Chinese Concept Stocks Skyrocketed Overnight at the End of 2021, Will They Reverse the Decline in 2022?

At the end of 2021, China’s Concept Stocks staged a significant reversal. The three major US stock indexes closed down at the end of the year. Still, the Nasdaq Golden Dragon China Index, which measures the overall performance of China’s concept stocks, suddenly soared 9.4% overnight, setting the record for the biggest one-day gain since 2008. The total market value of China’s concept stocks increased by more than 600 billion yuan (Renminbi) overnight. After the US stock market opened on that day, China’s concept stocks rose more than 10% across the board. Among them, iQiyi rose 17%, Tencent Music and Weilai Auto rose 15%, and even the most disadvantaged education stocks rose sharply, with Gaotu rising 22%. Why on earth was there a significant reversal? And, what is the prospect for China’s concept stocks this year?

Since the beginning of last year, China’s concept stocks have performed dismally. Bloomberg reported that the total value of the US and Chinese stocks had lost more than US$1 trillion since February. Investors, including retail investors, were generally underweight on Chinese concept stocks. Some Chinese concept stocks have massive short positions, but their trading volume is relatively minimal. These conditions create an excellent opportunity for large foreign investors to hold short positions and create a rush effect. There was a reversal at the end of the year, and Chinese concept stocks skyrocketed. 

The single-day reversal could not completely reverse the long-term downturn in the minds of investors who own China’s concept stocks. However, does this mean that China’s concept stocks are expected to rebound in 2022?

CICC stated in a report that the sudden surge might have been caused by some technical factors, such as short-covering, etc. Furthermore, it did not rule out the need to offset performance at the end of the year and some tax deductions. However, in addition to technical factors, considering the valuation levels and relative attractiveness of overseas Chinese stocks after nearly a year of decline, the analyst team at CICC stated that it could not rule out that the rally was in part driven by the deployment of funds in readiness for 2022.

As for the prospects of China’s concept stocks, the CICC also gave an optimistic view. Its analysts said that as short-term uncertainty gradually fades and policies that stabilize growth are further implemented, they believe that the overseas Chinese stock market could gradually rebound, thereby attracting more capital inflows. However, risks and uncertainties still exist, such as interference from various sources, including the tumultuous Sino-US relations and the global COVID-19 epidemic.

Due to an unstable political environment and uncertain regulatory policies, foreign investment concerns about Chinese companies will continue to persist. Large institutional investors, including the Soros Funds, hedge fund Insman Group and other large-scale institutional investors, have expressed their worries about the prospects of Chinese concept stocks trading in the United States and Asia.

This year, many Chinese concept stocks have “returned” to the Hong Kong stock market. Therefore, it is expected that more Chinese concept stocks will choose to delist from US stock exchanges or change their preferred listing destinations in the future. In addition to Didi, which plans to return to Hong Kong for listing, many Chinese concept stocks may “return” home this year, including Pinduoduo, Weilai Automobile, Shell, Tencent Music Entertainment, Futu Holdings, among others.

On the other hand, the markets are also worried that the Fed’s interest rate hiking cycle is fast approaching. In the context of tightening monetary policy, investors in Chinese concept stocks are apprehensive about whether there will be an outflow of US dollars from China, leading to the Renminbi’s devaluation against the US dollar. As a result, some Chinese concept stocks’ share prices and market value have shrunk, and exchange rate fluctuations may negatively impact the valuation of Chinese concept stocks.

Although multiple uncertainties abound, most investors are cautious about China’s Concept Stocks. However, Sino-U.S. relations seem to be improving, and investors are still optimistic about China’s domestic consumption growth. These are some factors that could fuel a future rebound in China’s Concept Stocks. In the long run, Chinese concept stock companies should focus on improving their profitability and competitiveness to maintain stable performance growth and regain investors’ trust. In the short term, the country’s current policy of “stabilizing growth” will benefit the financial and real estate sectors and the Chinese concept stocks in the mid-and downstream consumer sectors.

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