(Bloomberg) — The relentless selloff in Chinese technology stocks continued on Monday, as Beijing’s close relationship with Russia raised risks for mainland companies already battered by renewed regulatory headwinds.
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The Hang Seng Tech Index slumped more than 8% in morning trading, with the sector again at the forefront of losses in Hong Kong and China stocks. The Golden Dragon Index, which tracks American depository receipts of Chinese firms, plunged 10% on two consecutive days last week — something that’s never happened before in its 22-year history.
The tumble follows a report that showed Russia has asked China for military assistance for its war in Ukraine. Traders worry that Beijing’s potential overture toward Vladimir Putin could bring global backlash against Chinese firms, even sanctions.
That comes on top of a spate of regulatory worries. The U.S. Securities and Exchange Commission last week named its first batch of Chinese stocks as part of a crackdown on foreign firms that refuse to open their books to U.S. regulators, heightening delisting risks. Also a growing Covid-19 outbreak in China and a lockdown in tech hub Shenzhen are clouding earnings outlook.
“At this stage, we still see the technology space as very vulnerable,” said Jun Li, chief investment officer at Power Pacific Investment Management, adding that the firm is avoiding Chinese ADRs. “It is very difficult to evaluate the risk profile at this stage.”
The Hang Seng Index fell as much as 4.1% on Monday, while China’s benchmark CSI 300 index was down as much as 2.1%. The onshore yuan also fell to its weakest in a month as sentiment toward Chinese assets turned sour.
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Both Hang Seng Tech Index and the Nasdaq Golden Dragon Index have lost more than 60% from their peaks, respectively. On Monday, Alibaba Group Holding Ltd. sank as much as 8.4% in Hong Kong while Tencent Holdings Ltd., which is headquartered in Shenzhen, was down more than 4%.
“We don’t see a major catalyst in the near term,” for China stocks, though earnings results may create some share price volatility, said Marvin Chen, a strategist at Bloomberg Intelligence. “For a material re-rating of China tech, we may need to see a shift in regulatory tone, and we didn’t get that from the recently concluded NPC meeting.”
Even amid the rout, traders in the mainland have continued to snap up Hong Kong stocks, though that’s proving insufficient to buttress share prices. They have been net buying Hong Kong equities via the stock connect in every session since Feb. 22.
The historic slide in tech stocks is baffling China bulls, the number of which had grown this year as strategists bet on a rebound thanks to policy easing by the People’s Bank of China.
Goldman Sachs Group Inc. strategists toned down their optimism slightly on China stocks, slashing their valuation estimates for the MSCI China Index.
“We stay overweight China on well-anchored growth expectations/targets, easing policy, depressed valuations/sentiment, and low investor positioning,” but lower our 12-month valuation target from 14.5 times to 12 times on changes in the global macro environment and higher geopolitical risks, strategists including Kinger Lau wrote in note dated Monday.
The MSCI China Index has seen its valuation more than halve from a Feb. 2021 peak. The gauge is trading at about 9 times its 12-month forward earnings estimates, versus a five-year average of 12.6.
For some strategists, now is the chance to add China stocks.
“Valuations are at historic lows and we continue to believe these are good entry points for investors who can look past near-term volatilities,” said Ivan Su, analyst at Morningstar Investment Management Asia Ltd. “The decline we are seeing in Hong Kong is most likely just sentiment-related. At the end of the day, there’s nothing fundamentally changed about the underlying businesses.”
(Updates with yuan movements. An earlier version corrected Alibaba spelling.)
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