Truth, Inspiration, Hope.

Piper Sandler Analyst Warns Against Chinese Stocks

Jonathan loves talking politics, economics and philosophy. He carries unique perspectives on everything making him a rather odd mix of liberal-conservative with a streak of independent Austrian thought.
Published: December 11, 2021
Chief executive at Piper Sandler does not see Chinese stocks as a smart buy.
Chief executive at Piper Sandler does not see Chinese stocks as a smart buy. (Image: StockSnap via Pixabay)

U.S.-listed Chinese stocks have received quite a beating this year as these companies have come under regulatory pressure from both Beijing and Washington. While the S&P has only fallen three percent from the high it set in November, the KWEB China internet ETF has slipped by 61 percent and the FXI China large-cap ETF has declined 30 percent from its peak in February.

Some investment experts are advising to buy Chinese stocks at their current low levels. However, Craig Johnson, chief market technician at Piper Sandler, warns against heeding such advice. Investors should look for attractive opportunities elsewhere, he says.

“The chart says it all… It just purely looks like people are trying to catch a falling knife. You’re making five-year new lows in here on the BKCN [S&P/BNY Mellon China ADR index]… If you drill down now looking at the Alibaba chart, that’s 10% of that particular index, there is no indication we’re getting anywhere close to making a bottom… The evidence at this point in time says pass on this and wait for clear evidence that a bottom is getting set,” Johnson said in an interview with CNBC.

Citi is “neutral” on Chinese stocks and believes that the yuan will “relatively outperform” other emerging market Asian currencies.

Jack Siu, the chief investment officer for Greater China at Credit Suisse, said investors should scale down their exposure to communist China given the increasing regulatory risks. Regulators are reportedly planning to require onshore funds to completely pull out their positions in foreign-listed securities.  

“The uncertainties to … regulatory related events are presenting risks to investors in the next 12 to 18 months… As a result, we think it’s prudent for holders of these stocks to … diversify, hedge their exposure, maybe switching to some of the Hong Kong-listed stocks where there’s a dual listing to hedge against this delisting risk,” Siu told CNBC.

Uncertainty in “strategic sectors” can persist well into March of next year. In addition, funds have been reluctant to return to Greater China markets and many analysts are yet to upgrade their earnings outlook for Chinese firms. Fundamentally, “things are not improving for the companies,” Siu stated.  Chinese stocks listed in the U.S. have so far lost over $1 trillion in value since February.

The United States is also strengthening its rules with regard to which foreign companies can participate in American capital markets. Firms that refuse to show their accounts to U.S. regulators, which includes almost all Chinese companies, will be delisted from stock exchanges. Chinese ride-hailing company Didi recently announced delisting from NYSE, moving to Hong Kong instead.

A FI35 article recommends not buying Chinese stocks like Alibaba because of their current “unbelievable” cheap value. It accuses Beijing of being “willing to smash foreign investors” and warns against looking at Chinese stocks as a good buying opportunity.

“The government has shown a great disdain for investors, and investors’ rights will always take a back seat to domestic politics. Chinese education stocks could well go to zero… And it could be a long time before the Chinese government decides to stop waving the stick. The fight is about control and data. Building a regulatory framework can take years. In the meantime, companies will not dare to grow and innovate,” the article states.