The steep plunge in Chinese technology stocks appeared to level off on Tuesday morning after several sessions of intense selling in New York and Hong Kong.
The Hang Seng Tech Index initially fell a further 7.2% when trading started in Hong Kong but soon was trading above Monday’s close. After almost two hours of trading, it was again down 0.7%. The main benchmark Hang Seng Index was 2.1% below the six-year low it hit on Monday.
Chinese tech stocks continued to dominate trading, with Tencent Holdings, Alibaba Group Holding, and Meituan leading activity. Meituan was up 2.7%, while Alibaba was down 5.6% and Tencent 3.6% lower.
JPMorgan advised investors to stay on the sidelines in a new research note, downgrading most tech stocks to neutral or “underweight.”
“We believe that China’s geopolitical risks, along with escalating volatility across all asset classes and weak equity performance of global growth sectors, makes risk management the most important consideration for investors with a global mandate in relation to their China internet investment strategy,” the bank said.
Tech shares had taken a beating on Monday, in part due to China’s publication of a new draft regulation that would extend time limits on children’s internet use, set last year for games, to streaming and social networking apps. A news report published after Hong Kong’s close on Monday saying that Tencent faces a large potential fine for alleged violation of money laundering rules added to the selling pressure in New York.
In the overnight session, Alibaba and JD.com each slid a little over 10%. Rival Pinduoduo plunged 20.5%.
The latest bout of intense selling began last Thursday after five Chinese companies listed in New York were notified by the US Securities and Exchange Commission to expect delisting in 2024.
The five, which included restaurant operator Yum China and cancer drug developer BeiGene, are all already listed in Hong Kong or Shanghai, but Pinduoduo, among other Chinese stocks, is only listed in New York.
In a note published on Tuesday, Goldman Sachs said that current valuations implied Chinese internet companies would only be able post annual profit growth of 8% over the next decade.
“The implied growth looks conservative relative to our mid-to-high-teen growth projection for the sector based on what we view as reasonable assumptions,” the bank said. It added that the stocks “are also priced at or close to all-time high valuation discounts relative to their US peers.”
Worries about a surge of coronavirus cases in China and the war in Ukraine have also made investors risk-averse.
“As Chinese authorities continue their ‘zero-corona policy,’ urban blockades could hinder economic recovery from the pandemic,” said Toru Nishihama, chief economist at Dai-ichi Life Research Institute.
Several US and European media outlets have reported assertions by U.S. government officials that Russia has requested military assistance from China, including the provision of arms.
“If China were to start supporting Russia, the US and Europe would also take a tough stance toward China, possibly imposing economic sanctions,” said Mutsumi Kagawa, chief global strategist at Rakuten Securities Research Institute. “Foreign investors are stepping up selling to avoid geopolitical risks.”