BNP Paribas’ private banking arm is advising investors to stay cautious on Chinese technology stocks, underlining continued pressure on earnings growth due to Beijing's ongoing crackdown.

China’s tech crackdown has transitioned to the next chapter after a 2021 largely focused on anti-monopoly efforts and this does not bode well for the sector which saw around $1 trillion of market value erased last year.

«Last year, there was a lot of concern about the antitrust measures for the technology sector. We believe that a lot of this kind of bad news has been priced in but for this year, it looks like the Chinese government will focus a lot on data privacy and internet security,» said BNP Paribas Wealth Management’s Hong Kong chief investment advisor Grace Tam at a virtual briefing yesterday.

«A lot of those big technology companies are still in the process of complying with the government’s […] policies and in this process, they need to invest more to make the changes. We still believe that could affect the earnings growth of these technology companies.»

No Catalyst

According to Tam, there is potential for a short-term rebound due to distressed valuations and monetary easing in China, she sees limited upside beyond a mild recovery.  

«If we need to a sustainable rally in the China technology shares, we don’t think it will happen in the near-term given the lack of catalyst,» she said.

Within the property sector, Tam also notes that it is undergoing the process of downward adjustment with credit impulse possibly bottoming out in the second half of the year.

Gradual Improvements

Nonetheless, the bank still expresses some optimism about 2022 for China despite the recent emergence of Covid outbreaks in the mainland.

«The good news with Omicron the peak-to-trough from cases in the west and South Africa is relatively shorter than Delta,» said BNP Paribas Wealth Management’s Asia CIO Prashant Bhayani. «That’s one silver lining as we come through that disruption.» 

For those still keen on investing in China, BNP Paribas Wealth Management is relatively more positive on its domestic A-shares, especially mid and small caps, expecting them to be beneficiaries of easing measures and less affected by regulatory risks.