Hong Kong and Chinese shares shot higher with a vengeance on Wednesday after days of heavy selling, with China's vice premier in charge of economics saying the Beijing government will intervene to support stocks. The official also hinted at a deal to allow Chinese shares to remain listed on U.S. markets.
In Hong Kong, where the market has surrendered 25.7% of its value in the last month, the Hang Seng index bounced almost 10% in intraday trading, closing on gains of 9.1%. The Hang Seng Tech Index soared 22.2%.
There were rip-roaring advances of more than 25% for noteworthy U.S.-listed names such as JD.com ( (JD) and HK:9618), up 35.6%, Meituan (MPNGY and HK:3690), up 32.1%; and Alibaba Group Holding ( (BABA) and HK:9988), up 27.3%. Together with Alibaba's online health clinic Alibaba Health Information Technology (ALBBY and HK:0241), which was up 27.6% and is better known as AliHealth, they were the best performers in the Hang Seng today.
Video game designer NetEase ( (NTES) and HK:9999) and Tencent Holdings ( (TCTZF) and HK:0700), which operates the superapp WeChat and creates video games, were next in line among the advancers. They rose 23.4% and 23.2%, respectively.
These are enormous companies that should not be seeing their value bounce around by as much as one-third in a day. Investors have been waiting for buy signals on stocks such as Alibaba; they certainly found one today. More than anything, U.S. investors who have begun questioning the rationale of holding Chinese companies should find encouragement from developments in China.
Though the biggest gains came in tech, consumer-focused companies in other sectors also advanced. Property developers such as Longfor Group Holdings (HK:0960), up 19.3%, and casino operators such as Sands China (SCHYY and HK:1928), up 18.6%, were also among the 23 Hang Seng names that posted double-digit percentage gains. Those are all companies that have been treated harshly in the selloff.
The impetus came from a meeting on Wednesday of the financial stability and development committee of the State Council, China's cabinet. Vice Premier Liu He, best known in Washington for leading the Chinese trade delegation, chaired the meeting, which concluded that China would "actively introduce policies that are favorable to the market," as quoted by the official news agency, Xinhua.
Liu also said that Chinese and U.S. regulators have made "positive progress" on talks concerning Chinese companies listed on Wall Street and are "working on forming a specific plan for cooperation." The Chinese government still supports companies listing overseas, Liu said, despite pressure on both sides of the Pacific that has made many investors question the viability of U.S. listings for Chinese stocks.
There wasn't any more detail than that, so investors are grasping at straws of comfort to keep them afloat in a sea of pessimistic news. Investors were also encouraged by a sharp drop in the price of oil, with Brent crude briefly breaking below US$100 a barrel. That eases the economic pressure on China, which is by far the world's largest oil importer. A hint at the prospect of peace in Ukraine came from the Ukrainian President Volodymyr Zelenskyy, who said talks with Russia were beginning to sound "more realistic." China is in an awkward position of tacit support for its ally, Russia, but today is vehemently protesting any suggestion that is lending support to Moscow.
The walled-off mainland Chinese markets have not experienced quite the same viciousness of selling as Hong Kong. But the CSI 300 of the largest names in Shanghai and Shenzhen still had given up 21.6% since early December before today's rally. The CSI 300 closed up 4.3% today.
More Li, Less Xi
There is some subtext to the official pronouncements out of China. The six-day National People's Congress (NPC), China's annual economy agenda-setting meeting, ended on March 11 with what analysts say was a heavy focus on the pronouncements of Premier Li Keqiang and a surprisingly muted performance from President Xi Jinping. Xi, who is seeking a third term later this year after he initiated a "common prosperity" drive last year that has proven disastrous for a number of industries and the stock market, creating uncertainty around industries such as housing development and Big Tech. Market-moving policy changes happened overnight with regularity and dramatic negative effects for investors.
Though Xi remains firmly in command, the "Less Xi, More Li" tone of the annual meeting suggests Xi may be concentrating on politics and social issues and leaving the economy and corporate policy to officials with more expertise in those spheres.
Liu is Xi's closest adviser on the economy. To hear him stressing the need for the "stable operation of the capital market" at a time Chinese shares are experiencing shocking volatility suggests the Communist Party has grown concerned enough to provide listed companies with policy support. The meeting also highlighted the need to "effectively boost the economy in the first quarter." Premier Li announced the government's target of growth at "around 5.5%" for this year at the start of the NPC, a mark that I explained economists consider "highly challenging," and its ability to produce such activity is only challenged further by a widening COVID-19 outbreak.
There are dark storm clouds over the Chinese tech sector. Stocks such as Alibaba sold off hard, as I outlined on Friday, due to the Securities and Exchange Commission's move to cite five Chinese companies as non-compliant with their accounting. That's a label likely to be extended to other Chinese companies as they file their annual reports. Failure to provide accounts that can be audited by the SEC for three consecutive years could prompt delisting from U.S. markets. But Chinese law for now prohibits sharing audits overseas.
Hong Kong is the natural alternative, and we have already seen the likes of Alibaba and JD.com list here. It's an escape hatch should a New York listing become untenable. Unless Chinese and U.S. stock regulators can reach a compromise, all Chinese listings would be forced to relocate. That's a total market capitalization of US$2.1 trillion across 248 companies, based on May 2021 data, when the U.S.-China Economic and Security Review Commission last ran a count.
The headwinds had some Western analysts throwing in the towel. J.P. Morgan on Tuesday downgraded the 28 Chinese Internet stocks it covers, including Alibaba, Tencent and Meituan, to the equivalent of a "sell," saying the rising geopolitical and macro risks make them "uninvestable" over the next 6 to 12 months.
Likewise, Chinese tech becoming "un-investable" seems a matter of "when," not "if," according to the house view at T.S. Lombard, which conducts independent analysis. "Wars are won and lost with technology," notes Grace Fan, who specializes in global policy and disruptive themes research at Lombard, adding, "while it is early days in the Ukraine war, lessons from the fallout of Western sanctions on Russia are set to reverberate, not least for China, long after the fighting subsides."
Fan is concerned about how Chinese officials will react now that they see how savage sanctions placed on Russia can be. This will "turbocharge China's quest for tech autarky," she believes. China can't decouple from U.S. tech at this stage, but would love to.
Liu's pronouncements today are a lot more encouraging. He doesn't have long to follow through on the promise to spur growth in the first quarter, but we will see in the next few weeks how aggressive China's stimulus for the stock market will be. A deal between the SEC and its Chinese equivalent would be groundbreaking and would reassure all investors that there's a future on Nasdaq or the New York Stock Exchange for the most-promising Chinese growth companies.
