Experts warn of risks for stocks

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Five-star red flags line the pedestrianized Nanjing Road in Shanghai, China on June 22, 2021. This year marks the 100th anniversary of the Chinese Communist Party.

Cost photo | Barcroft Media | Getty Images

GUANGZHOU, China – Chinese authorities have enacted a number of laws in recent months, mostly targeting the tech sector – a move that has scared investors and wiped billions in the value of the country’s internet giant.

The legislative attack began in November last year when billionaire Jack Ma’s giant IPO of financial technology company Ant Group was suspended.

Since then, regulators have introduced antimonopoly laws that focus on the so-called “platform economy,” which generally refers to Internet companies offering a variety of services from e-commerce to grocery delivery. Regulations have also aimed to strengthen critical data security and privacy laws.

As a result, high-profile technology companies have faced investigation and punishment.

E-commerce titan Alibaba was fined $ 2.8 billion in an anti-monopoly investigation and China’s largest ride-hailing company Didi was forced to stop registering users while regulators were only days away conduct a cybersecurity review of the company following its listing in the United States.

But with most of the landmark laws passed and the visibility of corporate requirements mounting, investors are now wondering whether it is time to get into Chinese technology stocks.

Nevertheless, the mood remains mixed.

“I think the current sentiment towards Chinese tech stocks, at least for English-speaking investors, is two extremes: those who see some kind of regulatory change / risk as an example of why they won’t invest in Chinese stocks compared to other investors.” who see this as a buying opportunity for higher-quality Chinese names whose actual future earnings will be far less affected than the extent of this year’s sell-off, “Tariq Dennison, asset manager at Hong Kong-based GFM Asset Management, told CNBC.

So what are the risks for investors in Chinese technology stocks?

Regulatory uncertainty

Although China has passed many marquee laws, there is still a risk of surprise and uncertainty in the market.

“The wave of new regulations has cascaded and grown since we first responded to Ant Group’s initial public offering,” Brian Bandsma, portfolio manager for emerging markets equities and Asia Pacific at Vontobel Quality Growth, told CNBC. “There was no sign then or in the weeks that followed that this was going to expand in so many different directions. Every time it seemed like we were close to the end, something new came along.”

In the absence of any negative news, there is now some calm in the Chinese markets. However, trust is now extremely fragile.

Dave Wang

Portfolio Manager, Nuvest Capital

“So I would say that at this point it is risky to bet that the worst is behind us,” he said.

Last week, Chinese tech stocks saw a huge one-day rally. Fund under Ark Investment Management, founded by Cathie Wood, bought some shares in JD.com last week. After the rally, tech stocks fell again on the following trading days, underscoring the cautious attitude of investors who are wary of regulatory risks.

“Political uncertainty remains” [in] the summit. In the absence of any negative news, there is now some calm in the Chinese markets. However, trust is now extremely fragile, ”Dave Wang, portfolio manager at Nuvest Capital, told CNBC.

“If the Chinese authorities continue to publish negative news, and worse, other unexpected policies, we could see another sell-off.”

geopolitics

Chinese tech companies have been trapped in the geopolitical battle between the US and China since President Donald Trump’s tenure.

Gaming giant Tencent, TikTok owner ByteDance, and telecom company Huawei have all been dragged into geopolitics, and that remains a risk for Chinese tech companies.

One risk is that “foreign governments will impose more sanctions on Chinese stocks,” said Dennison of GFM Asset Management.

Meanwhile, Chinese companies listed on US stock exchanges could face stricter licensing and auditing requirements.

Gary Gensler, chairman of the US Securities and Exchange Commission, told Bloomberg this week that Chinese companies that are already listed in the US need to better educate investors about regulatory and political risks.

Many US-listed Chinese companies, including Alibaba and Baidu, conducted secondary listings in Hong Kong to hedge against these risks.

Change to business models

There are also concerns that technology companies will need to change their business practices before landmark policies go into effect. These regulations include those that target data collection practices, online content, and the use of targeting algorithms.

When Alibaba was fined in an anti-monopoly investigation earlier this year, regulators said they were investigating a practice that forces merchants to choose one of two e-commerce platforms instead of allowing them to work with both . China’s market regulator said the practice is stifling competition.

“Companies will certainly have to be much more careful with certain activities,” said Bandsma from Vontobel.

“Acquisitions, especially of companies that can be perceived as a competitive threat, are being questioned more. Showing pricing power, especially with small retailers or consumers, will be more difficult to implement.”

However, it is still unclear whether this could have a meaningful impact on business models and ultimately on profits.

Where is China’s tech giants?

Short-term speed limits could be imminent for China’s internet companies.

Ultimately, according to analysts, these technology giants – which in the past have adapted quickly to new regulatory environments – will be able to cope with the multitude of new rules.

“The more diversified giants know better than anyone how to handle new data regulations and how to monetize their users differently than anyone,” Dennison said. “On the other hand, more Chinese rules will further protect Chinese tech companies from any emerging foreign competition.”

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Such regulations could also offer long- and short-term oriented investors an opportunity.

“There are a number of companies that are extremely strong and can play the long game. The regulations are broad-based and will ultimately also raise the barriers to entry. Investors with patient capital will benefit greatly from choosing the right companies. ”Wang said, referring to long-term capital.

“Professional traders who have much shorter maturities can also try to take advantage of the volatility and volatility premiums that come with it.”

However, one expert warned that regulatory uncertainty could make foreign capital less willing to fund Chinese tech companies. Masayoshi Son, CEO of SoftBank, said this month the company will cut new investments in China.

“What would that mean for the continued competitiveness of the Chinese technology industry or even other industries if foreign capital became more and more aware of the risks involved and then withdrew? ? “Charles Mok, founder of Tech For Good Asia, a technology advocacy group, told CNBC on the Beyond the Valley podcast.

“I would think this is a matter of concern in the long run.”