Hong Kong-based technology shares of China plunged into a bear market on Thursday, and this is in contrast to the upward trend of the past year due to the tax concerns and global risk aversion that is shaking investor confidence.
The Hang Seng Tech Index, which is dominated by mainland Chinese technology companies, dropped over 1 per cent, bringing the index down slightly more than 20 percent since October. This is the sixth consecutive day that the index is down.
The fear of the potential increase in value-added tax on internet services was identified by the participants of the market as one of the main grounds of the recent decline.
This anxiety comes after a VAT increase that has already been applied to some telecom services, which makes people worried that internet platforms might be next.
The speculation briefly spilled over to online gaming and other digital transactions, triggering fresh policy windblows on a sector already tinged with years of regulatory tightening. After experiencing a fall in the tech stocks, authorities on Tuesday brushed off the rumors of a tax on the gaming sector.
Qi Wang, investment strategist at UOB Kay Hian, “The sell-off in recent days is driven by concerns over possible VAT tax increase on internet services, online gaming, and other online transactions. This follows the recent VAT increase on certain telecom services.”
The pullback of the Chinese technology stocks has also been accompanied by a wider volatility in the world technology market due to the fear of artificial intelligence-induced disruption of the software companies.
Phelix Lee, senior equity analyst at Morningstar, said, “To me, it’s a barrage of negative news globally.”
Lee added, “We have Anthropic reportedly rolling out an AI plugin that automates bits of legal work, sparking fears in legaltech firms and fueling the broader software sell-down; then we have VAT hike rumors on Chinese internet firms and risk-off sentiment builds in the hardware AI trade as there are reports of rupture between Nvidia and OpenAI.”
In spite of the precipitous decline, there are still investors who believe that the sell-off is a corrective effort and not the beginning of a new and greater decline.
From the perspective of the wider Hong Kong and China equity markets, the more recent weakness seems to be localized in areas that had already performed well, according to Morningstar.
Lorraine Tan, director of equity research for Asia at the firm, stated, “I regard the action as a healthy pullback, and it’s largely concentrated in sectors that have probably overshot fair values.”
Other asset managers claim that the underlying perspectives on Chinese tech have not materially worsened, despite the lack of positive triggers in the short term.
Vey-Sern Ling, managing director at Union Bancaire Privée, added, “Catalysts have been somewhat lacking for the sector.”
Ling reported, “Recently, there’s also been regulatory noise in travel and e-commerce, which we think are specific rather than systemic, as well as some worries about value-added tax.”
He added, “Fundamentally, nothing has changed to derail our positive outlook [for Chinese tech stocks]. Valuations continue to be supportive, sector earnings have potential to rebound, and AI may provide a stream of catalysts ahead.”
