Why Chinese stocks were tumbling en masse today

What happened

Chinese stocks plunged today, once again over fears of regulatory crackdown from the Chinese government. This time, the focus was on Chinese education stocks, as a number of media outlets reported that officials may ask Chinese tutoring companies like TAL Education Group and New Oriental Education Group to become non-profit organizations, a decision that would have obvious consequences for investors. These two stocks and other Chinese education stocks have lost more than half of their value today.

The fallout largely affected Chinese stocks and came as fears grew about the Chinese Communist Party’s intervention. These include restrictions imposed by Beijing on the rideshare giant’s recent IPO. Didi Global earlier this month and fined Alibaba Holding Group $ 2.8 billion in April for violations of antitrust laws.

Among today’s losers were GDS Holdings (NASDAQ: GDS), which was down 12.8% as of 12:30 p.m. EDT; Complete Truck Alliance (NYSE: AMM), which was down 24.6%; KE Holdings (NYSE: BEKE), which had lost 18.8%; JD.com (NASDAQ: JD), which had divested 5.8%, and bilibili 9:30 a.m. NASDAQ: BILI, down 14.5%.

So what

Threats to the education sector were the main reason for the massive sale, but they were not the only one. Morgan Stanley also downgraded GDS Holdings, which operates data centers in China. The Bank of Wall Street downgraded its rating on the stock to equal weight, expressing concern about unfavorable power quota allocations in Shanghai, another potential sign of the impact of government regulations.

Other Chinese stocks falling today have also faced Beijing’s wrath in the past. The app of digital media company Bilibili was removed from Chinese app stores due to censorship concerns in 2018, and e-commerce giant JD.com was not directly targeted by Beijing but fell in sympathy with Alibaba for fear of a wider crackdown on e-commerce. markets.

The Full Truck Alliance digital freight platform went public just over a month ago, but the timing seems to be unfortunate as Didi’s IPO came shortly thereafter and Didi’s shares went down. fell after its apps were pulled from China’s largest app stores over concerns over data collection. Full Truck Alliance shares are now down more than 40% from their IPO price of $ 19.

Finally, real estate tech company KE Holdings is also competing in the kind of data-rich environment that has drawn negative attention from Chinese regulators, meaning that equity investors are particularly susceptible to the government’s machinations.

Now what

In addition to pressure from Beijing, the US government has also threatened Chinese stocks in recent months. The Defense Ministry released an “entity list” with several actions that it said would be delisted from US stock exchanges for acting as agents of the Chinese government and military.

Separately, another law will strike Chinese companies listed in the US like Alibaba if they don’t make their audits available to US regulators. However, the timeline for implementation is unclear.

Overall, the environment has become considerably hostile to Chinese stocks as US investors fear Beijing’s unpredictable excesses, and the threat of delisting looms as well. If those shares were delisted, they would continue to trade on other exchanges, such as Hong Kong, and a number of Chinese shares have gone public in Hong Kong for this reason.

While many of these stocks, like Alibaba, are trading for very low valuations, with investor sentiment as it is, these stocks could be value traps. The good news is that they will have another chance to show off their business success in the coming weeks as the earnings reports come in.

Nonetheless, stocks appear unlikely to return to their earlier levels until pressure from Beijing subsides.