24 May 2022
Financial giant JPMorgan has turned bullish on Chinese tech stocks with a new era of pro-tech regulations on the horizon. This comes after the Chinese government held an event on Tuesday to promote the digital economy. At the same time, several Chinese-based tech stocks have been returning to Hong Kong/Chinese mainland stock markets. So is this the start of a new era?
There is speculation that the Chinese government is looking to acquire a 1% equity stake in major Chinese tech firms. Those holding a 1% stake can appoint a director to the board. This close working relationship would help ensure that tech giants abide by existing and future regulations, avoiding any misunderstandings.
In reality, this process has already been tested with a government-backed investment fund taking a 1% stake in social media platform Weibo back in April 2020. The government-backed China Internet Investment Fund has gone on to invest in more than 40 Chinese tech companies. The fact that many innovative tech services can push existing regulatory and legal boundaries is a global issue. However, working hand-in-hand with the Chinese government would be sensible for all parties.
Sentiment for the tech sector was also boosted by confirmation that Shanghai will begin a phased reopening in June. This should ensure that Chinese economic growth avoids the doomsday scenario floated by many economists. While Covid is still a worldwide issue, the Chinese authorities' short-term pain/long-term gain approach could prove crucial in maintaining economic growth in the short to medium-term. In turn, this would help to support the tech industry and attract both domestic and overseas investors.
Many see the Hong Kong stock exchange as a bridge between mainland China and international investment. The growing importance of the “Connect” system, which allows Chinese companies to operate a dual listing facility, is proving crucial. As more companies return to China for their primary listings, this will encourage overseas investment and an expected resurgence in the Chinese tech sector.
In reality, China has been a crucial hub for entrepreneurs for many years, incubating some of the world's largest and most successful tech companies. While many began to look overseas for much-needed investment, relaxing overseas investment regulations means this is no longer a necessity. In a situation which could be described as success breeding success, the foundations are now set for long-term solid growth in new technology.
As more young, developing, and mature tech companies look to establish their primary listings in China, this will significantly improve liquidity. This should create the perfect scenario for day traders with a degree of volatility, ability to deal in size and improvements in the quality and amount of research available. Whether this is the perfect storm for long-term tech investment remains to be seen, but the likes of JPMorgan would appear to have spotted what could turn out to be an exciting opportunity.