Mainland traders will have a nasty shock on their hands when they return to their computer screens on Thursday after a long holiday. The Hong Kong market saw heavy selling here on Wednesday in Chinese tech names such as Alibaba Group Holding ((BABA) and HK: 9988), which dropped 3.7% on the day.
Investors were spooked by just about anything.
They were spooked for a second when they thought Alibaba lightning rod Jack Ma had been arrested for publishing seditious stuff on the Internet. That was not true, but it was pretty funny.
Investors were also spooked by ride-hailing operator DiDi Global (DIDI), which mentioned in its annual report that it is being investigated by the US Securities and Exchange Commission over its disastrous initial public offering last June.
Investors were spooked, too, by what the Fed might do tonight, Asian time. They were spooked by selling from insiders and big investors. The markets in Shanghai and Shenzhen will resume trading on Thursday after breaking since Friday for Labor Day. Hong Kong was closed just for Monday.
The negative sentiment dragged the Hang Seng Tech Index down 3.3% for the day in Hong Kong.
The online health clinic and pharmacy JD Health ((JDHIY) and HK: 6618) bore the brunt of the selling, down 13%, after a filing showed selling by its chairman. But there were heavy losses for its rivals, the Alibaba affiliate Ali Health (ALBBY and HK: 0241), down 7.5%, as well as Ping An Good Doctor (PIAHY and HK: 1833), down 5.1%.
Video-sharing site Bilibili ((BILI) and HK: 9626) fell 8.2% in Hong Kong ahead of earnings before the start of US trading on Friday. The “Chinese YouTube” warned on April 29 that advertising and e-commerce sales will take a hit from China’s COVID crackdown and the lockdown in Shanghai, where tight movement restrictions stopped the shipment of goods.
Grocery delivery app Meituan (MPNGY and HK: 3690) dropped 4.6% after its filing showed that venture capitalist backer Sequoia Capital had reduced its stake by almost US $ 800 million. Its ability to deliver goods has also been hampered in Shanghai and Beijing, not to mention the 44 other cities with some form of lockdown.
The broad-market Hong Kong benchmark, the Hang Seng Index, ended the day with modest losses, down 1.1%, showing the selling was primarily in tech.
Mistaken Ma identity
A quirky incident that led to a flash crash in Alibaba shares on Tuesday revealed how fragile the sentiment is when it comes to Chinese tech, and how much policy-driven factors are influencing the sector.
Alibaba shares suddenly lurched 9.0% lower at the open on Tuesday after the state broadcaster CCTV reported that someone named Ma had been detained by the authorities in Hangzhou, Alibaba’s hometown, on suspicion of using the Internet to subvert the state and endanger national security.
Using information from the state-security bureau, which has launched a “criminal-enforcement action” against the person, CCTV said the individual is Ma XX, obscuring the second character of the Chinese name. That led investors to connect the dots that the person under investigation is Jack Ma, the figurehead and co-founder of Alibaba, whose Chinese name is Ma Yun.
The police later clarified that the person has three Chinese characters in their name – in other words, it was mystery man Ma XX XX that had been arrested. Because that rules out Jack Ma, Alibaba shares bounced back. Speculation leapt to a local Chinese Communist Party official Ma Xiaohui who has already been under investigation. Ma, a former deputy mayor of Hangzhou, was thrown out of the Chinese Communist Party in March for “serious violations of party discipline,” the polite term the party uses for corruption.
But that, too, seems to be off the mark. The Ma in question works in information technology and hardware R&D, according to the state-owned Global Times. The man allegedly colluded with shadowy “foreign forces,” which brainwashed him to spread “rumors and disinformation” and publish a “so-called independence declaration” on the Internet.
I say “allegedly” because the investigation is ongoing. However, it’s a sign of how the police, Chinese Communist Party and law courts railroad cases that the Global Times reports all the activity as fact. “Ma also targeted young people and university students, inciting them to join in activities that smear the country and the people,” the state newspaper states. “Ma’s activities are in violation of China’s laws,” it goes on to conclude. “The Internet is not a place beyond law and those who attempt to infringe on the country’s interests, undermine its security or betray the country and the people will be severely punished, according to related departments.”
This particular Ma is in big trouble, in other words.
Meanwhile, Alibaba shares were selling off on Wednesday in line with the tech sector, leaving them down 16% for the year. They’ve had a pretty good rally surrounding the Labor Day holiday, up 10.2% despite today, with the Chinese Politburo promising to stabilize capital markets and saying it may soon “conclude” its correction of the tech industry.
And then there’s DiDi …
DiDi Global did declare for the first time in its earnings that it’s under investigation by the US securities watchdog. Days after its IPO on June 30 last year, Chinese regulators stopped it from signing new customers and stripped its apps from Chinese stores.
“After our initial public offering in the United States, the SEC contacted us and made inquiries in relation to the offering,” DiDi admits in its annual report. “We are cooperating with the investigation,” subject to strict compliance with Chinese law, DiDi said, but gave no details. “We can not predict the timing, outcome or consequences of such an investigation.”
DiDi cites a long list of risks in its report; it’s a list that is full of litigations, investigations and regulatory inquiries, mainly on the Chinese side. The SEC also wants access to DiDi’s audits, as it does with all Chinese listings, and could force them all to delist if Chinese regulators do not allow access.
To be honest, I would have surprised if Didi Global was not being investigated by the SEC, because there are numerous class action lawsuits claiming the company should not have held the IPO when it did. The SEC will be checking if the company had any inkling it could run afoul of the Chinese side.
I believe DiDi went through the normal rules for listing out of China and satisfied the rules and regulations for securities regulators. But it broke a “suggestion” – a then-nonexistent rule about data protection – from a previously little-known department now charged with vetting cybersecurity. It is a victim of incredibly poor timing, for sure. If it caught any wind of a possible suspension, it would be really dumb, and those class action suits might have some grounds.
DiDi has declared its intention to delist in New York and relist in Hong Kong. DiDi shareholders are due to vote on that plan on May 23. With DiDi’s share price down nearly 86% from the US $ 14 listing price, a lot of them want some kind of reparations.
Most Asian markets ended the day on slim losses, but losses nonetheless, with Tokyo’s Topix broad market index down 0.1%, the Kospi in Korea down a similar amount, and the Aussie central bank’s decision to raise rates a surprisingly large 25 basis points pushing the S & P / ASX 200 Index down 0.2%.
It’ll be another sleepless night for active investors tonight. The Fed’s interest rate decision will come at 2 am for traders in Hong Kong, Beijing and Singapore, 3 am if you’re in Tokyo. So we’ll see a reaction on Thursday once they’ve caught a bit of rest after digesting that news.
Get an email alert each time I write an article for Real Money. Click the “+ Follow” next to my byline to this article.