Company / Analytics

Analytics, 03 September 2021

Chinese Tech Stocks end lower

Chinese technology stocks ended the week lower as investors remained concerned with regulatory crackdowns in China, and news that tech giant Alibaba Group will donate $15.5 billion to “common prosperity” in China by 2025.

Investors are worried that the donation will potentially impact Alibaba’s balance sheet, and that other tech firms will be forced to offer their own donations.

Meanwhile, shares of Didi Global rallied on Friday on news that Beijing City was considering taking a stake in the ride-hailing company and possibly bringing it under state control.

Technology indexes ended lower

The Hang Seng Tech Index closed down 1.1% in Hong Kong, in part led by Alibaba Group, which fell 3.6%. The decline came on concerns that the e-commerce giant’s $15.5 billion pledge to Beijing’s “common prosperity” vision would hit profits in coming years.

Analysts believe that the donation does not guarantee that the state will stop cracking down on Alibaba or other tech companies. Arguably, the donation is huge, and will likely affect Alibaba’s future earnings growth, which could fall to a low digit and make its shares a completely different asset.

Alibaba is among large Chinese companies that are promising to give back after accumulating vast wealth during a decade-long mobile internet boom. Pinduoduo Inc. pledged its next $1.5 billion in profit to farmers’ welfare. Tencent Holdings Ltd. said last month it will double the amount of money it’s allocating for social responsibility programs to about $15 billion.

Other technology firms might be forced to make their contributions too, which will cause investors to worry since these payments come from the company. Meituan was the worst performer in the tech gauge on Friday, as traders sold the stock after the firm and some other car-hailing service providers were asked by the government to rectify instances of what it considers misconduct by December. Shares had been gaining in the previous four sessions, which was the longest stretch since May 21.

On Thursday, China’s broadcaster regulator also ordered sweeping action to clean up the entertainment industry, vowing to ban film stars with “incorrect” politics, cap salaries, and address problems in the fan-based culture. Entertainment shares were mixed, with Mango Excellent Media Co. finishing 3.6% lower while Huayi Brothers Media Corp. climbing 3.1%.

Despite the retreat on Friday, the Hang Seng Tech Index still advanced 6.4% for the week. The gauge is up more than 14% since its Aug. 20 low following a bout of bargain hunting in recent weeks, according to Bloomberg.

Beijing City to buy a stake in Didi Global

Meanwhile, shares of Didi Global rallied 4.3% in the premarket following a Bloomberg report that Beijing was considering taking a stake in the ride-hailing company and possibly bringing it under state control. It is unclear what size stake Beijing would consider taking in the company, but reports indicate the city proposed that government-run firms invest in the Chinese ride-hailing company, according to a Bloomberg News report.

China is also looking for greater control of its listed stocks. The country’s President Xi Jinping says he wants a stock exchange in Beijing for small and medium-sized entities.

Analysts at J.P. Morgan believe China’s regulation crackdown is heating up and will create downward pressure on major market groups and industries. China will actively target companies in waves, and the latest one could last another couple of months. The regulation activity is part of its “common prosperity” push that focuses on consumer and social welfare.

But remains massively under-owned by global investors. Analysts believe focusing on Chinese bonds provides a strategic way to get exposure to economic growth while limiting downside risk tied to the regulatory crackdown.

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