China ADRs Tumble in Longest Rout Since 2019 on Fresh Risks
(Bloomberg) -- Stocks of Chinese companies tumbled in the U.S., posting the longest losing streak in more than two years, over the risks posed by a potentially widening regulatory crackdown in the nation’s technology industry.
The Nasdaq Golden Dragon China Index plunged 8.5%, the steepest drop since March 2020, after officials in Beijing were said to consider forcing companies that offer school tutoring to turn into non-profits. That drove the gauge, which tracks some of China’s biggest firms that are listed in the U.S., to its fourth straight weekly decline, its longest slump since May 2019.
TAL Education Group, New Oriental Education & Technology Group and Gaotu Techedu Inc., some of the largest education companies, lost more than half their value Friday.
“This escalating behavior should temper any temptation to invest heavily in these names. Ignoring this trend is something you do at your own peril -- China is unlikely to let up,” said Hans Albrecht, a portfolio manager at Horizons ETFs Management. “At some point the risk-reward makes sense in a diversified manner -- placing a bet on one Chinese company could be foolhardy. Buying a basket that is exposed to various Chinese sectors is likely more prudent.”
Regulators in China have been ramping up scrutiny of education companies for months -- which could upend the country’s $100 billion industry -- as part of a broader push to rein in the country’s technology giants. Even before Friday’s plunge, shares of private education firms like TAL, New Oriental Education & Technology Group and Gaotu had been under pressure, declining steeply since the beginning of March.
If the policies for education companies do materialize, they will “effectively make the sector un-investable,” according to JPMorgan Chase & Co. analyst DS Kim. “We think it’s best to avoid the sector until clarity emerges,” he said.
TAL and New Oriental have said they are aware of media reports about reforms to Chinese after-school tutoring services and that neither company received any official notice of regulations. Hong Kong-listed Koolearn Technology Holding Ltd also said it hasn’t had any official notification of new orders.
The latest crackdown comes after officials were said to be considering unprecedented penalties for Didi Global Inc. earlier this week. The ride-hailing giant has become the poster-child for Chinese regulatory oversight, seeing its stock price drop to roughly half the high hit in July soon after its closely watched initial public offering.
In total, more than $650 billion of market value has been erased from the 98 stocks that make up the Nasdaq Golden Dragon China Index since the gauge hit a record high in February.
Heavy-weight technology titan Alibaba Group Holding Ltd has seen its market capitalization shrink by nearly one-quarter. Meanwhile, fellow tech giants JD.com Inc. has fallen over 30% from its February peak, while Pinduoduo Inc. and Baidu Inc. both down by about 50%.
“People have to take into account the regulatory risk that comes with investing in these stocks,” said Greg Taylor, chief investment office at Purpose Investments. “As much as there’s a ton of upside, there’s also a lot of risk.”
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