Chinese Stock Sell-Offs – A Buying Opportunity?

Chinese stocks have been in a perfect storm recently, fueled by rising political risks and a slowing economy at home as well as growing tensions with the U.S., which threatens to delist Chinese shares trading on Wall Street.

"China has been in some form of recession for much of 2022, as strict COVID policies and a global economic slowdown have reduced Chinese growth below 6%,'' Adam Coons, Certified Financial Analyst (CFA) with Winthrop Capital Management, said in an email to International Business Times. "Markets had been hoping for a loosening of these policies heading into 2023, but today it seems we will have to wait much longer for China to return to a more normal post-COVID economy."

But with recent sell-offs, market leaders like Pinduoduo Inc., Alibaba and Baidu trade below 10x earnings and close to cash values, with Alibaba trading below its IPO prices.

Is it time for traders and investors to go bargain hunting or wait on the sidelines for the worst yet to come? It depends on whether the risks driving the sell-offs are rising or easing.

Michael Wang, founder and chief executive officer of Prometheus Alternative Investments, thinks China is at a turning point in the geopolitical order as President Xi begins his third term by tightening his grip on the Chinese economy and society.

Moreover, he sees investors concerned about Xi's absolute power, his commitment to carrying out his agenda and the macroeconomic headwinds currently impacting global markets.

"With a solidified Xi government, companies like Alibaba and other tech names are taking the full brunt of the investor backlash," he told IBT in an email. "As Xi cements his power, I think China's current trajectory will continue to give investors pause and create an uncertain environment, particularly in the tech and e-commerce sectors."

Still, some of these technology companies hold a dominant position in the world's fastest, making them an appealing proposition for intelligent investors who have learned to separate fundamentals from market sentiment.

For instance, Baidu is the country's largest internet search engine, with a 94.5% market share, according to Statist.com. That's why it is called the "Google of China." It also owns Baidu Feed, which provides users with personalized searches, plus the Hakan short video streaming app and the Quanmin flash video app for creating and sharing short videos.

Alibaba Group is the "Amazon of China. It provides technology infrastructure and marketing services to merchants, brands, retailers and other businesses to interact with their users and customers at home and abroad.

Coons thinks that the recent sell-off in Chinese technology shares is more a matter of short-term COVID-related policies rather than a matter of fundamentals and that investors are overreacting to the long-term narrative driving Chinese technology stocks.

China is the second largest economy in the world, holding great promise, and the recent sell-off is a buying opportunity. "Given the currently attractive valuations across Chinese technology stocks and the forward long-term growth outlook, we think the recent sell-off is a buying opportunity," he added. "While we are currently buyers, given the volatility of Chinese stocks, we advise investors to position smaller than they typically would with U.S. comparable."