Chinese Tech Stock Sentiment Improves with Fewer Covid Restrictions

After a two-year rout in Chinese technology stocks, market sentiment may be finally turning the corner for the sector.  A surge in buying call options on Chinese technology stocks last month pushed the put-to-call ratios for many of the stocks to multimonth lows.  At least half of the stocks in the Nasdaq Golden Dragon China Invesco ETF (PGJ) saw their ratios fall last month.

Chinese technology shares are likely to be one of the biggest beneficiaries of a reopening of China’s economy.  That is because the battered tech sector is closely tied to a pickup in consumption, which many analysts say is among the last remaining factors to watch before a turnaround in technology stocks could be sustained.

Market sentiment toward Chinese technology stocks has improved recently after the government started to signal a relaxation of its strict Covid Zero policy.  An easing of pandemic restrictions and lockdowns in China would spark a rebound in economic activity that would help advertising revenues and boost online shopping sentiment.  BNP Paribas said, “we believe the Chinese internet stocks will be a key beneficiary of China’s potential reopening due to the increased consumption that such a reopening will generate.”

The newly found optimism for Chinese technology stocks has begun to take hold.  The Nasdaq Golden Dragon China Index surged +42% in November, its biggest monthly rally on record, while also posting its biggest outperformance relative to the Nasdaq 100 Stock Index($IUXX) (QQQ).  In addition, fund flows into the KraneShares CSI China Internet ETF (KWEB.L.EB) turned positive in November for the first month in five.

Pegasus Fund Managers Ltd is optimistic about a rebound in Chinese technology stocks, saying “the sector has the potential to lead the recovery in the reopening-driven rally.” However, not all are jumping into Chinese technology stocks yet.  Baring Asset Management said the earnings recovery for the sector is still key, and they will only consider buying Chinese e-commerce and mobile gaming stocks when there’s a meaningful recovery, which may not happen until the second half of 2023. 

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