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China Tech Stocks Fall on Rising US-China Tensions: What’s Next?

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Chinese tech stocks crashed today amid the escalations in US-China tensions following the shooting down of suspected Chinese spy balloon by the US. After the balloon incident, Secretary of State Antony Blinken also canceled his Beijing visit.

US-China tensions have not come down in Biden’s tenure and if anything, they might have only increased. Biden administration imposed restrictions on exports of high-end chips to China which added another layer of contention between the world’s two largest economies. Nancy Pelosi’s visit to Taiwan did not help matters and added fuel to the fire.

China tech stocks have rebounded from their lows

Meanwhile, Chinese tech stocks fell to multi-year lows last year amid the country’s controversial zero-COVID policy. They rebounded in the fourth quarter of the year after China not only abandoned the policy but gave ample hints that it is reaching out to private businesses.

The optimism over the reopening in China helped lift Chinese tech stocks. Names like Alibaba, NIO, and Tencent have rebounded smartly from their lows. Hong Kong-listed Chinese stocks closed with gains for six consecutive weeks before falling last week.

In the US, the Nasdaq Composite Index has also closed with gains for five straight weeks. The index is up around 15% for the year. It lost 33% of its value last year as investors exited US tech stocks amid the rising interest rates.

All major central banks globally raised rates in 2022 but China and Turkey were two notable exceptions. The Chinese central bank instead eased its monetary policy to support a sputtering economy.

China’s GDP Growth tumbled in 2022

China’s GDP rose at an annualized pace of 3% in 2022 which was better than the 2.8% growth that analysts expected. The growth rate is however the second lowest since 1976 and the world’s second-largest economy fared poorly in only 2020 when it grew by a mere 2.2%.

China was officially targeting GDP growth of 5.5% in 2022. However, the target looked demanding at the very onset. As the year progressed it became amply clear that the country would not be able to meet the target.

Tech crackdown took a toll on Chinese stocks

In 2021, Chinese stocks bore the brunt of the tech crackdown in the country. The country went after several sectors including delivery companies, gaming companies, and the Edtech sector. The country also tightened its antitrust policies and Alibaba was particularly targeted.

Chinese President Xi Jinping pushed forward with the “common prosperity” agenda to address the glaring wealth disparity in the country. However, as the Chinese Communist Party reverted back towards a more communist and socialist regime, it reversed some of the gradual opening of the economy that it had achieved over the last two decades.

Many analysts termed China as “uninvestable” as Xi Jinping tightened his grip on the polity and pushed for a more socialist agenda.

However, China has since reversed many decisions including giving up its zero-COVID policy. It also allowed downloads of Didi apps in the country while approving Ant Financial’s lending arm’s capital raise program.

Optimism toward Chinese stocks surges

Meanwhile, optimism toward Chinese stocks has risen among global investors. According to research firm EPFR Global, the total global inflows into Hong Kong and mainland Chinese stocks is running at the highest level since 2018.

Steven Shen, manager of quantitative strategies at EPFR said, “Active managers have never been this positive toward China markets in the past five years.”

He added, “In the very short term we should be expecting more inflows from the active managers.

Morgan Stanley also echoed similar views about China

Morgan Stanley also echoed similar views and said, “U.S.-based long-only managers shared that they just started to reduce their underweights on China, or were in discussion with investors to release mandate constraints on China exposure.”

Incidentally, Morgan Stanley expects Chinese stocks to outperform their US counterparts this year. The firm’s chief US equity strategist Mike Wilson is among the most bearish on US markets.

Wilson, who got his 2022 market calls almost right last year expects the S&P 500 to fall towards 3,000 in Q1 2023. However, the S&P 500 has rebounded this year after a dismal 2022.

What’s next for Chinese stocks?

Coming back to Chinese stocks, many market participants are bullish on the reopening story. Also, many analysts find Chinese stocks undervalued as compared to global stocks.

That said, many still investors still have scars of the 2021 tech crackdown in China which eventually led to the forced delisting of Didi.

Also, the Chinese economy has slowed down structurally and the days of high single-digit growth seem to be over. Also, several sectors of the Chinese economy especially the real estate sector are facing severe headwinds.

Tensions with the US, which is its largest trading partner, are not making things any easier for China. Many companies including Apple are contemplating diversifying their production away from China. While there hasn’t been a mass exodus of foreign companies from China, most are now having second thoughts on over-reliance on China for their sourcing needs.

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