Chinese stocks hold the allure of strong profitability and impressive gains, but fresh U.S. blacklistings of Tencent and CATL spark uncertainty and investor unease
The outlook for Chinese stocks appears, at first glance, highly promising.
Many companies in the People’s Republic are undervalued, often delivering stronger cash flows and profits compared to their global counterparts. Take Tencent, for example, which reported an impressive operating margin of 29% in 2024—outpacing numerous American tech giants. Meanwhile, CATL achieved free cash flow exceeding $10 billion, underscoring its dominance in the rapidly growing battery market.
Major players like Tencent and battery powerhouse Contemporary Amperex Technology (CATL) emerged as investor favorites in 2024, posting double-digit gains amid rising optimism that Beijing would finally implement stronger measures to stimulate growth.
Yet, beneath this rosy narrative lies a fragile foundation. On Monday, the U.S. Department of Defense designated Tencent and CATL— collectively valued at $640 billion— as companies allegedly tied to the Chinese military. Both firms denied the allegations, with Tencent denouncing the action as a “clear mistake.”
At face value, the listing has limited immediate consequences, unlike more punitive measures from the U.S. Treasury or Department of Commerce, which can block access to American capital or critical technologies.
Furthermore, inclusion on such lists is not always permanent. For instance, Megvii, a Chinese facial recognition software company, was recently removed from the Pentagon’s blacklist, even though it remains restricted by the Department of Commerce’s rules, which have curtailed its ability to purchase U.S. goods since 2019.
Despite the absence of direct sanctions, the reputational damage has already spooked investors.
Tencent shares tumbled up to 7% in Hong Kong on Tuesday—a concerning development for major benchmark indices. Tencent alone constitutes over 16% of the MSCI China Index, while CATL accounts for roughly 6%. For CATL, this scrutiny also raises thorny questions for Ford (F.N), which is partnering with the company to build a U.S. battery plant using CATL-licensed technology.
The risks for Chinese equities could escalate further.
After significant interventions in 2024—including relaxed credit margin rules and liquidity injections by the People’s Bank of China—that propelled the CSI 300 Index to a 15% annual gain, the market faced a rude awakening on January 1, 2025, with the index plunging more than 5%. This drop reflects renewed worries about China’s economic trajectory, compounded by political uncertainty as President Donald Trump prepares to take office.
For fund managers who ramped up their exposure to Chinese stocks during last year’s rally, the need to reassess strategies has become evident. What initially appeared to be a lucrative uptrend now comes with heightened risks, especially if geopolitical tensions persist and additional strategic Chinese firms find themselves subject to restrictive U.S. measures.
Original article published on Money.it Italy 2025-01-09 06:48:41. Original title: Che anno sarà per il mercato azionario cinese?
