Hong Kong stocks are set to beat their mainland peers for a second time in three years, on a six-month basis, as signs that a year-long regulatory crackdown is easing fuel optimism that the worst is over for China’s tech juggernauts.
The Hang Seng Index has slid 10 per cent so far this year, while the CSI 300 Index of yuan-traded stocks has fared worse, with a 15 per cent decline. The city’s benchmark outperformed this time last year too, when it gained 5.9 per cent against a 0.2 per cent advance in the onshore market.
The pattern shows investors are now more upbeat about local stocks than their mainland-traded counterparts, after the regulatory outlook for China’s technology sector, which makes up the bulk of the weighting on the Hang Seng Index, has brightened.
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A barrage of top-level meetings suggest Beijing will probably rein in the regulatory curbs that have erased more than US$1 trillion from the value of Chinese companies trading overseas. Media reports have also emerged that the regulators will soon bring to an end the protracted cybersecurity investigation into Didi Global and allow the ride-hailing giant to add new users.
While the trio of Alibaba Group Holding, Tencent Holdings and Meituan are still in the red this year, the index heavyweights have rebounded at least 26 per cent from a low in March. Both Alibaba and Meituan’s revenue for the quarter to March exceeded consensus estimates.
“China has paused the regulatory crackdown on Big Tech in order to save the economy,” said Wang Qi, chief executive officer at Mega Trust Investment in Hong Kong. “None of these Big Tech firms are listed in [yuan-denominated] A shares. Thus the A-share market is less responsive to the easing regulatory pressure.”
Valuations also matter. The Hang Seng Index is the world’s second-cheapest major benchmark after Brazil, trading at 7.6 times earnings, according to Bloomberg data. The Hong Kong-traded shares of dual-listed Chinese companies are 30 per cent cheaper than the stocks trading on the mainland’s exchanges, according to a gauge of the price discrepancy between the two markets.
Meanwhile, a rally spurred by the reopening of Shanghai and Beijing is at risk of wobbling, as sporadic outbreaks of coronavirus prompt the authorities to reimpose lockdowns in some areas and ban dine-in services in restaurants. China’s zero-Covid approach continues to weigh on the economy and stocks, according to BNP Paribas.
“While we think the Chinese authorities will relax their ‘dynamic zero-Covid’ policy a little to minimise growth shocks, the uncertainty over Covid outbreaks means Chinese equities are still likely to be susceptible to start-stop cycles,” said Jason Lui, a strategist at the French bank.
China’s stimulus packages have fallen short of investors’ expectations so far as top policymakers in Beijing attempt to balance bolstering growth with averting possible asset bubbles fuelled by credit creation, according to Leo Wealth, a Hong Kong and New York-based wealth manager.
A divergence in the monetary policies of the US and China has also prompted Beijing to withhold its tools to stimulate the economy. Further loosening is set to widen the interest-rate spread, weakening the yuan and possibly triggering capital flight, said Wang at Mega Trust.
“The market believes the current stimulus package is still not big enough,” he said. “In terms of the monetary policy, there has been no official interest rate cut [so far this year], versus the investor expectation of at least one rate cut in 2022.”
An increase in the valuations of Chinese yuan-denominated shares is unlikely in the near term, as home sales are still wobbling, the pandemic-hit services industry is still in the doldrums and external demand remains weak, according to HFT Investment Management.
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