Cathie Wood’s US$25.5 billion flagship investment fund began 2021 as one of the most enthusiastic, and biggest portfolio investors of Chinese technology companies listed in Hong Kong and the United States.
As June turned into July, enthusiasm dissipated into wariness. Didi Global’s US$4.4 billion New York initial public offering (IPO) on June 30 exploded into a debacle described by Chinese regulators as a “deliberate act of deceit,” a characterisation that promises severe repercussions for the company behind the biggest Chinese stock offering in the US since 2014.
Amid the blow back, Ark Innovation ETF reversed course, trimming its US$1.66 billion holdings of China stocks, from as much as 8 per cent of its portfolio in February to 0.8 per cent as of July 29, according to filings.
Ark’s disposals included 5.9 million shares of Tencent Holdings, 6.8 million shares of Tencent’s games publisher Huya, and 2.7 million shares in the internet search engine Baidu. A stake of 5.4 million shares in real estate platform operator KE Holdings, also known as Beike, has dwindled to a mere 1,270 shares.
The New York-based fund, which invests in what it calls “disruptive innovation,” was one of the scores of US-based institutional investors that grew wary of China’s regulatory crackdowns on the country’s technology champions. Fuelled by rumours of tougher US rules on Chinese stock holdings, concerns about the China risk spilled over into a selling frenzy, culminating in this week’s US$390.7 billion wipeout in Hong Kong that knocked it off the third place into the world’s fourth-largest capital market, behind New York, mainland China and Japan.
The combined value of Shanghai and Shenzhen fell 4 per cent, or by US$492.5 billion, from the July 22 high, reminding some traders of the market rout in the summer of 2015, which erased US$5 trillion from China’s markets. Hong Kong’s market value fell by 20 per cent that summer.
“China’s regime is different and the government has more instruction and guidance than other foreign governments,” said Thomas Kwan, chief executive officer at Harvest Global Investment in Hong Kong. “The impact on the industries will be more direct, so it’s reasonable that the market will have a bigger reaction.”
The wild swings underscore the growing China factor in Hong Kong, now the world’s third-largest capital market after New York and the combined bourses of Shanghai and Shenzhen. From a window for foreign investors to access yuan-based assets in its early days of reforms, the city has gradually turned into a listing hub for China’s emerging industries.
Three of the five most valuable stocks in Hong Kong’s benchmark Hang Seng Index are technology champions domiciled in mainland China. Alibaba Group Holding, Baidu, Bilibili and New Oriental Education and Technology Group have all conducted secondary offerings in the city after Hong Kong overhauled the listing rules and the China-US ties soured.
Market volatility will probably persist for the city’s US$6.2 trillion market, according to brokerages including Bocom International and China Renaissance Securities. Most China-domiciled companies traded in Hong Kong are in the cross hairs of regulatory crackdowns. In all, mainland companies make up nearly 80 per cent of the daily turnover and value of Hong Kong’s stock market.
An electronic board showing stock prices at a securities brokerage in Beijing on 2 August 2019. Contrary to global conventions, China represents losses and declines in green, and uses red to denote gains and advances.Photo: EPA-EFE
“There will be uncertainty overhang and volatility,” said Bocom International’s managing director Hong Hao. “Day traders may like a more volatile environment, but it’s still too early to buy for long-term investors.”
The implied 30-day volatility on the Hang Seng Index surged to its highest in 14 months this week, while the gauge on China’s CSI 300 index is at a five-month high, according to Bloomberg data.
Mainland traders also hold a bigger sway on stock prices, since they gained access to the Hong Kong market via the Stock Connect link from 2014. They contribute a fifth of turnover in Hong Kong, many of whom are individual investors who chase momentum and dump on panic to amplify stock swings.
They sold Hong Kong-listed stocks for nine consecutive days on Thursday, dumping combined HK$43 billion (US$5.5 billion) worth of shares including Tencent and Meituan.
Hong Kong’s move to showcase technology unfortunately fuelled the volatility, as the increased weightage of internet stocks in the Hang Seng benchmark added to the overall market’s slump when the sector faced selling pressure, said Harvest’s Kwan. A large proportion of foreign funds and index derivatives products have also made the market more vulnerable to bigger fluctuations, he added.
For now at least, the fiercest sell-off may be taking a breather, as Beijing’s authorities sought to calm frayed nerves. State news agency Xinhua published a widely circulated analysis on July 28 after two days of market rout to emphasise the sound fundamentals of China’s economy. Several state-run newspapers read by market investors also piled in to talk up sentiments.
Hong Kong is now the world’s cheapest major stock market, with a price-to-earnings ratio of 11.4 times. But it is still too early to call a bottom for the market as headline risks abound at home and abroad, according to SPDB International.
The Hang Seng Index will probably close the year at 23,000 points, implying another 12 per cent to fall from current levels, according to a forecast by Guosen Securities, which cut the 2021 earnings forecast for companies on the Hang Seng by 14 per cent.
Companies in big data, property, commodity, education and property management industries should be avoided, Guosen said, while recommending investors buy the stocks linked to new energy and semiconductors.
“Given the rising risk premium, the geopolitical risk and the volatility of the yuan, Hong Kong’s market is still in the process of releasing selling pressure and seeking a bottom,” Bruce Pang, head of macro and strategy research at China Renaissance in Hong Kong. “There will probably be more negative news that causes disruption and risks.”