In the past few days, Chinese technology stocks have experienced an unprecedented historic plunge. The 323 Chinese stocks trading in the U.S. suffered an overall $326.09 billion of value evaporating by midnight 15 March (Beijing Time), according to Jiemian (China’s most influential digital media outlet specialising in finical and business news).
The drop pushed the prices to a record low since the 2008 financial crisis. However, the stocks began a strong rebound from Wednesday (16 March) onwards. What has happened during this roller-coaster ride, and more importantly, where would all these lead?
What put Chinese tech stocks on a roller coaster ride?
The record drop in Chinese tech stocks was primarily associated with a recent move from the U.S. Securities and Exchange Commission (SEC). On 11 March, SEC notified five China-based public companies for potential delisting from U.S. stock exchanges under the Holding Foreign Companies Accountable Act (HFCAA), which became law in December 2020. The five companies were fast-food giant Yum China, biotech company BeiGene, high-tech firm ACM Research, and medical enterprises Zai Lab and HutchMed. If the above companies fail to provide Public Company Accounting Oversight Board (PCAOB) access to required accounting documents for three executive years by 29 March, they will face a forced delisting. Such notice sparked a broad sell-off in Chinese stocks listed in the U.S., with the Nasdaq Golden Dragon China Index plummeting 10% – its largest drop since 2008.
In addition, media coverage also played a part in China’s stocks fall. On 14 March (E.T. Time), Wall Street Journal published an article titled “Tencent Faces Possible Record Fine for Anti-Money-Laundering Violations “. This report stirred up fear and anxiety in the market. As a result, Tencent’s share price sank for two consecutive days, with each day seeing a fall of more than 10%. Pony Ma, Tencent chairman and cofounder, also saw his net worth tumble to 42.7 billion Hong Kong dollars, according to the New York-based newspaper The Epoch Times.
What led to a strong rebound in China’s stocks?
However, those Chinese companies started to show a strong rebound yesterday. At the time of writing, the Nasdaq China Golden Dragon index had closed up nearly 33 per cent, with several stocks bouncing up by over 50 per cent – the biggest gain since 2001. The five companies named by the U.S. Securities and Exchange Commission are also recovering overnight, with Yum China up by 9.5 per cent, BeiGene 25.1 per cent, Zai Lab 23.2 per cent, HutchMed 19.7 per cent, and ACM Research 26.2 per cent.
The strong rise happened after Liu He’s speech – the vice-premier and head of China’s financial commission – at the meeting of the Financial Stability and Development Committee under the State Council. The meeting was held to study the current economic situation and capital markets, and it called for concrete actions to bolster the economy and stresses economic and financial stability. Regarding the regulation over U.S.-listed Chinese enterprises, the Chinese and U.S. regulatory bodies have maintained good communication and are progressing toward a cooperation plan in this aspect, according to China’s Xinhua News Agency.
Goldman Sachs Research believes that the meeting of the Financial Stability and Development Committee played an important role in guiding the market. It was a gesture made by China’s policymakers, urging that relevant authorities should earnestly shoulder their responsibilities and take measures to keep the country’s major economic indicators within an appropriate range and maintain stable operation of the capital market. Nevertheless, the institution suggests that more specific, market-friendly policies should be introduced soon to support China’s overall economic growth, given that the Covid surge over the past two weeks has already put millions of people into lockdown.
There is another factor for recent Chinese stocks’ bounce-back. On 16 March, the U.S. Federal Reserve announced a quarter-point rise in the benchmark interest rate to bring increasing inflation under control. That is the Federal Reserve’s first rate hike since December 2018. The announcement had a huge impact on the U.S. stock market. It boosted not only the American company stocks, but also the Chinese ones – tech giants like J.D., Baidu and Alibaba saw a rise of over 36% in their stock index.
Amongst all the Wall Street financial giants, Citibank has maintained bullish on Chinese stocks and China stock market. A recent report released by this prominent financial institution pointed out that China set this year’s economic growth target at around 5.5%, indicating strong determination to stabilise growth, which is likely to be followed by active fiscal policy and move towards easy monetary policy. Citibank also thinks that foreign capital will continue to inflow into China, due to the favoured China-US interest rate gap, long term investment opportunities and the need for global assets allocation.