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2021 lows: Why are Chinese stocks getting smashed this week?

Image of Hang Seng, Chinese stocks on app
Chinese stocks are getting smashed as the CCP's regulation efforts bite. (Source: Getty)

Asian stocks have been getting battered all week amid a China regulation crackdown that has also sparked jitters on Wall Street.

China’s CSI 300 index, which replicates the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, has hit its lowest point all year.

Meanwhile, MSCI’s index of Asia-Pacific shares (excluding Japan), has hit its lowest point not seen since December last year, and Hong Kong bourse Hang Seng has wiped off US$551 billion in market value

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Wall Street was also a sea of red as American investors have also been concerned about the outlook of US-listed Chinese stocks.

So what’s happened? What is this Chinese regulation crackdown that’s caused shockwaves from Beijing to New York? Here’s a quick explainer.

China’s regulatory crackdown, explained

Earlier this week, a number of things happened in rapid succession.

Over the weekend, Chinese media announced it was curbing after-school tutoring. New fee standards would be introduced, teaching would be banned on the weekends, on public and school holidays, and the regulator will cease approving the setup of new private school tutoring companies.

Existing companies that tutor school curriculum would be forced to turn into not-for-profit institutions, and would face restrictions on receiving foreign capital or raising capital through public markets.

Regulators told internet conglomerate Tencent on Saturday it would have to cease exclusive music streaming rights and licensing deals with global record labels. The company was also fined 500,000 yuan ($104,119.30) after an official investigation found the company engaged in monopolistic practices.

The Tencent booth is seen at the World Artificial Intelligence Conference 2021 in Shanghai, China, July 7, 2021.
The Tencent booth at the World Artificial Intelligence Conference 2021 in Shanghai, China, July 7, 2021. (Photo credit: Costfoto/Barcroft Media via Getty Images)

On Monday, China’s antitrust regulator then announced a swathe of new guidelines for food delivery platforms that include paying delivery drivers the local minimum wage, which could dampen profits from companies like Meituan and Alibaba’s online food delivery platform Ele.me.

At the same time, China’s tech sector regulator ordered internet giants to fix anticompetitive and security issues, such as blocking links to rival companies’ websites and products, infringing users’ rights and mishandling data.

All of these moves aren’t by accident; China’s regulators have been on a months-long campaign to crack down on companies that they see as having grown very rapidly with little regulation.

Commentators believe Chinese President Xi Jinping is keen to flex his muscles over the country’s companies.

“It’s about systemically trying to establish the authority of the state, or of the party, over the private sector—which effectively has been at the cutting edge of China’s economic eruption for the last 20 or 30 years,” said economist and Oxford University’s China Centre research associate George Magnus.

Chinese President Xi Jinping addresses the Informal Economic Leaders' Retreat of the Asia-Pacific Economic Cooperation APEC via video link in Beijing, capital of China, July 16, 2021. (Photo by Li Xueren/Xinhua via Getty Images)
Chinese President Xi Jinping. (Photo by Li Xueren/Xinhua via Getty Images)

“To the extent it stifles the private sector, and private-sector innovation, I think it will cost China in years to come.

The overall effect? A major sell-off of China’s biggest tech giants.

In the last five days, Chinese shopping platform Meituan’s stock price has fallen 23.45 per cent, while Alibaba is down 11.58 per cent over the same period. Tencent is down by 16.95 per cent.

All together, these three companies have shed more than US$237 billion just in 48 hours, according to CNN.

Wall Street worried

“The turmoil in tech stocks in China is finally bleeding into U.S. tech stocks,” said Susquehanna International Group’s Chris Murphy.

The concern is also about where China’s ever-widening regulatory crackdown will take aim next.

"The market seems to be uncertain whether there will be more policy changes for fintech, social media platforms, delivery platforms and ride hailing platforms," said ING chief economist for Greater China, Iris Pang.

People walk near the  New York Stock Exchange (NYSE) at Wall Street on July 15, 2021 in New York City. - Wall Street stocks declined early Thursday, extending a period of choppiness as investors weigh better employment data and the latest dovish Federal Reserve commentary. (Photo by Angela Weiss / AFP) (Photo by ANGELA WEISS/AFP via Getty Images)
People walk near the New York Stock Exchange (NYSE) at Wall Street on July 15, 2021 in New York City. - Wall Street stocks declined early Thursday, extending a period of choppiness as investors weigh better employment data and the latest dovish Federal Reserve commentary. (Photo by Angela Weiss / AFP) (Photo by ANGELA WEISS/AFP via Getty Images)

"Each has their own issue and faces different regulatory actions, so the market is looking for 'which technology subsector will be next?'"

US investment research firm New Constructs CEO David Trainer said this sell-off was not a buy-the-dip opportunity.

"China’s recent regulatory crackdowns are the beginning, not the end, of increased control and command by Chinese leaders," he said.

Not all bad, says JP Morgan

But JP Morgan Asset Management's global market strategist Chaoping Zhu doesn't think investors need to panic-sell, with regulator intervention "clearly" aimed at improving overall market competition to help more private companies succeed in the long-term.

"All of this suggests to us, on balance, that Chinese authorities continue to regard domestic and foreign capital as positive elements for the functioning of Chinese markets," he said.

"We retain our long-term positive stance on Chinese equities, with a focus on structural growth areas such as technology, healthcare and domestic consumption. While some sectors face regulatory headwinds, others could enjoy policy support," said Zhu.

"For example, semiconductors and software are benefiting from the effects of the import substitution, set out by the 14th Five-Year Plan. Carbon neutrality is another policy focus."

However, investors should diversify their companies and sectors to navigate the quickly-changing regulatory landscape, he added.

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