China tech shares extended declines to test fresh lows last year, following a slump in their U.S. listed peers' concerns over withdrawal from American exchanges.
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The Hang Seng Tech Index, a gauge of most Chinese tech giants traded in Hong Kong, fell by 2.9% to the lowest since its launch in July 2020. The biggest losers were Trip.com Group Ltd. and Alibaba Group Holding Ltd., both of which sank at least 8.3%. Both companies have American depositary receipts.
The decline came after the Nasdaq Golden Dragon China Index fell 9.1% on Friday, the most since 2008, due to concerns that Didi Global Inc.'s delisting would put pressure on other Chinese firms.
Castor Pang, head of research at Core Pacific Yamaichi said that the selloffs in the dual-listed stocks in both Hong Kong and the U.S. will continue because of U.S. regulation scrutiny. It could be difficult for them to submit accounting records to the U.S. government. U.S. regulators tried to boot Chinese companies off American stock exchanges for not complying with Washington's disclosure requirements last week. A delisting from the US stock market could increase the cost of capital for Chinese firms and reduce investor pool.
Didi pulled out of the New York Stock Exchange just five months after it was debut intensified investor angst over the listing status of mainland firms in the U.S. as Beijing tightens its grip on the data-rich private sector. In the last week, Bloomberg reported that China plans to impose more restrictions on companies going public on foreign stock markets.
The US and Chinese regulators have worsened sentiment on tech shares after a disappointing earnings season. The Hang Seng Tech Index has plunged 47% from a February peak, wiping out about 1.5 trillion of its members' combined market value.
Selina Sia, head of greater China equity research at Credit Suisse Private Banking, told Bloomberg Television that policy concerns are still the key. That is negatively affecting valuations. The price of Alibaba is 14 times its 12 month projected earnings in Hong Kong, down from a peak of 30 times in August last year, while Trip.com has seen its value halved over the past seven months.
The US institutional investors currently own around $700 billion of Chinese stocks across A shares, H shares, and ADRs. The American mutual funds would take up to two months to unwind their holdings in U.S. or Hong Kong-listed Chinese stocks, according to Goldman Sachs Group Inc. analysts including Kinger Lau.
The note says that the US market has offered higher valuations than Hong Kong for Chinese companies that are looking to go public because of the liquidity and investor composition reasons.
Hong Kong's Hang Seng Index fell by as much as 1.7% on Monday.
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