Chinese Tech stocks: Why are Chinese tech stocks under pressure?

Why Chinese Tech stocks are falling?

• Chinese Tech giants witnessed their worst quarter of growth in history due to covid lockdowns in China.
• China's “zero-Covid” policy resulted in Chinese economy growing by just 0.4% in the June quarter.
• This impacted consumer spends as well as spending from companies in areas like advertising and cloud computing.

Covid impact on Chinese Tech stocks:

Alibaba

• Chinese e-commerce giant Alibaba reported first ever flattish on-year quarterly revenue growth in its history.
• Retail sales decreased on-year in April and May due to the Covid lockdowns in Shanghai and other major cities.
• It also impacted its logistics networks and few of its cloud computing projects got delayed.
• Alibaba was also in news recently after the US Securities and Exchange Commission (SEC) put the company on its watchlist as US auditors couldn't inspect its financial statements.

Tencent

• Gaming and social media firm Tencent reported its first sales decline on record.
• Tencent's fintech revenue growth slowed down as due to lockdowns less people were going out and using its WeChat Pay mobile payments service. 
• Its online ad revenue also fell sharply as companies cut down their marketing budgets amid slowdown in the economy.

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JD.com

• Chinese E-commerce player JD.com, also witnessed its slowest revenue growth on record in June quarter.
•  It also witnessed rise in costs for fulfilment and logistics amid severe covid lockdowns in China.
• However, JD.com fared comparatively well in June quarter as it majorly controls a lot of its logistics supply chain and inventory.

Xpeng

• Chinese EV maker Xpeng posted a more-than-expected loss and lower future revenue guidance in the June quarter due to lower demand.
• It now expects to deliver 29,000-31,000 vehicles in the third quarter of 2022, below street estimates.
• XPeng president Brian Gu said that “traffic in the stores are less than what we’ve seen before because (of the) post-COVID situation.

Combined, these companies have a market capitalization of more than $770 billion.

Stock Performance

Regulatory Fines

• China in July imposed fresh fines of $372,567 on Alibaba and $896,24 on Tencent among other firms, for failing to comply with its anti-monopoly rules on the disclosure of transactions.
• The Chinese govt has been targeting top tech giants to check their dominant market positionings.
• The crackdown has resulted in billions being wiped away from the market capitalizations of big techs.

Banking and Real Estate crisis:

A Rural banking scandal has come to highlight after hundreds of depositors protested over their lost savings worth millions of dollars in China's central Henan province. Chinese Police has arrested suspects involved in this scandal. However, experts worry of greater financial crisis looming due to fallout from a real estate crash and soaring bad debts related to the Covid-19 pandemic.

As per Morgan Stanley, Chinese stocks could plunge by 20%, GDP would slow and unemployment would rise if Chinese authorities do not provide support to stabilize the real estate market.