Growing hopes that China will reopen its economy ignited a spectacular rebound in Chinese technology stocks. See why we believe hopes for a reopening are premature.
Growing hopes that China will reopen its economy have ignited a spectacular rebound in Chinese technology stocks, which have been among the biggest losers since the government's sweeping tech crackdown and Covid-19 crisis hit in 2020. The KraneShares CSI China Internet ETF, in particular, outperformed all other major China ETFs year-to-date after having registered a whopping 46.47% single-month gain. Not only are we sceptical that the recent rally in Chinese equities can be sustained, but we also maintain our view that the potential returns for investing in China simply do not justify the risks associated with the political environment long term. No Reopening Without Effective Vaccination Crucially, we do not see any scope for a meaningful reopening of China's economy unless there is an effective vaccination program in place. China Tech Valuations Are Expensive Given The Risks Some investors may point out that even after the sharp rebound in recent weeks, Chinese tech companies still seem attractive given how much they have fallen from the peak. In Conclusion China's economy is likely to struggle to reopen meaningfully from the Covid-19 pandemic while signs of an easing tech crackdown appear to be only temporary in our view. In a nutshell, the downside risks of investing in Chinese tech companies far outweigh the prospects of a strong economic rebound in China.