Wild dragon ride: China stocks poised for comeback

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by Florian Hielscher, Euro on Sunday

Whe who holds Chinese stocks may have looked at his portfolio in amazement over the past few days. After months in a downward trend, stocks from the Middle Kingdom have recently recovered noticeably. The papers of the e-commerce platform Pinduoduo have increased by around since the beginning of the month 27 percent, with the Amazon counterpart Alibaba it was at least in the difficult market environment 17 Percent. It is not only the now very favorable valuation of many companies that attracts buyers.

Signs of improvement are coming from the Middle Kingdom. The reopening of the economic metropolis of Shanghai after weeks of lockdown helped, with signs of new measures recently increasing again after many new corona cases. However, another lockdown would severely disrupt the economy and global supply chains.

But politics has recently been showing signs of relaxation. Online retailer Alibaba’s stock rose sharply after rumors surfaced that financial technology subsidiary ANT Group would attempt another IPO. Alibaba founder Jack Ma tried to take ANT public in late 2020. However, the issue, which was supposed to be the largest IPO in China with a volume of 37 billion euros, failed due to new government regulations on the granting of loans. In the run-up to the cancellation, Jack Ma had accused regulators of slowing down innovation. A whole wave of drastic regulatory measures against Alibaba and other technology companies in the country followed.

Recently there was great hope that the green light from Beijing for an ANT IPO could initiate a fundamental turnaround in relation to the Internet companies. However, the Chinese securities regulator recently announced that it was not working on a resumption of an IPO. However, it is helping eligible internet companies to list in China and abroad, news service Bloomberg reported. So the way is open.

Government encourages growth

This is not the only reason why investors are increasingly daring to invest in Chinese stocks again. Supportive government policies also contribute to risk-taking. The Communist Party holds its five-yearly party congress in November. President Xi Jinping wants to secure a third term. Accordingly, China’s head of state has increased interest in being able to present a strong economy.

For the current year, the country is aiming for growth in gross domestic product of 5.5 percent. Because of the rigorous zero-Covid policy, however, this is an ambitious goal, which is why the government is now intervening to support it. In order to stimulate the economy, the central bank recently lowered interest rates on five-year loans by 15 basis points to 4.45 percent. In addition, measures were initiated to boost consumption in the Middle Kingdom.

One of the beneficiaries of this could be the gaming industry, which has long been the focus of regulation because of the state-desired protection of minors. In April, state authorities approved 45 new video games, and in May the number of new games rose to 60 games. Analysts saw this as a sign of fundamental easing. “We believe that the announcement of the approval will also be a positive signal of political support for the entire Chinese internet sector,” said Citigroup analyst Alicia Yap.

However, games by the industry heavyweights Tencent and NetEase were again excluded from approval. Hard for Tencent, the group only reported sales revenues for the first quarter at the previous year’s level, the business with domestic games shrank by one percent. Other ex-highflyers could also use growth-promoting measures. In the first quarter, Alibaba only increased sales by nine percent, and the Chinese search engine market leader Baidu only by one percent.

Cautious optimism

The question remains as to whether the Chinese stocks, which JP Morgan criticized as “uninvestable” in March, have now bottomed out. The major US bank itself has recently shown itself to be more optimistic in the person of strategist Marko Kolanovic. “Chinese stocks may have reached their tipping point. Bans are gradually being eased, pro-growth measures continue. News that China is nearing the end of the investigation into Didi suggests that regulatory risks are easing,” Kolanovic said. Beijing had prohibited the transport service provider Didi from accepting new users due to investigations. Recently, reports about a possible end to the ban caused price jumps. According to this, the app could appear again in the Chinese App Store and Didi could continue his business.

Overall, many experts are more confident again. “Chinese stocks are starting to look more attractive in our view despite the headwinds, and we have to keep in mind that some of these headwinds are starting to fade and some are even turning into tailwinds,” said Tilmann Galler, strategist at JP Morgan. The uncertainty remains as to whether Beijing will continue its friendly course towards the Internet companies after the party congress in November. The only thing that is certain is that the red dragon will remain unpredictable.

INVESTOR INFO

The company, founded by Jack Ma, is broadly positioned in promising segments such as e-commerce, cloud business and payment services. Alibaba has been growing more slowly recently, but the prospects remain good. The stock shows strength in a weak market, the valuation remains moderate. Those who want to invest in China can access it now. Due to the uncertainty beyond November, the paper remains primarily suitable for speculative investors.

The internet giant holds stakes in a variety of companies in potential growth industries, including social media, gaming and e-commerce. As a result, Tencent was often affected by regulatory measures in the online sector and, as with the approval of games, is being slowed down in growth. The share had not collapsed as much as other stocks, so there is a lack of rebound fantasy. Keep.

The HSBC ETF tracks the Hang Seng Tech Index, which is made up of the 30 largest companies listed in Hong Kong. The largest positions are the Chinese companies Meituan, Alibaba, JD.com, Tencent and Xiaomi, each with a weight of seven to nine percent. The weak performance since inception at the end of 2020 offers potential for investors who are banking on a broad recovery in the tech sector.

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