Once bitten, twice shy: Why investors aren’t betting on China’s tech rebound

China’s tech stocks just had their best week since December. But for many investors who have been burned chasing past rallies, more signs of fundamental improvement are needed before they jump back in.
The industry still faces a raft of challenges including a sluggish economic recovery, and uncertainty about whether the end of the official crackdown will be followed by more concrete support. There are also doubts over whether the companies will be able to generate stronger earnings even if the regulatory overhang has indeed been removed.
“Just because we may be exiting the tech regulatory woods, doesn’t mean that the tightened regulations over the past few years for the internet platform companies will be relaxed, and that corporate profits could return to pre-Covid levels,” said David Chao, a strategist at Invesco Asset Management in Singapore.
The Hang Seng Tech Index, which tracks 30 of the Chinese tech firms listed in Hong Kong, jumped 8.4% this week. Investors turned bullish as fines levied on Ant Group Co. and Tencent Holdings Ltd. were taken to mean the long crackdown is over, and after Premier Li Qiang called Internet firms the “trailblazers of the era” at a meeting on Wednesday with executives from the sector.
Still, the tech gauge remains 60% below its pandemic-era high set in February 2021, before the years-long crackdown helped wiped out as much as $2 trillion in shareholder value.
Change of tone
The government’s recent change of tone seems to have been driven by its effort to revive growth as the post-pandemic recovery loses momentum. The property market is showing signs of further weakness, exports are contracting and the threat of deflation is increasing.
The more positive messaging alone though won’t be enough to generate a sustainable recovery for the tech sector, said Terrence Kan, director and client portfolio strategist at Fidelity Investment Management in Hong Kong.
“The fines, along with other recent measures, confirm our view that we won’t see new round of regulatory tightening over the Chinese technology companies,” he said. “But for a meaningful recovery in the Chinese stocks, we still need more stimulus.”
Mainland investors also appear unimpressed. Traders in Shanghai and Shenzhen cut their holdings of Hong Kong stocks by HK$8.5 billion ($1.1 billion) in the six days since news of the fines being levied on Ant and Tencent were announced July 7. Tencent and the CSOP Hang Seng Tech Index ETF were among the 10 top selling targets, according to data compiled by Bloomberg.
“The crux of the issue is that people are still scarred from the internet tech anti-monopoly crackdown, and don’t feel assured that private firms will get the same treatment as state-owned firms,” said Wu Xianfeng, a fund manager at Shenzhen Longteng Assets Management Co. in the southern city of Shenzhen. “There’s no knowing if they will be targeted again.”
While the improving regulatory environment is expected to help a recovery in earnings, analysts have so far been conservative in their forecasts. Profit estimates for the members on the Hang Seng Tech Index have climbed about 12% since April, but they are still well below pre-Covid levels.
“Those days of unbridled internet growth are behind us,” Invesco Asset Management’s Chao said. “The sector’s outlook is somewhat murky given the difficulty these companies have to raise offshore capital and the government’s continued focus companies that create common prosperity – a tall order for e-commerce companies.”