After months of calling a market top in Chinese equities, large stocks have officially entered correction territory. The CSI 300 index, which tracks the largest companies traded in Shanghai and Shenzhen, is down 15 per cent from last month’s high. Tech stocks have led the fall.
There are three main reasons. First, US regulators have revived threats to delist Chinese companies quoted in the US. Second, Beijing is cracking down on the most lucrative units of its biggest tech groups, including Alibaba and Tencent. Third, investors fear monetary tightening. Officials are stressing the need for policies to reduce financial risks as well as support growth.
The drop in shares of tech groups including Baidu, JD.com and NetEase was an accident waiting to happen. Investors were optimistically betting US president Joe Biden would take a softer stance towards China than Donald Trump. Those wagers are unwinding. Chinese companies face losing their US listings unless they can prove a foreign government entity does not control them. They would also need to show that they follow US audit standards.