The S&P/BNY Mellon China Select ADR Index, which tracks the American depositary receipts (ADRs) of major US-listed Chinese companies, dropped 5.9% on Friday after Beijing moved to bar tutoring for profit in core school subjects, triggering a collapse in the shares in the sector.
It was the latest in a series of actions by Beijing that have caused the index to lose 18.8% since the beginning of the year. A string of cybersecurity investigations by Chinese regulators into major technology companies such as Alibaba Group Holding Ltd and Baidu Inc has prompted many investors to dump their shares.
China’s latest crackdown on technology firms was announced just two days after ride-hailing giant Didi Global Inc went public in New York at the end of last month. Its shares are down 42% since the initial public offering.
The Chinese Communist Party’s uneasy relationship with private business has always weighed on the minds of Western investors who seek legal and regulatory certainty to place their bets.
Yet Beijing’s recent moves are unsettling even seasoned investors who are otherwise used to navigating corporate China’s murky auditing and poor governance in order to chase growth in the world’s second-largest economy.
Max Gokhman, head of asset allocation at Pacific Life Fund Advisors, where he oversees more than $30 billion in assets, said he believed Beijing’s end game was to bring capital back to China. He said he was bullish on many Chinese consumer-facing companies over the long term because of the country’s emerging middle class, but that it was difficult to price stocks in the short term.
“The near-term picture is murky as Chinese ADR issuers are caught in the crossfire between US regulators that are asking for more disclosures and Chinese regulators that demand privacy for data on Chinese citizens,” Gokhman said.
Some investors deem these investments too risky. Paul Nolte, portfolio manager at Kingsview Investment Management in Chicago, said he has not held any China-related stocks in his portfolio for the last two years because of the political risk.
“What we have done is moved away from the fundamentals of the companies. It has now become a political football and there is no way to analyze that and put it into a financial spreadsheet,” Nolte said.
The vexing question for many investors is whether they can call the bottom in these stocks. With the S&P 500 at record levels after rallying more than 95% from its March 2020 lows, they are trying to establish whether the next rally could come in Chinese ADRs.
The discrepancy in the trajectory of the shares of US and Chinese companies has been especially profound in the technology sector. The regulatory clamp-down has suppressed the value of Chinese tech firms just as US technology giants are riding high after work-from-home and big data trends accelerated during the COVID-19 pandemic.
“At this point, it is anyone’s guess where (Chinese ADRs) will bottom, and where you are seeing this money go is to the US big tech stocks,” said Joel Kulina, a senior trader at Wedbush Securities who specializes in technology stocks.
