The rally in Alibaba Group Holding is reassuring stock analysts that Beijing’s regulatory crackdown is over. That may not reduce the risk premium in the Chinese stock market just yet, as Beijing’s investigation into Micron Technology memory chips has opened a new front in the US-China tech war.
China last week announced a cybersecurity investigation into the local sales of the US memory chips maker, targeting a US company for the first time in response to US export curbs on advanced chips and gear. The rivalry could upset the feel-good factor sparked by Alibaba’s internal business reorganisation.
At risk is US$84 billion of market value that investors have pumped into Alibaba’s shares in Hong Kong and New York on the news, and the US$3 billion-odd inflows that money managers have ploughed into the Stock Connect’s southbound and northbound channels last week.
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“China’s undefined ‘investigation’ into Micron sends a clear message to Washington that new tech restrictions will come at a significant cost,” said Brock Silvers, managing director at Kaiyuan Capital in Hong Kong. “The Micron action thus represents China moving from a containment strategy to one of retaliation. As both sides seem to be acting with logic and conviction, the market should expect that the tech war has yet to reach its nadir.”
Brock Silvers, managing director at Kaiyuan Capital in Hong Kong. Photo: Handout alt=Brock Silvers, managing director at Kaiyuan Capital in Hong Kong. Photo: Handout>
Micron slumped 4.4 per cent in New York on Friday. The company said in an email reply to the Post on Monday that it is in communication with the Chinese regulator and “cooperating fully”.
“Micron is committed to conducting all business with uncompromising integrity, and we stand by the security of our products and our commitments to customers,” it said.
The tech war is just one facet of the US-China geopolitical tensions that have simmered for years, taking many forms from state surveillance to data security and access to advanced semiconductor technology and equipment. China views US export curbs as an attempt to contain its progress.
The Micron affair clouds otherwise bullish sentiment around Chinese stocks after investors embraced Alibaba’s internal business reorganisation, and cheered rival JD.com’s spin-off and listing plans. The Hang Seng Index capped a three-week winning run, its best winning streak since January.
Alibaba is the owner of the South China Morning Post. The e-commerce leader last week unveiled a revamp plan that helped balloon its market value by HK$334.3 billion (US$42.6 billion) in Hong Kong and US$41.8 billion in New York amid a chorus of approval from analysts.
The restructuring served as “the ultimate stamp of reassurance that regulatory tightening has ended”, Morgan Stanley said, with Beijing allowing the private-sector economy to rebuild confidence. Internet-platform operators will enter “a period of accelerated revenue growth”, Shanghai-based GF Securities said.
“From a business point of view, there could be a case where the sum of the parts is greater than the whole,” said Wang Yan, chief China strategist at Montreal-based research firm Alpine Macro. “From a regulatory point of view, Alibaba may use this to make peace with Beijing on monopoly concerns.”
Since China canned Ant Group’s jumbo dual-stock offering in November 2020 and launched an investigation into ride-hailing and online tutoring firms throughout 2021, internet stocks have borne the brunt of a market sell-off. As a result, Alibaba, Tencent Holdings, Meituan and DiDi Global have paid hefty fines and had their wings clipped.
The price-earnings multiple of MSCI China Index, the broadest measure of Chinese stocks listed at home and abroad, has fallen to 10.7 times currently, according to Goldman Sachs, from about 15 to 18 times preceding the crackdown.
The members of the Golden Dragon China Index are now trading at about 27 times multiple, the cheapest since 2014. Their Hong Kong listed peers, tracked by the Hang Seng Tech Index launched three years ago, are also struggling at a lower-than-average price-earnings ratio, according to Bloomberg data.
“The Alibaba reorganisation confirmed an important trend – these internet firms are not going to just sit there and let regulation erode away their growth and profits,” said Wang Qi, CEO of MegaTrust Investment in Hong Kong. Technology firms “have been making bottom-up changes to mitigate” regulatory risks, including lay-offs, improving operating efficiency, divesting noncore businesses and now a strategic move to reorganise.
“Our view has been that Beijing’s harsh regulatory crackdown was over since late last year, which is one of the reasons for our bullish stance on Chinese stocks,” Alpine Macro’s Wang said. “But it could take a while for investors to regain confidence in China’s regulatory environment.”
That new-found confidence will be tested this week as the US-China tech war intensifies and investors brace for the Micron fallout. A secular uptrend in geopolitical tensions “warrants higher premiums on Chinese offshore risk assets”, according to BCA Research in Montreal.
“That message [from China] goes beyond chips and seemingly foreshadows the expected US ban of TikTok,” added Kaiyuan Capital’s Silvers. “It was always unrealistic for the US to sanction Huawei, ZTE and the firms on its Entities List without eliciting a strong reaction from Beijing.”
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.
Source: https://finance.yahoo.com/news/chinese-stocks-face-micron-test-093000211.html