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China tech selloff trigger worry about Hong Kong exits

The decline, as well as the Chinese regulators’ moves, have raised the concerns of foreign investors exodus from Hong Kong
By Goh Thean Eu and Hui Ching-hoo   
July 30, 2021

Chinese technology stock selloffs this week has sparked concerns about a potential exodus from Hong Kong’s financial markets, but market participants are largely unfazed and remain upbeat about the long-term prospects.

The Hang Seng Tech Index shed 14% in the two-day selloff on July 26 and 27. The benchmark comprises 30 of the largest technology companies, including Chinese tech giants Alibaba Group Holdings Ltd, Lenovo Group Ltd, and Tencent Holdings Ltd. Meanwhile, the Shenzhen Composite Index lost 6.22% and the Shanghai Composite Index fell 4.76% over the two-day period.

The decline was triggered by new reforms and guidelines from Beijing. China’s antitrust regulator announced on July 26 a set of guidelines for food delivery platforms that included paying delivery personnel at least the local minimum wage. And regulators published reforms that will alter the business models of private firms teaching the school curriculum.

The stock indices have since recovered but are still below pre-selloff levels.

“While regulatory tightening is not new in China, this time markets are pondering the intention as it appears to go beyond the normal frameworks and require reassessment,” Frank Tsui, senior fund manager and head of environmental, social and governance investment at Hong Kong’s Value Partners Group, tells Asia Asset Management (AAM).

He sees the “escalated regulatory activism” in a positive light. “We view the recent policy implementations and draft consultations in various sectors…as part of the long-term quality growth agenda – to pursue equality, balanced developments,” he says.

“Therefore, despite the near-term pains to curb the power of large corporates with monopoly potentials and impacts to social harmonious, the agenda to address long-term quality growth will offer quality outlook and we focus on identifying the potential de-rating and re-rating developments in respective areas,” he adds.

But Nick Marro, lead of global trade at The Economist Intelligence Unit, says the risk is of the kind of messaging that these moves send to international investors.

“China's regulatory response, including in terms of how rapid things can change, is illustrative of the state's paramount importance in the economy and financial markets. That's not new, but these developments should re-emphasise this to investors, some of whom may have assumed – or may continue to assume – that a relatively more hands-off approach would persist indefinitely,” Marro writes in a report.

Some foreign investors are already voting with their feet. According to a report in Barron’s on July 28, New York-based ARK Invest has exited nearly all its positions in Chinese stocks held through its ARK Innovation ETF. The ETF had an 8% allocation to Chinese stocks as recently as February.

But David Quah, managing director for external asset management at HeungKong Financial Group in Hong Kong, points out that some of the stocks sold by the ETF are listed in the US, and some in Hong Kong.

“Therefore, it is not directly relevant to the [question of] foreign investors’ exodus in Hong Kong,” he tells AAM. "Also, the ARK ETF has cleared most of its Chinese stocks, and there's not much market impact."

Moreover, he notes that worries about a foreign pullout are nothing new and come up from time to time.

“History has proven that the Hong Kong market has the institutional strengths to facilitate both entries and exits from foreign investors and this resulted in foreign investors having confidence to come back again when positive sentiment returns,” Quah says.