Tech Crackdown Hits Chinese Stocks, Just Not in China
June 09 2021 - 5:50AM
Dow Jones News
By Elaine Yu
China's tech crackdown is mostly affecting firms listed outside
the country, helping to create a big performance gap between
onshore and offshore Chinese stocks.
In the three months to Tuesday, an iShares exchange-traded fund
tracking an MSCI Inc. index of 490 onshore Chinese stocks, or A
Shares, has gained 8.9%, according to FactSet. A similar vehicle
that follows the broader MSCI China index is up just 0.2% over the
same period. Over the last 12 months, the former has outperformed
by 20 percentage points.
The wider index includes some shares listed in Shanghai and
Shenzhen, but is heavily tilted toward internet companies, most of
which are listed in Hong Kong and the U.S.
Five companies -- Tencent Holdings Ltd., Alibaba Group Holding
Ltd., food-delivery giant Meituan, and e-commerce platforms JD.com
Inc. and Pinduoduo Inc. -- make up nearly 35% of the benchmark and
are listed outside mainland China. The biggest company in the
A-Share index is liquor maker Kweichow Moutai Co., with an index
weight of 6.2%.
China's internet-technology sector is reeling from what began in
part as a crackdown on anticompetitive practices, with regulators
imposing a record $2.8 billion antitrust fine upon Alibaba in
April. The campaign has since become a broader effort to clean up
the sector, spanning issues such as data usage and employment
practices.
The clampdown could result in both slower revenue growth and
lower profit margins, said Thomas Gatley, an analyst at Gavekal, a
financial research and money-management firm.
For example, Mr. Gatley said pressure was mounting on Meituan to
better protect its contracted delivery drivers, and stricter
regulation would likely mean higher costs. In an earnings call last
month, Meituan Chief Executive Wang Xing said the company would do
more to support drivers, including taking part in a government-led
program to buy work-related injury insurance. "The importance of
delivery riders as our business partners cannot be stressed
enough," Mr. Wang said.
Some say a clearer regulatory framework will be beneficial in
the longer term. William Yuen, a Hong Kong-based investment
director at Invesco Asia Pacific, said having proper and more
transparent guidelines will ultimately benefit the sector, and
investors can then focus on deciding which businesses are better.
"Everyone will be more or less under the same sets of rules," he
said.
There is some irony in the outperformance of the domestic
market, which is more skewed toward old-economy businesses in areas
such as the industrial, financial and consumer-staples sectors.
The absence of the tech heavyweights -- some of China's
highest-profile, most valuable and fastest-growing businesses --
from mainland markets has been a sore point for Chinese policy
makers. To date, local investors have had limited options for
buying into these firms, although some of the Hong Kong-listed
shares can be bought and sold through a trading link with Hong
Kong, known as Stock Connect.
Chinese onshore stocks have also been buoyed by other factors,
including buying by international investors, who have increased
their overall holdings in recent years. Net purchases of mainland
shares through Stock Connect this year have already topped last
year's full-year total of $32 billion, Morgan Stanley equity
strategists including Laura Wang wrote in a June 3 note.
Another recent source of support for the market was a move to
dampen commodity-market speculation in China. Some investors
welcomed this because it was seen as reducing the case for tighter
monetary policy.
With China's onshore stocks more accessible to global investors
than they were a few years ago, some say they are agnostic about
listing locations. Nicholas Yeo, who oversees China equities at
Aberdeen Standard Investments in Hong Kong, said the quality of a
company is what matters the most, regardless of where it is
listed.
Write to Elaine Yu at elaine.yu@wsj.com
(END) Dow Jones Newswires
June 09, 2021 05:44 ET (09:44 GMT)
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