After a year-long crusade by the Chinese government against their own technology firms for monopolistic practices, China might finally be easing up on the tech sector.
At the latest Politburo policymakers meeting, the Chinese Communist Party (CCP) emphasised technological self-sufficiency and innovation, and left out any mention of antitrust or “disorderly expansion of capital”. Maybe slowing GDP growth, the real estate crisis sparked by Evergrande, and intensifying competition from the U.S. has given the Chinese authorities a wake up call.
China’s central bank PBOC has also recently cut the reserve requirement ratio (RRR) for banks, releasing ~$188B of liquidity to support the economy, at least in the short term.
Beijing leaves antitrust out of 2022 economic goals, focuses on technological development, read here.
China frees up US$188 billion for banks in second reserve ratio cut this year, read here.
The portion of our portfolio exposed to Chinese tech was impacted greatly by the ensuing bear market. I’ve recently closed my position in Alibaba (BABA) at a 53% loss (ouch) and I’m holding onto the Lion-OCBC Securities Hang Seng Tech ETF (SGX:HST) currently down 19%.
However, recently there have been some encouraging signs that the great Chinese tech sell-off might be bottoming out.
Looking at the price chart of the Hang Seng Tech Index HSTECH, we can see that the index has bounced off the roughly 5,770 points level for the third time recently on 6th Dec 2021. If the CCP indeed does not continue cracking down on the tech sector by introducing new policies or regulations, I expect that this level should hold in the short term.
China Big Tech valuations have also been reduced close to historic lows, e.g. Alibaba, JD.com, Xiaomi, and Baidu are trading at low single digit P/S ratios. Tencent is still pretty resilient at 6.9x P/S but that’s also considered low if you look back historically.
In my opinion, the risks in Chinese tech stocks seems to be receding and the risk-reward appears to be becoming more and more attractive.
That said, we’re far from being out of the woods. The longer term downtrend which started since mid-Feb this year is still pretty much intact. Until we have a clear and sustained breakout from this decline, there’s definitely still risk of more pain to come especially if the index falls through the ~5700 point support level.
My game plan
Currently my only exposure left to China is through the Lion-OCBC Securities Hang Seng Tech ETF (SGX:HST) and a small position in Tencent (HKSE:0700).
Looking at the top 5 constituents of HST – Kuaishou, Meituan, JD, Tencent, and Alibaba – only Alibaba still appears to be in a downtrend. Kuaishou, Meituan, and Tencent appear to be in consolidation which JD has even started a gradual uptrend.
If you’re not familiar with Lion-OCBC Securities Hang Seng Tech ETF, I’ve previously written an introduction and analysis of the ETF here.
I’m considering to restart slowly averaging into HST, starting with my proceeds from the Alibaba sale. However, I would first like to see HST break through the $1.12 short-term downtrend line and ideally also break above the $1.18 level before buying more. In the long term, I believe the prospects for Chinese tech is bright barring any interventions from the CCP of course.
Currently, our portfolio exposure to China is only at 4% but my plan is to increase that to as much at 10% once we’re out of this rut.
If you’re interested to invest into Chinese stocks but prefer a broader ETF covering other industries besides technology, you can also consider the Lion-OCBC Securities China Leaders ETF (SGX:YYY). YYY seems to be faring pretty well, and even appears to potentially start an uptrend if it can break through the $2.11 level.
I’ve also previously written an introduction and analysis of the Lion-OCBC Securities China Leaders ETF (SGX:YYY) here.
Are you bullish or bearish on Chinese tech right now?
Disclosure: I’m long Hang Seng Tech ETF (SGX:HST) and Tencent (HKSE:0700).
Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.
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