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Why Chinese Tech Stocks Got Destroyed This Week

Why Chinese Tech Stocks Got Destroyed This Week

So what

The bad news began with another company, not on this list — recent IPO and China’s answer to Uber, ride-sharing app DiDi Global (NYSE: DIDI). That company got slammed over the holiday weekend by a Chinese order to halt registering new users while local regulators examine its data security practices. But while the bad news began with DiDi, it didn’t end there.

On Monday, China announced it is investigating data collection and security practices across a raft of Chinese companies with overseas listings. Then on Wednesday, China announced a series of anti-monopoly fines, too. Digging into the details of mergers and acquisitions that were finalized as much as a decade ago, regulators began levying fines for failure to seek merger pre-approval from the government.

Granted, these fines are relatively small — just 500,000 yuan per incident, or about $77,000 each. On the other hand, though, that’s the maximum fine allowed by current law. And when you consider that China is punishing these business combinations retroactively, you have to wonder if the next step might be to change the size of the permissible punishments retroactively as well. That could open up the possibility of stiffer fines or fiercer penalties being announced, potentially up to and including forcing companies to unwind their past acquisitions.

Now what

Indeed, China already appears to be moving in the direction of stricter enforcement, announcing Thursday that it plans to institute “further regulation of Chinese payments companies,” for example.

Combined with unrelated U.S. actions that threaten to curtail trading in Chinese stocks, even as other sanctions continue to impinge on Chinese exports to the U.S., investors in Chinese tech stocks seem to be caught between Scylla and Charybdis. At the risk of mixing metaphors, everywhere they turn, one government or another seems intent on biting the invisible hand of the market that feeds it!

So what’s an investor to do in a situation like this? Acknowledging that there are serious risks to investing in Chinese tech stocks right now, market giant BlackRock opines that while the risks are real, “investors are compensated for these risks” by the fact that some Chinese stocks are trading at discounted prices. To cite just one obvious example, after its sell-off, Baidu stock that trades for less than 9 times earnings right now looks like a real bargain based on analyst expectations of a 14% annualized earnings growth over the next five years.

Of course, that’s assuming that China allows Baidu and other tech companies to grow at all — and right now, that’s precisely what investors are so worried about.