What happened
Chinese stocks were pulling back en masse today after President Xi Jinping was awarded a third term as China's president following a gathering of Communist Party leaders.
Hong Kong's Hang Seng index plunged 6.4% on the news, and the Shanghai Composite lost 2%. Among the Chinese tech stocks to fall today were Vipshop Holdings (VIPS 1.22%), NetEase (NTES -1.91%), and Bilibili (BILI -2.13%).
Vipshop closed Monday down 6.2%; NetEase lost 9.9%, and Bilibili fell 16.8%.
So what
Xi not only retained the leadership post, but also consolidated power over the world's second-biggest economy as his close allies claimed the top spots in China's government.
Investors reacted poorly to the news, sending Chinese stocks plunging, as many assumed that policies under Xi that have helped lead to a collapse in Chinese stocks over the last year or two would continue. Those include a regulatory crackdown on Chinese tech companies, strict COVID-19 lockdowns that have hindered economic growth, and a worsening trade relationship with the U.S., which recently imposed strict limitations on sharing semiconductor technology with China.
Vipshop, NetEase, and Bilibili haven't been the primary targets in the regulatory crackdown that has hit companies like Alibaba and Didi Global, but the entire Chinese tech sector has fallen on regulatory fears and as recent coronavirius lockdowns have hampered the economy.
Vipshop, a discount e-commerce company and the parent of VIP.com, has fallen sharply since its peak in early 2021 due to the headwinds facing Chinese stocks. But its recent results also help explain its poor performance. Like other Chinese e-commerce stocks, growth has nearly ground to a halt. In the second quarter, revenue fell 17% to $3.7 billion; gross merchandise volume was down by a similar percentage as lockdowns weighed on the company.
Though profits actually grew slightly, the combination of falling revenue and larger fears around China, especially with Xi's consolidation of power, explain why the stock is down more than 80% in less than two years.
NetEase is a mobile gaming platform in China, and has fared better than a number of its peers in a difficult environment. Nonetheless, its stock is still down by roughly 50% from its peak last year.
In the second quarter, the company posted a revenue increase of 12.8% to $3.5 billion, while operating profit rose 31.5% to $738.5 million. Netease hasn't been immune to the regulatory restrictions in China, however, as it reportedly downsized a number of projects a year ago in response to Beijing's decision to slow down approval for new games. The Chinese government also issued new rules limiting China's youth to less than three hours a week of gaming.
Lastly, Bilibili, which competes with NetEase as a gaming and YouTube-like platform, has seen its stock fall more than 90% since early 2021. Growth has slowed due to lockdown and government restrictions, but the company continues to attract new users. While revenue increased just 9% in the second quarter to $732.9 million, its monthly active users rose 29% to 305.7 million.
Early this year, Bilibili received a slap on the wrist from regulators when it was fined $78,000 for violating an anti-monopoly law, and, like NetEase, it has faced headwinds due to the restrictions on gaming.
Now what
The situation in China just keeps getting worse for investors despite hopes for a turnaround. While the regulatory threat should reach an equilibrium point and the lockdowns should eventually end, investors seem to have lost confidence that things can improve under Xi.
Meanwhile, the recent move by the U.S. to limit access to new technology also signals that China could become increasingly isolated, and there's the possibility that these stocks get delisted from U.S. exchanges if China doesn't allow American regulators to examine their audits.
These tech stocks and their peers have seen their stock prices come down substantially, but they're cheap for a reason. They're unlikely to rebound until the regulatory cloud lifts, which just got less likely with Xi's consolidation of power.
