China’s tech stocks have staged a $700bn rally as the country reopens and a regulatory clampdown on the sector loosens, drawing the attention of international asset managers who fled the market in recent years.
Hong Kong’s Hang Seng tech index, which is stacked with Chinese companies, has soared almost 60 per cent since its lows last October, with heavyweights such as Tencent and Alibaba gaining $350bn combined in market value, according to Financial Times calculations based on Bloomberg data.
The gains, which picked up late last year when Beijing began lifting its Covid-19 curbs, sharply contrast a painful stretch for Chinese tech shares. Many big-name groups in the sector had their valuations dragged lower since 2021 by punitive measures from Beijing. At the height of the government crackdown, many foreign fund managers debated the extent to which Chinese equities were rendered “uninvestable”.
Foreign investors remain sceptical, with strategists and traders saying that while local investors and hedge funds had been snapping up China tech stocks since the start of the rally, most global mainstream investors had yet to take the plunge.
“Has a fund manager sitting with a global tech mandate in Boston necessarily been running this China tech rally? No,” said Andy Maynard, a Hong Kong-based trader at investment bank China Renaissance. “Is he or she sitting there now [ . . .] feeling fomo [fear of missing out]? Almost certainly.”
International investors and analysts were once among the biggest boosters for tech stocks such as Alibaba, Tencent and NetEase, which for years helped turbo-charge China’s growth while reshaping its economy with online payment platforms and innovative so-called superapps. But sentiment soured substantially in the second half of 2021, when the administration of President Xi Jinping launched a sweeping regulatory crackdown on the sector’s most powerful corporate groups.
Now strategists say the game has changed again, with Beijing using all available means to bolster growth as the country leaves behind its longstanding and economically damaging zero-Covid policy. Recent share price gains have been reinforced by a growing number of positive calls from analysts previously wary of recommending that investors jump back into the beleaguered sector.
Si Fu, a China equity strategist at Goldman Sachs, said easing of regulatory pressure, improvement in earnings momentum for Chinese internet stocks and reduced risk of delisting for tech groups listed in New York had all contributed to the rebound, adding that the country’s reopening “could also boost consumer confidence and help traffic and volume at ecommerce companies”.
Analysts at Morgan Stanley have also grown more bullish on tech as a potential outperformer amid the wider “reopening rally” for Chinese equities, recently recommending “large cap, highly liquid Chinese internet companies, with a preference for Alibaba”.
Some of the strongest signals to buy this year have come straight from Beijing: authorities have begun taking “golden shares” — small equity stakes with special rights over certain business decisions — in units of Alibaba and Tencent, formalising the government’s role at the tech groups and signalling a wrap-up for the wider crackdown. Authorities have also resumed approvals for sales of new video games vital to both Tencent and NetEase, while ride-hailing group Didi has been given permission to sign up new customers after an investigation into the company forced it off Chinese app stores two years ago.
Zhikai Chen, head of Asian equities at BNP Paribas Asset Management, said those moves were more substantial than previous, largely symbolic, gestures such as when vice-premier Liu He attempted to convince foreign investors that the worst of the tech crackdown was already over, first in March of last year and then again in May.
“Now they’re actually taking some [positive] actions, and actions speak louder than words,” Chen said. But he added that “global funds, after the shock of the last three years, are probably still underweight China tech [. . .] and the question on people’s minds that will be answered in the coming quarters is whether revenues can come back.”
That wariness from global investors is reflected in a review of fund flow and shareholding data by analysts at CICC, which suggested the recent rally for Hong Kong stocks had been driven primarily by hedge funds and short covering, in which traders who have bet on share price falls need to buy a stock to close their positions.
“The trading of such funds is unlikely to have been driven by fundamentals, and this also explains the speed of the recent market rebound,” said Kevin Liu, an equity strategist at CICC.
Si, at Goldman, said that across all Chinese equities trading in the US, Hong Kong and mainland China, “since the end of October, hedge funds’ positions have picked up significantly. We’ve also seen some long-only funds’ positions picking up, although not as quickly.”
Maynard, at China Renaissance, said that the rally “still has room to run [ . . . ] If you’re a long-only fund manager with a global tech mandate, how can you not be looking at that Hang Seng Tech index rally of 60 per cent?”
But he added that valuations for the sector’s biggest stocks were unlikely to ever recapture the highs touched prior to when the sector-wide crackdown first kicked off.
“We are not going back to the first half of 2021, that game has well changed,” he said. “The dynamics are so much different now — the market, the regulatory environment, the macro, the micro, everything has changed.”