China’s stock market crash: what’s going on?

After a major sell-off in Chinese tech stocks, our ETFs expert looks at what’s driven the collapse

China stocks have taken a big hit over the past few days, due predominately to continued concerns about the government’s regulatory crackdowns on Chinese technology and education companies.

The biggest losers have been Chinese companies with foreign listings. Over the past five days, the CSI Overseas China Internet Index has lost around 20%. The Nasdaq Golden Dragon China Index, which tracks Chinese companies listed in the US, has seen similar falls. Some of China’s biggest public companies, which many fund managers have heavy weightings towards, have seen large price declines. Meituan (SEHK:3690), for instance, has lost around 24% over the past five days. Over the same period, Alibaba (NYSE:BABA) has lost around 10%, Tencent (SEHK:700) 17%, JD.com (NASDAQ:JD) 14% and Pinduoduo (NASDAQ:PDD) 22%.

Is China turning anti-tech?

There are several things to consider about the China tech crackdown. Towards the end of 2020, the IPO of Ant Financial was abruptly canned by Chinese regulators supposedly due to critical comments from Alibaba founder Jack Ma. Ant Financial was a spin-off from Alibaba. Soon after, the Chinese government started investigations into the supposedly monopolistic practices of large Chinese tech companies, including Alibaba. Probes into the practices of China’s tech giants are ongoing.

According to many analysts, this is part of an attempt by the Chinese Communist Party to reassert its power in the face of increasingly large tech companies and their founders. Some compared the crackdown to Putin’s jailing of prominent business leaders in the early 2000s, and break-up or nationalisation of large oil and gas companies, labelling this China’s “Yukos moment”.

• US shares and Chinese bonds: the new 60/40 portfolio?
• China stock market surpasses $10 trillion – why is it rallying?
• Tech crackdown creates sizeable gap in Chinese ETF performance

Others have suggested that the Chinese government is now less enthusiastic about the growth of consumer tech platforms and the benefits they bring. Some, such as economics commentator Noah Smith, have speculated that the Chinese government is trying to reorientate its economy towards the sort of tech companies that better serve the country’s geopolitical aims, such as semiconductor producers.

Crackdown on listings in the US and elsewhere

The Chinese government also appears to be cracking down on companies listing abroad, most of which are tech companies of some sort. Chinese companies looking to list on foreign exchanges had previously got around Chinese restrictions on foreign investment in certain sectors using complex legal structures. However, Chinese authorities have recently put greater restrictions on this, requiring companies holding data on more than 1 million users to apply for special approval before listing outside China.

These new rules came after DiDi (NYSE:DIDI), China’s largest ride-hailing app, listed in the US at the end of June. Shortly after listing, Chinese authorities accused the company of mishandling user data. As a result, the company’s app was banned from being downloaded. The stock is now down around 40% since listing just a month ago.

Potentially driving this crackdown on foreign listings is concerns over new US stock market auditing rules. US authorities have suggested that companies listed on US stock exchanges must soon allow American regulators access to their financial audits. Chinese authorities, however, are reluctant to allow this to happen. As a result, fears have been raised about the future of the Chinese tech giants listed on foreign exchanges. These fears have grown in recent days, with a top official from the US Securities and Exchange Commission (SEC) suggesting that Chinese companies listed on US stock exchanges must disclose the risk of “Chinese government interference”.

Another aspect of this broader tech crackdown is China curtailing its online education and tutoring sector. In recent years, China has experienced a boom in online private tutoring, largely due to the country’s hyper-competitive education system. Over the past few weeks, the Chinese government has signalled its desire to rein this in.

• Why this education ETF has had a bad 2021 so far
• How to invest in emerging markets using ETFs: a beginner’s guide
• The frontier market that has outperformed the world so far in 2021

Notably, Chinese regulators recently said they would restrict the ability of companies that offer national curriculum tutoring to make profits. Some of these firms are among China’s largest listed companies, with many also listed on US and other foreign exchanges. As expected, this has sent their share prices into a tailspin. For instance, New Oriental Education & Technology Group (NYSE:EDU) has lost around 60% in value over the past five days. 

Beyond education companies, this has further raised fears among investors about the ability and willingness of the Chinese Communist Party to destroy the value of large companies in pursuit of its broader goals.

Biggest losers

All this, of course, has created havoc for exchange-traded funds (ETFs) tracking parts of the China market. The biggest loser has been the KraneShares CSI China Internet ETF USD (LSE:KWEB). Over the course of one month, the ETF has lost 33%, in sterling terms, according to data from FE Analytics. Year-to-date it is down 40%.

The EMQQ Emerging Mkts Internet&Ecomm ETFAcc (LSE:EMQQ) has also experienced big losses. On a one-month basis, the ETF has lost 21%. Year-to-date, it is down almost 23%. This ETF tracks a basket of emerging market e-commerce platforms. As a result, it has a big weighting to large Chinese companies that have been in the Chinese government’s firing line.

The Rize Education Tch & Dgtl Lrnng ETF AUSD (LSE:LERN) has also taken a hit, owing to the education crackdown. On a one-month basis, it has lost 16.7%. Year-to-date, the picture looks even worse, with losses standing at almost 40%. While the ETF focuses on tech-enabled learning companies around the world, it has had a substantial weighting to Chinese companies in the sector.

More broadly, the HSBC MSCI China ETF (LSE:HMCD) has seen one-month losses of 13.6%. Measured on a year-to-date basis, it has experienced similar losses. Chinese share prices losses have also taken a toll on the performance of emerging markets. China dominates the emerging market index, with a weighting of almost 40% at the end of June. As a result, the iShares MSCI Emerging Markets ETF (LSE:SEMA) has lost around 8.6% over the course of the month.