Alibaba Inc (NYSE:BABA), Baidu, Inc. (NASDAQ:BIDU) – Are investors bullish on Chinese stocks again?

A series of regulations targeting a number of sectors – from technology to real estate and education – hammered Chinese stocks late last year and into 2022, and although many economists remain optimistic about the potential of Chinese equities, Beijing’s relationship with the Kremlin is now weighing on investors’ appetite for Chinese equities.

On Friday, April 1, the Shanghai Composite SSE Index fell 5.8% year on year and is down 9.6% year to date. The SZSE Component Index, the tech-heavy Shenzhen Stock Exchange’s benchmark, is also down 13.2% year-on-year on Friday and 17.3% since the start of the month. the year.

The Hang Seng China Enterprises Index, which tracks Chinese companies listed in Hong Kong, also fell 31.9% year-on-year on Friday and 8% year-to-date.

2021 in retrospect

In 2021, Chinese companies were hit by regulatory changes as Beijing sought to eliminate anti-competitive behavior, online gambling addiction, excessive childcare and education costs, and eliminate other risks in the private sector.

Beijing’s crackdown on the tech and fintech sector led to the record fine of more than 18 billion yuan (about $3 billion) on Alibaba (NYSE: BABA), the branch’s transition from Alibaba Ant Group’s mobile payment into a financial holding company and a series of rules aimed at data security and anti-monopoly, among others.

The government also targeted the education sector last year, launching sweeping rules that have upended for-profit tutoring firms. New rules aimed at protecting minors have also weighed on the operations and revenues of major gaming companies like Tencent Holdings (HKG:0700) and NetEase (NASDAQ:NTES).

Towards the end of last year, the vulnerability of China’s real estate sector was revealed as China Evergrande’s (HKG:3333) huge debt build-up of over $300 billion highlighted the sector’s risks the country’s heavily indebted real estate that many fear will lead to a wider contagion affecting the country’s financial industry and global markets.

These factors led to a sell-off in Chinese stocks in the country and in the United States, the Nasdaq Golden Dragon China Index (INDEXNASDAQ: HXC), which tracks 98 of the largest Chinese companies listed in the United States, posting its biggest drop since the financial crisis. 2008 in March after hitting an all-time high in February 2021. At the time of writing, HXC is trading lower than its 2008 high after retracing around 70% of the gains it has made since its 2008 low.

NASDAQ Golden Dragon China Index W1

Prime Chinese stocks from US stock exchanges

Geopolitical tensions and data security concerns prompted the U.S. Securities and Exchange Commission to toughen its auditing rules on Chinese companies listed on U.S. stock exchanges. This threatens the U.S. listing status of companies such as KFC operator Yum China Holdings (NYSE:YUMC), Weibo (NASDAQ:WB), Baidu (NASDAQ:BIDU) and iQIYI (NASDAQ:IQ).

Even before these companies were added to the SEC’s “provisional list” of companies that violate US foreign corporate liability law, the United States has already fired several Chinese companies – including the Big Three telecom companies. Chinese – over the past year, citing data security issues and other alleged breaches.

Bullish on Chinese stocks

Despite uncertainties about the outlook for China’s regulatory environment in the coming years, some global banks and economists, including Bernstein, Credit Suisse and Goldman Sachs, remain bullish on Chinese stocks.

Credit Suisse raised its outlook on China, noting that values ​​could be depressed, while Goldman Sachs highlighted the investability of Chinese assets due to liberalization and reform measures in Chinese capital markets, which , according to the bank, confirms its view that Chinese equities are an asset class “too big, too booming and too dynamic to ignore”.

Geopolitical issues, COVID-19 risks remain

However, some economists are polarized over their outlook on Chinese stocks due to lingering geopolitical tensions and a resurgence in COVID-19 cases that recently prompted shutdowns in two of the country’s most populous cities.

Reports highlighting Beijing’s relationship with Russia could reduce investors’ appetite for Chinese stocks. Beijing has refused to back global condemnation of the Kremlin’s military actions against Ukraine, refusing to describe the attacks as an invasion.

Chinese companies listed in the United States have lost more than $1.1 trillion in market value in recent weeks due to such concerns and Jamie Allen of the Asian Corporate Governance Association told CNBC more than a year ago. a week that the delisting of Chinese companies listed in the United States could occur in the next two to three years. years.

This article was submitted by an external contributor and may not represent the views and opinions of Benzinga.

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