A 40% slump in shares over the past year, the winding down of a hallmark investigation and vows of support for the sector should offer a solid buy signal for China’s tech giants. But investors aren’t so sure yet.
As the Hang Seng Tech Index approaches the second anniversary of its inception next week, traders say they remain wary about ploughing money into companies in the benchmark. Their angst centres on the year-long government crackdown, which they see persisting even if the worst of the punitive measures may be over.
The uncertainty is highlighting just how hard it remains for investors to navigate the volatility in shares of Alibaba Group Holding Ltd, Tencent Holdings Ltd and others. Prediction of a market bottom in recent months have been met with knee-jerk drops triggered by sudden headlines. All that is weighing on a sector that’s already seen $2tn wiped out in one of the world’s worst tech stock corrections. 
“We are seeing signs that the worst of the regulatory pressures could be over,” said Pruksa Iamthongthong, senior investment director of Asian equities at Abrdn, who remains underweight on Chinese internet stocks. “However, we do expect regulatory noise to persist in the background and therefore we should expect some volatility given the fragile market.” 
While the Hang Seng Tech has bounced by 32% from its low in March, it remains more than 30% below its July 2020 launch. Over the same period, the Nasdaq Composite Index has gained 14%. Chinese tech shares got a boost this week from news that authorities were putting an end to the probe of Didi Global Inc by levying a fine. Much of that excitement fizzled later, as analysts pointed out that it may do little for sentiment in the broader sector.  
There are other reasons to remain wary, including China’s increased oversight of livestreamers and Tencent Holdings Ltd remaining unable to win approval to launch new games on the mainland.
To make matters worse, China’s adherence to the Covid-zero policy is hurting consumption and weighing on online advertising, a key pillar for e-commerce giants and internet platform operators.
“I think the worst is likely over, but a lower expected growth rate and continued smaller regulatory moves could constrain the attractiveness of the sector,” said Louis Lau, partner and portfolio manager at Brandes Investment Partners.
Still, there is a silver lining for tech shares. At 25 times forward earnings, the Hang Seng Tech Index is cheaper than its historical average and its mainland China peer ChiNext Index. 
Not everyone is so pessimistic about Chinese tech shares. Tightening regulation in China has shifted from the announcement phase into implementation, according to Victoria Mio, Fidelity International’s director for Asia equities. That means risk has already been priced into stocks, she said at a briefing this week.
The earnings reporting season that kicks off next month also offers a look into tech firms’ profit outlook and the outcome of their cost control measures.
“Investors are struggling to rewrite the growth story for China’s tech sector, and it is impossible without clear regulatory red lines on the type of business allowed, the issues on antitrust and data sovereignty,” said Gary Ng, a senior economist at Natixis. “The unanswered question is still how far it would go, which is still the key source of uncertainties.”
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