Tue. Jul 5th, 2022


It is not just oil prices that bring back memories of 2008. Chinese stocks listed in Hong Kong this week fell the most since the financial crisis. Expect oil prices to normalize before Chinese stocks do.

After a rough Monday, declines continued on Tuesday despite strong Chinese economic data. Hong Kong’s Hang Seng index dropped by 6 per cent, with the Shanghai Composite index close behind. Shares in tech giants Alibaba and Tencent fell by more than a tenth.

Severe lockdowns in China are partly to blame. China has partially locked down Shenzhen and Shanghai, two of its wealthiest cities, as it struggles to control a surge in Covid-19 cases. Shenzhen is especially important to China’s economy. It is a hub for local tech groups such as Tencent as well as manufacturers such as Taiwan’s Foxconn, supplier to global companies including Apple.

Lockdowns have pushed the number of container ships waiting off some of China’s biggest ports to almost double that of February, according to Bloomberg data.

Yet the biggest risk remains the potential of US-led sanctions. US officials believe China responded positively to Russian requests for weapons and military assistance. Beijing hit back at what it claims are US efforts to spread disinformation.

Nonetheless, China remains exposed to western sanctions imposed on Russia. Many Chinese companies, especially in high tech sectors such as chipmaking, continue to rely heavily on foreign equipment and technology for manufacturing. Future earnings of these companies, including the country’s biggest chipmaker SMIC, could be at risk if they continue to sell to Russia.

The 37 per cent decline in the Hang Seng index in the past year means its valuation on a forward earnings basis has more than halved over the period. The city’s benchmark index and the Shanghai Composite index now both trade at just 1.1 times book value, even below the lows of the global financial crisis.

But that is not a sign of a bargain. More drastic, citywide lockdowns in Shanghai, China’s wealthiest metropolis, are looming. The government has not signaled its intent to support growth, nor stem the tech sell-off. On Tuesday the central bank decided not to ease interest rates. Local regulators are continuing to crack down on tech groups. The worst is far from over for local stocks.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.



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