Equity markets around the world have had a rough week, but Chinese tech stocks seem to be having a particularly painful time.
As of 12:30 on October 12th, Hong Kong’s Hang Seng Index had tumbled 4.3 percent for the week, the Shanghai Composite Index was down 6.8 percent, while Shenzhen had fallen 8.8 percent.
Alibaba’s shares hit their lowest point in a year, Xiaomi’s plunged to less than 60 percent of their post-IPO peak.
Cautious of the choppy waters, Tencent Music has chosen to postpone its US IPO until November, according to media reports.
So how to make sense of it all?
Not just the trade war
Blaming the markets’ troubles on Trump and the trade war sure make for good headlines, but the bigger culprit may be something far less eye-catching: interest rates.
For much of the past decade, the US Federal Reserve has kept interest rates rather low, making bonds unappealing options for investors, and driving them to stocks, which offered a potential for higher returns. This helped create what has now become the longest bull market in history.
This benefited no one more than the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google), whose growth, market dominance, and potential for even more success going forward made them the default option for investors. Amazon, for example, has seen its market cap more than quintuple over the past five years.
This has also benefited China’s tech giants, as Alibaba and Tencent, listed in the US and Hong Kong respectively, saw their market capitalizations rival that of their Silicon Valley counterparts. This was based somewhat on their strong performance in China, but also on the wave of exuberance fueling good times for internet companies across the board.
As bond yields rise and investors now have a wider variety of options to choose from, stocks are seeing a dip, including the frothy FAANGs, and their Chinese counterparts.
Rising interest rates in the US also tend to make emerging markets comparatively less attractive, and can lead to capital flight, as investors ditch their high-risk/high-reward environments for safer harbors in the US bond market.
This has caused currency disruptions across emerging markets, from India to Turkey to Brazil. For the Alibaba’s, Tencent, and Xiaomi’s of the world (tech stocks from emerging markets), the environment is not exactly favorable.
While this week’s troubles are not entirely from the trade war, China’s tensions with the US certainly have coincided with trouble for the country’s stocks. While for much of the past year the Hang Seng generally tended to mirror America’s S&P 500, the two have been on divergent paths since June, as tariffs have gone into effect and the two economies seem to be actively decoupling from one another.
See the chart below, with the Hang Seng Index in dark blue, and the S&P 500 Index in light blue:
The dips in the S&P could mean that, despite its apparent earlier insulation, the trade war is starting to impact US markets as well. However, it’s too early to tell.
Among the Chinese tech stocks who have been taking blows during the past week and recent months, few seem to be feeling the pain as much as Tencent.
After hitting a high of HK$476.6 (around US$61) per share earlier this year and earning the title of Asia’s most valuable company, the Hong Kong-listed shares of the Shenzhen-based social media and gaming company have seen their value plummet, losing nearly 43 percent of their value since March of this year as of Thursday, before gaining back a few percentage points Friday.
Tencent has encountered several difficult conditions in 2018. In addition to the headwinds facing other Chinese internet companies mentioned above, Tencent has seen regulatory changes threaten to kill its gaming business in China, which has proven to be a cash cow.
As Chinese authorities now seem to have soured on the gaming industry, the Shenzhen-based behemoth now must change course, announcing a “strategic upgrade” late last month, shifting its focus to areas such as enterprise services and med-tech.
While Tencent still owns one of the world’s most valuable and most-used social media platforms and the company looks as poised as anyone to capitalize on China’s future digital marketplace, such a massive shift in a such a large company’s core business would make any investor nervous.
Worse times ahead?
This year, Chinese technology startups have been racing to list, mostly on stock exchanges in the US or Hong Kong. However, with a souring market, the results have been mixed at best. Many have been forced to lower their funding targets, and a number of high-profile companies have seen their share prices dip to even further below their already-disappointing IPO prices.
Despite less-than-ideal circumstances, Chinese startups continue to list, often out of necessity—private funding, for many of them, is drying up, leaving few other options.
Additionally, a popular sentiment among the Chinese tech and financial communities seems to be that as difficult as the current environment is, the future may be even more so.
“Everyone wants to cash in while they can,” explained one Chinese investment analyst. “Winter is coming.”
The author, who is a corporate trainer, executive coach, and writer based in Bangkok and Beijing, has stock investments in some of the companies mentioned in this article.