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Investing in Chinese Stocks

As one of the largest populations in the world and the second-largest economy, it is understandable why many investors find China appealing. China also has one of the largest internet markets, and investors continue to focus on Chinese technology stocks in e-commerce, social media, streaming, cloud computing, 5G, and mobile gaming.

Many Chinese technology stocks are high-growth, blue-chip names that are part of the two primary Chinese stock exchanges, the Shanghai Stock Exchange (SSEC) and Shenzhen Stock Exchange (SZSE). Some of the Chinese Technology stocks by market capitalization include Tencent Holdings Ltd. (TCEHY – 663.5 billion), Alibaba Group Holdings Ltd. (BABA – 563.5B), Meituan Dianping (MPNGF – 214B), Pinduoduo Inc. (PDD – 138B), (JD – 95.75B), Xiaomi Corporation (XIACF), NetEase (NTES – 68B), and Baidu (BIDU – 52B).

Although most investors are aware of the higher risks associated with investing in international stocks, investors were shocked by Chinese regulators imposing swift and broad restrictions that included fines, penalties, and bans on Chinese companies.

Last year Alibaba (BABA), China's largest e-commerce company, incurred the wrath of the Chinese government. Chinese regulators opened probes into their internet platform that subsequently led to the suspension of the ANT Group IPO. In addition, China imposed a $2.8 billion fine on BABA for anti-competitive practices and forced BABA to change its practices.

In recent months, financial regulators in China have also ordered big internet companies such as Tencent to cease their financial service operations and focus on payments. Other anti-trust inquiries and fines are likely to be implemented on other large Chinese technology-related companies.

Yesterday, China's cyberspace regulator announced a cybersecurity investigation into Chinese ride-hailing giant Didi Global (DIDI). The regulators demanded Chinese app stores stop the downloads of Didi's app. Interestingly, the crackdown on DIDI occurred days after the company listed its shares to trade on the NYSE. The news sent many Chinese companies, including the recently listed stocks in the US, to decline sharply. China's technology giants have now lost well over $800-plus billion market-cap since their peaks earlier in the year.

In previous Chinese government's crackdowns on tech stocks, its impact was relatively minor and brief, lasting from six months to one year.

Will China's scrutiny of the country's big tech giants and the implementation of broad-based regulations to curb the monopolistic practices slow the torrid growth of these tech names?

Will the recent crackdowns signal the end to the explosive growth and the start of a more volatile trading range market environment, at least from a near-to-intermediate-term basis?

Technically speaking, the near-term technical weaknesses in the Chinese stock market, Chinese ETFs, and big-cap tech names suggest further volatility. However, the intermediate-to-longer term trends remain favorable, suggesting consolidations rather than market tops. Enclosed below are the key technical levels for Shanghai Stock Exchange (SSEC), iShares China Large-Cap ETF (FXI), and the Chinese big-tech giants.

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

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