Alibaba, Tencent Price Cuts Put Chill On China Tech: Profit Squeeze, Trade Tensions Push Stocks Near Correction Zone

Chinese technology stocks are facing a significant downturn, nearing a technical correction due to profit-taking and geopolitical uncertainties.

What Happened: The Hang Seng Tech Index, which tracks Chinese tech stocks listed in Hong Kong, fell by as much as 0.9% on Friday. This decline has pushed the index down more than 10% from its May 20 high, indicating a technical correction, according to Bloomberg.

Major contributors to the decline include Meituan. MPNGF and Lenovo Group LNVGF The sector had previously seen a rally in April, driven by optimism in earnings.

However, recent price cuts to AI services by Alibaba Group Holding BABA and Tencent Holdings TCEHY have raised concerns about profitability. Additionally, ongoing trade tensions with the Group of Seven nations and profit-taking activities have further pressured the sector.

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Despite these challenges, Chinese tech companies have been actively repurchasing shares this year, using funds from convertible bond issuances or their own resources.

Why It Matters: The decline in Chinese tech stocks is not occurring in isolation. Multiple geopolitical factors are contributing to this downturn. On Friday, China tightened export controls on aviation and aerospace equipment, citing national security concerns. This move came amid ongoing restrictions from the U.S. on Chinese technology firms.

Earlier in the week, analysts highlighted election risks and potential tariffs impacting companies like PDD Holdings PDD and Alibaba Group. These geopolitical issues have led many to assign zero or even negative value to these companies.

Additionally, China has been ramping up its efforts to bolster its semiconductor industry. On Monday, the country launched a $47.5 billion state fund to support its semiconductor sector amid the global chip war. This move aims to reduce reliance on foreign technology, particularly from the U.S. and its allies.

Moreover, China is setting up its largest semiconductor fund to nurture advanced chipmaking capabilities, potentially making the market less accessible for U.S. companies like Nvidia and Advanced Micro Devices.

Investors can capitalize on China’s developments by diversifying their portfolios with ETFs that provide exposure to the country’s growth trajectory. ETFs like KraneShares CSI China Internet ETF KWEB, iShares MSCI China ETF MCHI, and iShares China Large-Cap ETF FXI offer diversified exposure to China's booming internet sector and large-cap companies, presenting compelling investment opportunities.

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This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote