Investors Continue to Dump Chinese Tech Stocks

Investors are selling their holdings of Chinese technology stocks at a record pace as worries over higher inflation and dimming growth prospects are hurting the outlook for the sector.  Investors are pulling out even after Chinese tech stocks rallied from their March lows and some of China’s biggest companies in the industry reported better than expected Q2 earnings.

According to Bloomberg data, the U.S. traded KraneShares CSI China Internet ETF has seen outflows of almost $700 million this month, which will be the worst month ever for the fund. Also, the CSOP Hang Seng Tech Index ETF in Hong Kong is on track for its smallest monthly inflow since April 2021; the last month traders pulled money out of the fund.

Outflows from Chinese technology stocks may continue even after the U.S. Securities and Exchange Commission (SEC) said today that the U.S. and China had reached a preliminary agreement to allow U.S. officials to review audit documents of Chinese businesses. Nomura Holding said that even if the audit spat gets resolved, there is still a “laundry list of issues that have undermined investor sentiment toward China stocks.”

The outflows from Chinese technology stocks this month took place despite the action by the PBOC to cut interest rates and vows by regulators to boost support for the economy through various stimulus measures.  Abrdn Asia Limited remains underweight Chinese technology stocks and said they are “looking at the following inflection points, including an improving China macro policy and regulatory backdrop that would boost sentiment around China” before investing in the sector.

Even if the economy improves, investors have changed their valuation models regarding Chinese technology stocks.  China’s regulatory crackdown caused firms to downsize and trim non-core businesses, curbing growth after years of unrestrained growth.  For example, Alibaba Group Holding (BABA) shares are trading at about 12.5 times its estimated earnings for the next year, cheaper than Hong Kong & China Gas Co’s 20 times multiples.  BNP Paribas Asset Management  said, “some of the participants in China’s technology sector are becoming more mature, so we think this sector’s golden age is probably over.”

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