Chinese Tech Stocks Are Down 70%, And American Ones Could Follow In Their Footsteps

Chinese Tech Stocks Are Down 70%, And American Ones Could Follow In Their Footsteps
Stéphane Renevier, CFA

almost 2 years ago2 mins

The Golden Dragon Index is made up of Chinese tech firms traded in the US – and it’s now down 72% from its all-time high a little over a year ago. And seeing as China’s generally been leading the US by a few months, whatever happens to Chinese tech stocks could foreshadow what’s coming for American ones.

Five main factors have contributed to the downfall of Chinese stocks overall. First, China’s regulatory crackdown on tech. Second, the fact that Chinese credit growth just shrank to record low levels. Third, the fear that Chinese stocks may receive backlash from investors and regulators alike due to China’s relationship with Russia. Fourth, the potential disruptions that the Covid resurgence in key tech hub Shenzhen could bring. And fifth, a deterioration in investor sentiment along with a reversal of very high valuations.

While some of those factors are specific to China, others – like deteriorating credit conditions, regulatory crackdowns, and plunges in sentiment – could directly influence what happens in the rest of the world.

There are two scenarios for where Chinese tech stocks could go next. Bulls, who think they’ll go up, are looking at the Chinese government’s 5.5% economic growth target for 2022 – along with the fact that valuations are much lower today and investor sentiment is extremely negative. If credit conditions improve and growth gets back on track, that sentiment could quickly turn and send Chinese stocks rallying.

Bears, who think they’ll go down, argue that valuations are still high – even with the recent drop. Chinese stock valuations are now at a similar level to US ones. And the government isn’t showing any sign of easing up on its tech crackdown, either.

Whatever your view, you’ll want to monitor the situation closely for the implications it could have on American stocks...

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