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Xi’s crackdown keeps strategists wary of China tech stock bounce

The Hang Seng Tech index subsequently pared a rally since August 20 to 15%.
Image: Qilai Shen/Bloomberg

Strategists remain cautious about China’s aggressive push to rein in a range of private industries despite a rebound in the nation’s technology stocks that suggests some investors think the worst is over.

The risks were underlined Thursday when officials ordered car-hailing services run by Didi Global Inc., Meituan and Alibaba Group Holding Ltd. to rectify instances of misconduct. The Hang Seng Tech index subsequently pared a rally since August 20 to 15%.

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Just the start

“It’s not the time to be dip-buying from a strategic viewpoint anyway,” Sue Trinh, senior macro strategist with Manulife Investment Management, said in a Bloomberg TV interview.

The short-term rally in Chinese stocks is tied to underlying views that regulation will be isolated and that China’s central bank will ease policy since economic momentum is slowing.

“Those views are somewhat problematic, in that we don’t think we’re at the end of this regulatory clampdown, and at the end of the day, China’s economic question is one that is driven by the quantity of credit not the price of that credit,” she said.

Enigmatic thinking

Fund managers on the mainland are struggling with how to price the market given uncertainties over the government’s regulatory thought process, said Mark Matthews, head of Asia research with Bank Julius Baer.

“For the Internet giants, intuitively, the value should be lower than it has been on average for the last 10 years,” Matthews said in a Bloomberg TV interview, adding the valuation of the MSCI China Index isn’t at a low yet.

“There’s also the onshore market, that’s a totally different story. That one, we like. It’s not driven by valuations. What we do know is the government’s making it very evident that property prices are going to be controlled. And wealth management products aren’t paying out the big returns they used to. So household wealth will be increasingly funneled into the onshore market, and there’s a tremendous amount of household wealth in China.”

Go with the flow

One of the things China’s Communist Party is focused on is “maintaining economic strength,” Tracie McMillion, head of global asset allocation strategy at Wells Fargo Investment Institute, said in a Bloomberg Radio interview.

Advanced manufacturing, high technology and green industries are among the “strategic sectors that Beijing has been directing resources to, will continue to direct resources to. So despite some of these tightening regulations we think China does remain investible.”

Entry point

Selloffs in the China market due to regulatory uncertainty and the delta virus variant have created an attractive entry point for investors ahead of an anticipated significant economic reopening in 2022, said Isaac Poole, global chief investment officer at Oreana Portfolio Advisory Services.

“There is some real valuation on offer now in Chinese markets,” he said in a Bloomberg TV interview. “They are probably sitting somewhere between 10% and 15% undervalued.”

© 2021 Bloomberg

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