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China equity funds hit as stocks undergo a correction on mounting risk
Thursday 01 Apr 2021 Author: Yoosof Farah

When it rains, it pours seems to be an appropriate adage for Chinese stocks at the moment with investors in the country hit by a cornucopia of bad news including increased regulation, rising tensions with the Biden administration in the US and a crackdown on Chinese firms listed in New York.

Big tech names like Alibaba and Tencent, two major holdings in many Chinese equity funds, have taken a hit on increasing regulatory oversight by the Chinese government.

Sentiment towards the stocks has not been helped by reports that Chinese officials are considering a joint venture with dominant Chinese internet platforms such as Alibaba, Tencent, and Bytedance so it can monitor user data.

And a new rule from US financial regular the Securities and Exchange Commission aimed at Chinese stocks listed in the US, which requires firms to submit documents to establish that they are not owned or controlled by a governmental entity in a foreign jurisdiction, has exacerbated the decline in big Chinese tech stocks.

Since Chinese markets peaked on 17 February, Alibaba and Tencent shares have fallen around 20%. JD.com, the e-commerce giant which is also widely held by China funds, has lost around 25% of its value in that timeframe while online shopping platform Meituan Dianping – another investor favourite – tumbled even further with a whopping 38% fall.

The wider Hang Seng index in Hong Kong has fallen 9% since 17 February, with China’s Shanghai Composite down 7%.

Falls in both China’s big tech giants and the stock market as a whole has invariably had an impact on Chinese equity funds, as many have seen big gains in January wiped out and are now trading down year-to-date, with Allianz China A-Shares (BMG9ZY3) the biggest faller with a 9.5% loss.

Also not helping Chinese domestic stocks is the fact other economies around the world are starting to recover from coronavirus, leading regional and global investors to look elsewhere for growth.

Despite this short-term market noise, longer term the growth opportunity for Chinese firms is clearly still there, and analysts at investment bank Jefferies point out that China economic forecasts for 2021 are actually being revised up and companies’ 2022 earnings are ‘holding up well’.

The analysts say one lesson learnt from the current sell-off in Chinese stocks is to ‘avoid crowded trades and to pare back stocks that get gripped by the momentum fever’, and add that the Chinese authorities have a ‘proactive stance’ in ‘pre-emptively pricking asset bubbles’.

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