China’s Tech Stocks End Tumultuous Year With Rebound

(Bloomberg) -- China's tech giants rebounded on Friday, with thin liquidity exacerbating swings as some traders closed out short positions on the last day of the year.

The Hang Seng Tech Index ended 3.6% higher, its best day in three weeks, in a shortened session. All members of the gauge rose, with Weimob Inc. and Bilibili Inc. among the top gainers. The climb followed the biggest rally in Chinese American depositary receipts overnight since 2008, with the Nasdaq Golden Dragon China Index surging 9.4% as analysts cited short covering.

“The outlook for 2022 remains uncertain, especially during the first quarter because the regulatory risk is not totally over yet,” said Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd. “As the rally was not due to any policy or fundamental changes,” a much stronger jump could trigger new short selling, he added.

Hong Kong's stock gauges have been the worst among the world's major benchmarks this year after Beijing's regulatory crackdown on private enterprise hammered sectors ranging from tech to casino operators. The Hang Seng Index capped 2021 with a 14% drop, its steepest loss in a decade. The Hang Seng Tech measure remains nearly halved from its February peak despite Friday's rebound.

Trading volumes for the overall market in Hong Kong were low on Friday, with the turnover of Hang Seng Index members at about 30% of this year's daily average.

Bearish bets have been heavy against Chinese tech stocks. Short interest accounted for 4.1% of outstanding shares of Alibaba Group Holding Ltd.'s ADRs on Wednesday, near the highest since June 2020, according to IHS Markit data. In Hong Kong, cloud service provider Weimob is one of the most shorted stocks, with short interest making up 17% of its free float, Bloomberg-compiled data show. 

While it's uncertain whether the worst of China's regulatory crackdown has passed, optimists point out that tech firms rushing to comply with new rules shows promise. Alibaba was the biggest point contributor to the Hang Seng Tech Index's gain on Friday, with an 8.2% jump. Still, it's down 49% for the year. JD.com Inc. advanced 5.5%, the most in six weeks.

China's renewed focus on propping up the nation's slowing economic growth could divert some attention away from the regulatory onslaught, even as concerns remain about the industry's earnings growth in 2022. That should make some of the tech giants attractive again given low valuations.

“It seems important to have a focus on stability and growth in such an important year – and not restructuring or new regulations,” said Herald van der Linde, head of equity strategy for Asia Pacific at HSBC Holdings Plc.

Alibaba Health Information Technology Ltd. and Ping An Healthcare and Technology Co. are the biggest decliners on the Hang Seng Tech gauge this year, falling around 70% each.

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