Alibaba Group Holding Ltd. and Bilibili Inc. led another rally in China tech stocks on Wednesday, giving stock bulls renewed hope that a nascent rebound in tech shares could sustain.
The Hang Seng Tech Index jumped 4.8% after the Chinese government approved 60 new game licenses, bolstering bets that a yearlong crackdown that wiped out US$2 trillion ($2.75 trillion) in market value from the sector was nearing its end. The gauge pushed further away from its recent downtrend and climbed above a key moving average for the first time in 15 months.
The gaming approvals come on the heels of a report this week that China is wrapping up its investigation into Didi Global Inc. -- a major flash point in Beijing’s move to curb the power and influence of the nation’s largest companies. To some investors, this suggests a marked turnaround in a sector that until recently had been considered uninvestable.
Having spent most of the past year under pressure, China’s tech gauge has also started to outperform the Nasdaq 100 Index in recent months as the Federal Reserve’s aggressive tightening and inflation woes hammer US stocks. Wednesday’s buying frenzy lifted most members of the Hang Seng Tech gauge including Tencent Holdings Ltd. and NetEase Inc., despite the companies being absent from the approval list.
The rally in Chinese tech stocks continued in the US, with Alibaba up 4.3% and Bilibili rising 8.8% in premarket trading. The KraneShares CSI China Internet Fund, an exchange-traded fund that tracks Chinese tech stocks, gained 3.2%, extending a 9% rally in the previous two sessions.
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“The market is still excited about the potential restore of Didi on Apps stores and feels a bit risk-on sentiment,” said Willer Chen, an analyst at Forsyth Barr Asia Ltd. “The newest batch of gaming license approval, though Tencent and NetEase are not on the list, is also good news.”
Beijing’s wide-ranging tech crackdown spread to online gaming last summer when regulators introduced stringent measures to curb addiction. China’s entertainment regulator on Tuesday approved licenses for 60 new games in what is seen as a step toward policy normalisation.
All Encompassing
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From the sudden scuttling of Ant Group’s IPO in late 2020 to sweeping reforms for online tutoring firms last summer to a shake-up of Macau casinos, Beijing’s hallmark crackdown on the private sector had forced a rethink of not just where but whether investors should put their money in the world’s second-largest economy.
Reforms have landed most heavily on tech companies, with nearly US$2 trillion of market value wiped out since a 2021 peak. While the Hang Seng Tech gauge has risen almost 40% from its mid-March low, it remains more than 50% below its 2021 high.
The outlook looks a bit brighter this time around. Forward earnings estimates for companies on the sector benchmark have risen by about 4% from a low in May after slumping nearly 11% from a peak in March, according to data compiled by Bloomberg.
Bullish calls on China stocks are growing by the day. Ayaz Ebrahim, a portfolio manager for JPMorgan Asset Management, said Wednesday investors can “get more juice out of China” over a six-month period.
Still, much will depend on the path of the economy, with China’s strict Covid Zero policy leaving the spectre of future lockdowns hanging. Investors that have repeatedly been burned by buying tech shares on the dip are still waiting for more actions from Beijing after a March promise from China’s top economic official -- Vice Premier Liu He --to end the tech crackdowns.
And some of the more bearish strategists still aren’t convinced. DZ Bank AG’s Manuel Muehl, who was the first among analysts tracked by Bloomberg to issue a sell rating on China tech last year, sees current optimism as premature and is sticking to his recommendation.
“When the economy is struggling, the tightenings will take a break and the policy will become more pro-growth,” Winnie Wu, China equity strategist at BofA Securities, said in a Bloomberg TV interview. “So during those times we could see a strong trading rally of the internet sector in general, because they remain to be some of the largest, most liquid stocks that investors are familiar with.”
