What’s going on with Chinese tech stocks?

23 Jul 2021

An ongoing regulatory crackdown on Chinese technology stocks has captured headlines around the world, with Chinese stocks listed in the US, China, and Hong Kong tanking recently thanks to concerns over personal data protection and cybersecurity. Tallying the losses amongst the technology giants alone, the group of Tencent, Alibaba, Meituan, JD.com, and four others had exceeded $800B so far.

Let’s get our investment analylst’s view on what does the future hold for these technology stocks.

Chinese tech companies have halted plans to list in the US stock market

Just two days after Didi Chuxing’s massive $4.4B IPO on the New York Stock Exchange on the 30th of June, Chinese regulators dropped the not-entirely-unexpected bombshell that they were to pull the ride-hailing giant’s app from Chinese app stores. Didi had gone ahead with the IPO without the blessing of the Cyberspace Administration of China (CAC), kicking off a wider crisis that had seen broad sell-offs in Chinese technology stocks.

Many larger, already-listed Chinese companies suffered collateral damage and saw their stocks tank. LinkDoc Technology Ltd, a startup backed by the Alibaba Group, decided to shelf their much-anticipated plans to go public.

Overall, early estimates by Bloomberg places the number of potentially delayed or cancelled listings at around 70, a significant disruption worth billions of dollars.

Our analyst’s opinion: Large Chinese tech companies with positions in companies with delayed or cancelled IPO plans are likely to see near-term pullbacks while alternatives are found.

Some Chinese tech companies are looking to list either on the mainland, or in Hong Kong

Chinese regulators have recently introduced a new law where technology companies with over 1 million registered users must submit themselves for a cybersecurity review before listing overseas, a move that is undoubtedly likely to dampen overseas listing sentiment. Already, many companies have shelved their original plans to list on foreign exchanges.

In the near-term, this has raised speculation that many companies will seek to list at alternate sites instead, with the HKEX being an immediate and viable alternative. Since Didi’s troubles began, the HKEX has risen sharply, and is trading around +11% above its prior levels.

Our analyst’s opinion: Things may just be beginning for the HKEX. Look out for further integration of larger Chinese companies listing in Hong Kong instead of elsewhere, largely thanks to rising concerns over data security. This means that Beijing is unlikely to loosen the reins on technology companies listing overseas, in the face of increasingly acrimonious Sino-US relations.

Tech companies using consumer data are at risk – but some more than others

Businesses depending on the use of personal data as a key plank of their business model may be in the midst of having their future outlook revised downwards. For the best part of the past two weeks, technology companies have largely dragged Chinese indices down, with large names such as Alibaba Group, Meituan and JD.com weighing heavily on the Hong Kong stock market, thanks to fears over data protection crackdowns. Alibaba remains -4% below “pre-Didi” levels, while Meituan and JD.com are still trading -9% and -3% lower.

Since then however, many of these companies have rushed to avoid Didi’s fate, placing them as potentially safer bets for investors. For instance, Meituan recently re-launched a once-retired app (Meituan Dache) to become more compliant with regulators’ wishes. The re-launched app interestingly has an obvious focus on user privacy, stating clearly that the app would not transfer user data to unauthorised parties and for unauthorised purposes.

Looking ahead, China’s Data Security Law is due to kick in come September, possibly further constraining specific revenue streams and business models. Lawmakers are also hammering out details for a further Personal Information Protection Law, due to be announced later on.

However, it is highly likely that the monetisation and usage of data for marketing purposes will be an increasingly difficult business model, and may necessitate a downward revision in the valuation models of several technology companies.

Our analyst’s opinion: Chinese technology companies may have been caught off-guard recently, but do not expect them to remain uncompliant with data security laws moving forward. Thus, the bad news may have already been fully priced in.

In summary: Chinese technology stocks remain volatile, but upside risks are improving

The CAC is now the agency to watch. The 10-year old agency has been effectively catapulted overnight from a low-priority agency, to wielding the ability to veto the listings (and future prospects) of massive Chinese technology companies.

The bottom for Chinese tech stocks may not be in yet, but it is certainly near. Technology companies have been on their absolute best behaviour in the past few months, eager to avoid further unnecessary regulatory scrutiny, and signs are emerging that regulators may be ready to play nice.

Most recently, Tencent received regulatory approval for the purchase of search engine Sogou, sparking a mini-rally in the HKG50, and a +3.9% rise for Tencent’s stock. With large amounts of negative news already priced into Chinese stocks, Tencent’s latest example shows that risks are starting to become skewed to the upside, with further positive news likely to trigger bullish sentiment and buying activity.

Tickers offered by Phillip Futures:

  1. HK Hang Seng (Phillip MT5 CFD Ticker: HKG50)
  2. Hong Kong Exchanges & Clearing (Phillip MT5 CFD Ticker: HKEX – HKEX)
  3. Tencent Holdings (Phillip MT5 CFD Ticker: TENCENT – HKEX)
  4. Alibaba Group Holdings (Phillip MT5 CFD Ticker: ALIBABA – HKEX)
  5. Meituan Dianping (Phillip MT5 CFD Ticker: MEITUAN – HKEX)

Why trade on Phillip MT5?

Trade Forex, Gold, and CFDs (Shares, Indices, Cryptocurrency, Oil, and more) at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

Download Trading Central’s Market Buzz for updates on more topics.

What’s more? Phillip MT5 is now supported on Mac OS! To install, simply download the file below and complete a simple installation process.

An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

  • ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
  • ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
  • An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
  • Smaller barrier to entry
    Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
  • No expiration date or risk of delivery
    Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.


Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

Register for a FREE 30-day Phillip MetaTrader 5 Demo Account

More Market Trends

NZDUSD slid to a nine-month low after the release of FOMC minutes on Wednesday, 18 August 2021. Minutes from the July meeting extended losses from the

Read More >

AUDUSD gains from Wednesday’s CPI data was erased when the latest PPI report hinted that inflation may not be over just yet. Extended lockdowns in

Read More >

Gain exposure to the US technology sector at zero commission on Phillip MetaTrader 5

Read More >