Internet & Tech

Dotcom crash 2.0

A rollercoaster ride for internet stocks this week


For investors looking for a better understanding how China’s political economy works, a good starting point is to review regulators’ efforts to maintain ‘stability’ in the country.

As WiC has reported on several occasions, 2017 was a pivotal year in restoring stability in China’s financial system. Beijing started off by arresting several high-powered financiers and senior public officials, including the bosses at Tomorrow Group, Anbang Insurance and the China Insurance Regulatory Commission. The central government then unleashed a crackdown on outbound investment, which crippled ultra-acquisitive heavyweights such as Wanda and HNA.

Last but not least, the Financial Stability and Development Committee (FSDC) was set up to pursue goals that are described  literally in  its name. The ‘super regulator’ – which is mandated to coordinate efforts between the central bank and other top financial regulators including the CSRC and CBIRC – is under the State Council’s supervision but it has been chaired by Vice Premier Liu He, who is said to be the most trusted economic advisor of Chinese President Xi Jinping.

This week the FSDC reminded onlookers of how influential it could be, as a statement on Wednesday triggered the biggest ever one-day rally in Chinese tech stocks following a brutal sell-off this month.

Chinese stocks, especially those in the internet sector, have been hit by nearly a perfect storm this year. Many heavyweights such as Alibaba have been on the receiving end of officialdom’s antitrust crackdown for well over a year. Besides that, a ‘zero tolerance’ policy on containing Covid-19 has investors concerned about the strength of the Chinese economy. Uncertainties brought about by the Ukraine crisis and the Federal Reserve’s monetary tightening have all weighed heavily on investor sentiment too.

So-called ‘China-concept stocks’, or Chinese firms listed in New York, were among the worst hit following Washington’s renewed threat to delist Chinese stocks failing to comply with US accounting rules (see page 9). The ADR of Alibaba, for instance, dropped nearly 40% before the FSDC’s market moving statement was published. Its e-commerce rival also dived 44% during the same period. The meltdown meant that the combined market value of all Chinese tech stocks listed in the US was (somewhat incredibly) lower than that of Amazon at one point.

The sell-off also spilled over to Hong Kong where many of the Chinese internet majors are dual-listed, pushing the benchmark Hang Seng Index to a five-year low following a 20% plunge in less than a month.

So what did the FSDC’s statement say? The FSDC declared China would keep its capital markets stable in tandem with “concrete actions”  taken to bolster the economy in the first quarter. Monetary policy, it added, would “take the initiative to cope with the situation”. Yet more importantly, the statement also strongly hinted that the crackdown on the tech sector may be over or at least paused.

Coming a day after the PBoC’s surprise decision not to cut the benchmark interest rate, the strategic statement from Liu’s FSDC offered a timely confidence boost. Many of the tech counters staged their biggest ever one-day rally. Didi, for instance, rebounded more than 35% on Wednesday. The tech index in Hong Kong also surged 22% in one session.

 The statement also signalled a new willingness to cooperate with Washington when it comes to ensuring market stability. “The Chinese and the US regulatory bodies have maintained good communication and made positive progress. The two sides are working on a concrete cooperation plan,” the statement noted. “The Chinese government will continue to support various enterprises to seek listings in the overseas markets.” The announcement came just two days after China’s top diplomat Yang Yiechi held talks with US National Security Advisor Jake Sullivan in Rome. Stock market analysts seem to have taken heart from the fact that both sides had enough to talk about for more than seven hours.

Meanwhile for investors in China’s internet sector the question will be whether this week’s market capitulation signals a new bottom from which Chinese tech stocks can recapture some of their substantial  losses.

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