What's Happening: Shares of Chinese Internet company NetEase (NTES 0.11%) were down as much as 13% Tuesday morning. By noon, the stock had largely recovered, down about 5% on the day. There is no company-specific news driving the decline. Instead, it appears that the continuing sell-off of Chinese stocks is the culprit.
Why It's Happening: Despite the suspension of new stock listings and the creation of a $19.4 billion stabilization fund meant to prop up the Chinese stock market, Tuesday brought further declines on top of Monday's. The Shanghai Composite fell by just 1.3%, but the Shenzhen index, which covers small-cap stocks, slumped by 5.3%. In this wave of selling, a majority of U.S.-traded Chinese tech stocks are down significantly today, including NetEase.
The continuing decline of Chinese stocks has wiped out nearly $3 trillion of market value since mid-June, and crashes of this magnitude tend to hit all stocks, regardless of valuation. NetEase trades at a forward P/E ratio of about 26, not nearly as high as some high-flying Chinese tech stocks. Ultimately, once the turmoil in the Chinese stock market comes to an end, the fundamentals will matter again. Until then, investors will need a strong stomach to withstand the current volatility.
