China tech stocks enter correction as recent rebound fizzles out

China’s tech stocks unwound recent gains to enter a technical correction on Tuesday, with analysts questioning if fresh probes on internet giants would spark another downturn in the sector.

The Hang Seng Tech Index fell 2.1% after tumbling 3.9% on Monday, taking declines from a June peak to 11%. Alibaba was among the biggest drags as it dropped 5.4% after the authorities levied fines on the firm and Tencent over the weekend.

The losses mark a swift reversal in sentiment toward China’s tech shares, which were recently buoyed by speculation that a crackdown on the sector was easing. The fines on Alibaba and Tencent have revived talk that the authorities may tighten oversight of internet firms again.

While the fines were “negligible,” said Redmond Wong, a strategist at Saxo Capital Markets, “the penalty reminded investors about regulatory risks over Chinese internet companies.”

Other China stock gauges were also in the red on Tuesday. The CSI 300 Index was down 0.9% while the Hang Seng Index lost 1.3%.

Souring sentiment

The recent decline in tech shares and the broader Chinese market are a reminder of how quickly sentiment can change, and how difficult it is to find a bottom. Before the losses set in, the tech index had rebounded almost 50% from a March low and the benchmark CSI 300 Index was closing in on a bull market as the authorities eased Covid-19 restrictions.

Bets on the reopening theme are quickly evaporating as a growing outbreak in Shanghai fuels fears of a new lockdown. Concerns of a fresh crackdown on the tech sector have emerged even after the regulator said it will fully support the development of firms that were penalized.

Against this backdrop, the Hang Seng Tech Index fell past its 100-day moving average on Tuesday. The daily price average had worked as a major resistance for the index since March 2021 when it slipped below that line.

Some strategists still see value in the sector. For example, Goldman Sachs Group Inc. analysts favour local internet services and e-commerce names in the second half on expectations that profit revisions will stabilize and earnings growth inflect positively from the third quarter, according to a note.

Next cue

In the days ahead, investors may look to the current earnings season to assess the impact of recent lockdowns and gauge how companies view the outlook. Some of that thinking is likely to provide the next cue, according to BNP Paribas Asset Management.

“There’s some more conviction that the second quarter is going to be better than expectations,” said Zhikai Chen, head of Asian equities at the French asset manager. “When we look at the second quarter numbers right now, it’s quite clear that some of the companies have been reaching out to sell-side analysts and that’s filtering through to earnings upgrades.”

© 2022 Bloomberg

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