Chinese stocks are crashing, what should we do?

Chinese stocks have tumbled into negative territory for the year. Chinese internet giants like Tencent, Alibaba and JD.com dropped in price to their lowest in 52 weeks’ time. What has happened?

The declines are caused by the step in by the Chinese regulators to oversee in education and technology sectors. This causes the education related stocks dropped more than 80% in price and tech giant stocks to drop more than 40% in price from their all times high. Didi, the e-hailing company has also dropped more than 40% since its IPO in US because they did not listen to the regulator’s recommendation not to be listed before addressing the internet security issue.

The single 2-day decline (Monday and Tuesday) for the Hang Seng index was significant. We have never seen such significant drop since financial crisis. When the drop is so fast and significant, it might be too late to exit any investment when everyone is panic selling.

After doing some research and calculations on the companies’ real values, it is found that Tencent, Alibaba and JD are undervalued. Their revenues have been rising despite the pandemic. This shows the strong and right business model. Even though their upcoming revenues might be affected by the Chinese regulations, but the impact is viewed to be minimum compared to the expected growth of the revenue. I believe they will still remain as leaders in the sector. As such, the decline can be a good time to accumulate more shares.

For the education and e-hailing Chinese businesses, the model needs to be re-looked. The interference of the Chinese government on these companies could impact their business models and revenues significantly and hence the future prospect of these businesses is questionable. Despite the above opinion, the Chinese stock market is expected to be volatile. Investors are advised to deploy proper asset allocation on their investment portfolio to avoid great loss. Whichever drop will rise up and whichever rise will drop again. Stocks are not moving in straight line up or down, they are moving in waves. Volatility in share price is always expected and hence it gives investors great capital gain opportunity. Stay calm always in the investment journey and stay invested on good and sound companies. Let the time does the magic on your wealth.

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