e-hailing space. Tencent for that matter, splits the cloud computing services market with Alibaba.
Regulators have published draft regulations for combat anti-competitive behaviour, and the potential consequences have shaken investor confidence.
Should you avoid Chinese tech stocks?
If you’re already invested in the Chinese tech market, then it has likely been a very difficult 2021 for you. Alibaba’s listing on the NYSE has lost 19.81% (as of August 17) of its value since January, Didi has dropped a significant 42.64%, Tencent is down by 21.04%, and JD.com slipped by 22.77%.
Seeing that the Chinese government is not yet done drafting the new regulations to ensure data security and promote a competitive online environment, this uncertainty is expected to continue for at least a little longer. In recent weeks, there have also been tightening measures exerted on the online education and video game industry while other technology related industries are also under scrutiny on their digital finance activities, monopoly practices and tax arrangements.
Experts are divided on how to view the current situation. There are those who believe the dip has not yet hit the lowest point, and that potential investors should continue to wait to see how things turn out. That said, there is no telling how long this could last, and investors may miss out on any potential recovery if they wait for too long.
On the other hand, Bloomberg published an editorial that concluded that there may be potential for long term gains for those that can stomach the current short-term losses. Especially if those investors diversify their China-based investments through exchange traded funds.
Needless to say, looking into these stocks at this very moment is something for experienced investors with a very high-risk tolerance.
According to Principal Asset Management, the clampdown may create some uncertainty but there are still growth opportunities over the long term. They recommend:
- Investors who are under-allocated to China may consider taking advantage of the recent underperformance to gain long-term exposure to selected industries
- Focusing on areas that will benefit from the global reopening and are less exposed to tighter regulation, particularly trends in automation, electric vehicle penetration, 5G handsets and the proliferation of digitalisation of the society.
Spread your risk of investment through Principal’s funds
If you are looking to diversify and invest in the China market, you can explore with these EPF approved funds.
| Name | Investment horizon | Fund | Year To Date Performance* (%) |
|---|---|---|---|
| Principal Greater China Equity Fund (formerly known as CIMB-Principal Greater China Equity Fund) | Medium- to long term | Invests in a portfolio of equity securities with exposure to the Greater China region consisting of the People’s Republic of China, Hong Kong SAR and Taiwan. | 11.59% |
| Principal Asia Titans Fund | Long term | Seeks capital growth by investing primarily in equities and equity related instruments in Asia (excluding Japan). | 11.93% |
*As of August 13, 2021
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