Chinese stocks look cheap. They can stay that way for a while.

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Exchange Square is home to the Hong Kong Stock Exchange. Investor sentiment towards Chinese equities continues to deteriorate.

Dale De La Rey/AFP via Getty Images

The sharp drop in some Chinese stocks from their peak draws comparisons to the declines suffered by internet stocks during the US dot-com crisis. But investors remain cautious, warning that volatility could ensue over the next 12 months as politics in the United States and China remain in flux and sentiment towards Chinese equities continues to deteriorate.


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ETF (KWEB) lost nearly 3% on Wednesday as

Global DiDi

revealed that it was facing a Securities and Exchange Commission investigation into its troubled public offering last year. This is the latest development to hit Chinese companies, with the ETF having fallen more than 60% from its November 2020 high.

iShares MSCI China

The ETF (MCHI) is down nearly 40% from its 2021 peak.

But the declines aren’t attracting a wave of bargain hunters. China saw capital outflows in the first quarter as foreigners sold stocks and bonds, according to the Institute of International Finance. While this is unlikely to trigger a funding crisis for China, the IIF said capital outflows indicated investors were increasingly cautious about geopolitics.

Short-term caution was also on display from a panel of Chinese investors at the Milken Institute’s global conference this week. Jason Tan, director of Jeneration Capital and former managing director of Tiger Global, said the current environment is “one of the darkest times” of his investing career in China. While bullish on long-term tech opportunities in the private market, Tan said he takes a “very conservative” stance on public tech stocks that are broke on sentiment.

In the short term, more developments in the United States and China could keep investors wary. US Secretary of State Antony Blinken was due to unveil the administration’s long-awaited China policy on Thursday, although the State Department said on Wednesday he had tested positive for Covid-19. While analysts don’t expect much in the way of details or bombshells, the speech is expected to clarify foreign policy goals and reinforce that the United States views China as its biggest geopolitical rival.

Also in the mix: The fate of tariffs put in place under the Trump administration as the Office of the U.S. Trade Representative formally begins the process of deciding whether to extend tariffs that will begin to expire in July. While Treasury Secretary Janet Yellen indicated that eliminating tariffs on consumer goods could at least ease some of the inflationary pressures, USTR representative Katherine Tai was reportedly wary it would come back to lose some weight in trade negotiations.

Congress is also beginning the final procedural hurdle the Senate must clear before formal talks on a compromise of the comprehensive China bill, which analysts at Beacon Policy Advisors believe could pass by August.

Investors should keep an eye out for a controversial provision that calls for an outbound investment screening mechanism. The latest iteration of the proposal narrows the scope, but it could still impact a range of industries, from pharmaceuticals and semiconductors to batteries for electric vehicles and even energy and agricultural supply chains.

There is also plenty to fuel volatility in China, starting with expectations that policymakers will stick to its zero Covid policy, perhaps until the fall when China’s top leadership is ready to change. at 20and Party Congress. It could mean more pain for the economy. Moreover, the change in leadership in the fall, as well as whether President Xi Jinping gets a third term as expected, could also keep investors nervous.

A source of concern: where the policy will head towards the private sector after the harsh repression of the technology and real estate sectors that hit Chinese equities.

Although some investors in recent weeks have taken some comfort in officials’ reassurances that they are ending the crackdown on the tech sector and pledging to help the economy. But Winston Ma, managing partner at CloudTree Ventures and former head of North America at China Investment Corp., said policymakers’ emphasis on ‘sound development’ suggests a ‘new era’ of growth. unbridled and unrestricted from the past, with government directing where innovation must be focused. Therefore, says Ma,

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it is

(BABA) the biggest growth area is the cloud business, far from its e-commerce origin. For


(BIDU), it makes chips, and other internet companies are moving into electric cars and smart manufacturing.

But the biggest source of volatility for US investors comes from the risk of delisting from Chinese companies that do not comply with US audit statements. While Chinese officials have offered a more conciliatory tone and shown a willingness to reach some sort of deal with US regulators to allow access to Chinese companies’ audit documents, US regulators have shown few signs. softening of their position.

With 261 Chinese companies valued at $1.4 trillion in market capitalization, as of March 31, listed on U.S. stock exchanges and invested by large investors like repo as well as small retail investors, Ma sees the threat of delisting as the greatest source of short-term uncertainty. as time is running out for Chinese companies to demonstrate three years of compliance with audit disclosure requirements or be delisted.

“This $1 trillion in market value is far more relevant to US-China relations than China’s Treasury purchases,” Ma said. “Over the next 24 months, the US and China can continue to talk and create the potential for a solution, but there’s huge volatility between the two.”

To complicate matters further, China’s own transition for the leadership of its central government, including those leading the national version of the SEC, could also complicate negotiations, Ma said.

Although China is not without investment, the next couple of months could keep investors nervous as they watch political tea leaves in both countries.

Write to Reshma Kapadia at [email protected]

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