Major Hong Kong listed stocks have been buffeted in recent months over an onslaught of new regulations announced by the Chinese central government. The restrictions kicked off in July, when Chinese private tuition companies covering the national school curriculum were ordered to go non-profit, effectively bringing the $100 billion industry to its knees.
Within a week, the Hang Seng Index fell 9% to 25,086 on July 27, nearly 19.5% below the 52-week peak of 31,183 in February. The decline was largely attributed to the selloff among the technology, private education and healthcare stocks.
The index has since rallied over the last few days – recovering from July’s lows – but the market is bracing for further tightening. Here’s what is happening in the Hong Kong stock market and what investors like you need to look at next.
Tightened regulations on competition and “spiritual opium”
The restrictions on private education companies was just a start. Technology stocks were hit next with antitrust laws and fines. Tencent, in particular, was fined and forced to give up their exclusive streaming rights. To make matters worse, gaming companies were threatened with tighter regulation on online games – which had been dubbed “spiritual opium”.
Food delivery company, Meituan Dianping, was faced with regulations to ensure the welfare of delivery workers, while insurance companies – like Ping An Insurance – and infant milk producers were ordered to curb unfair marketing and pricing practices. Ride hailing app Didi Chuxing was ordered to improve its data protections and enhance user privacy.
To be sure, market watchers remain divided on the intention of the new regulations. Some believe the moves will help recalibrate the market to ensure fair business practices, more equitable distribution of wealth, improve the health of the general population, while fostering greater innovation and competition.
On the other hand, the Chinese central government appears to be sending the message that no Chinese company – no matter how big they become – are above the law. Indeed, the Chinese government has shown that it has the wherewithal to rein in their technology companies in a manner that evades other western governments.
What’s next for investors?
In light of the continuing restrictions, investors need to re-evaluate the Hong Kong stocks they are invested in, and the direction these entities will be taking in light of the new regulations.
If the Chinese state-run paper Economic Daily is to be believed, the new rules are in place to “maintain fair and reasonable market competition” and are not targeted at specific industries or companies.
The Economic Daily commentary also added that China remains committed to “develop the digital economy” and reassured investors that the “rapid growth of China’s digital economy will not change, and China will continue to lead the global digital economy.”
That may signal a potential growth for China’s Big Tech in the medium to long term horizon, though it does not negate the volatility to be expected in the near term.
Many of the industries that have been badly hit in this round of regulatory crackdowns are seeing a kneejerk reaction to the new rules, but still offer fundamentally sound business operations. These include the information technology, payment solutions, online delivery, e-commerce, and healthcare sectors. In fact, some investors have already started to see new investment opportunities among certain oversold stocks.
Here are some stocks to keep on your watchlist.
Hong Kong Stocks Watchlist
|Company||Main Businesses||Price change YTD|
|Alibaba Group Holdings||E-commerce, Payment Solutions, Logistics||-28.73%|
|Kuaishou Technology||Video platform||-76.53%|
|Meituan Dianping||Online delivery||-22.49%|
|NetEase Inc HK||IT, Gaming, Ecommerce||-4.77%|
|Tencent Holdings||IT, Gaming, Payment Solutions||-17.6%|
|Wuxi Biologics Cayman Inc||Pharmaceutical||13.28%|
|Xiaomi Corp||Consumer electronics||-30.64%|
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