Chinese high-technology stocks are pushing up against the limits of their upside potential, beset by the triple woes of an intensifying U.S.-China confrontation, concern regarding the Chinese government’s regulatory regime and the stuttering pace of the economy.
With stock prices increasingly being affected by decisions about whether to ride the artificial intelligence boom, the weak performance of Chinese tech listings like Alibaba Group and Tencent has exposed the absence of a driving force.
Alibaba on Thursday released its April-June results, which came in better than market expectations. Yet an executive of an asset management company in Hong Kong waved off the feat. “External environments are too uncertain to buy tech stocks,” the executive said.
On the Hong Kong bourse, Alibaba on Friday temporarily rose 4% from the previous day to 97.95 Hong Kong dollars ($12.52) but ended the day’s trading 1% higher.
The Chinese government is set to support tech companies despite a sense of distrust among market players. The government will provide “new engines” to boost demand and promote innovations, Premier Li Qiang said at a meeting with tech company executives in early July.
The National Development and Reform Commission, responsible for managing China’s economic policies, has unveiled a series of measures to support tech companies. It includes 31 “provisions” to promote private sector growth.
With unemployment among 16- to 24-year-olds rising to an all-time high of 21.3% in June, attention is falling on the tech and other private sectors, which together provide around 80% of the jobs in urban areas. The government’s new support measures for tech companies are a clear sign that these businesses are being looked at to employ and innovate more, said Shuang Ding, chief economist at Standard Chartered Bank.
Having developed markets for its game business in North America, Tencent in its most recent business year made 10% of its total sales overseas. © Reuters
The Hang Seng Tech Index, which includes Alibaba and 29 other Hong Kong-listed high-tech companies from mainland China, rose 8% from the end of June to Monday, a winning streak helped by the Chinese government’s policy to support tech businesses.
Known as the Chinese version of the Nasdaq Composite Index, the barometer is still 60% lower than its record high set in February 2021. This comes in sharp contrast to the American index, which in that span has rebounded and now sits a little more than 15% short of its all-time high.
Many analysts note that lagging Chinese tech stocks offer golden buying opportunities. According to Refinitiv, 43 of 49 research companies recommend “buy” for Alibaba, whose shares are 29% below their average target price. Meanwhile, 52 of 57 research firms also recommend that investors buy Tencent, whose shares are 70% below their average target price.
The Hong Kong-Nasdaq discrepancy began in late 2020 and early 2021, and arrived along with the triple woes.
One reason foreign investors are growing distrustful of Chinese tech stocks is the Chinese government’s regulatory fervor. One analyst went so far as to say Chinese tech stocks cannot be trusted until Xi Jinping is replaced as leader of China.
In November 2020, Ant Group, founded by Alibaba’s Jack Ma, suddenly halted its initial public offering under pressure from the government. Tencent, Baidu and other tech titans would later come under tightened regulatory control.
More recently, Chinese authorities have written rules that would require electronics makers to build a feature into smartphones that limits their usage by anyone under 18 to two hours per day and makes them inoperable during set hours. This sent shares in tech companies tumbling. Alibaba and Tencent each dropped 3%.
Promoting the development of the public sector while toughening regulations on the private sector is weakening the vitality of the latter. At present, however, the China Securities Index shows that stock price discrepancies between private and state-owned companies are narrowing.
The second woe is the U.S.-led toughening of semiconductor export controls. “The U.S. is highly likely to continue restrictions on China’s progress in the fields of chip technology and AI,” said Dong Chen of Pictet Wealth Management. “It will be difficult (for China) to develop an independent ecosystem.”
“Whether it’s for civilian use or military use, [it] doesn’t matter, ” said Redmond Wong, the market strategist at Saxo. “The gap will be wider and wider.”
The U.S. government announced on Aug. 9 a plan to restrict investment in China in the fields of AI and other cutting-edge technologies.
Baidu and other Chinese companies are developing generative AI on their own. But there is no company that can drive the AI-related stock market like Nvidia in the U.S. In 2022, Cambricon Technologies, which once drew attention as China’s Nvidia, was placed on the U.S. Entity List, meaning exports to it are banned. Cambricon stock now hovers 40% below its recent high.
Then there is the third woe: slow growth in China. Alibaba, Tencent and other Chinese internet companies were able to grow without foreign competition, which was barred by government regulations. The number of people using Tencent’s WeChat messaging app has exceeded 1.1 billion. But with China’s population now in decline, the country’s companies have been intensifying the competition among one another. This has left them unable to revive foreign investor expectations.
Baidu and other Chinese companies are developing generative AI on their own. But there is no company that can pull the AI-related stock market like Nvidia in the U.S. © Reuters
The results of the U.S. policy to keep China from importing critical components and equipment have become evident on the stock market.
The weaker performance of Chinese tech companies is dealing a direct blow to the Hong Kong market, where foreign investors can buy and sell shares without limitations. The combined market value of Alibaba, Tencent and five other big Chinese tech companies at the end of July accounted for 23% of the market capitalization of all Hong Kong-listed companies, down sharply from a peak of 39% in September 2020. During the period, the Hong Kong bourse’s total market cap declined 13%.
The revival of Chinese tech companies depends on their ability to succeed overseas, but doing so will be extremely difficult and take time, said Kai Wang, a senior analyst with Morningstar. In other words, they need strategies for finding opportunities in growth markets beyond the Chinese government’s control.
Tencent has developed markets for its game business in North America, raising the overseas share of sales to almost 10% for 2022. Alibaba invested an additional $845.44 million in Lazada, a Singapore-based e-commerce company, in line with its pursuit of growth. But competition is tough because overseas market conditions differ from those in China.
In China, communications services, infrastructure providers and other corporate heavyweights, most of which are state-owned, will likely struggle to grow now that domestic demand is hitting a ceiling.
“Hong Kong’s Hang Seng Index will not go back to the previous peak anymore,” said Thomas Fung, chief investment officer at China Rise Securities Asset Management. “And none but tech firms can play the role of an engine for Chinese stocks.”