China tech stocks slide as regulators ramp up pressure on gaming

Technology stocks led Chinese shares lower as regulators took aim at gaming companies for focusing solely on profit, underscoring the market’s continued vulnerability to policy risks.

The Hang Seng Tech Index tumbled 4.5% as of 3:51 p.m. local time, with Tencent Holdings Ltd. dropping by almost twice that amount in its worst day in five weeks.

NetEase Inc. slumped more than 10% while Kuaishou Technology and Bilibili Inc. fell more than 8% as the Hong Kong’s tech gauge’s rebound from its August low came to an abrupt stop. The declines accelerated after the South China Morning Post reported that approvals for new online games would be halted.

Investors remain torn between enticing valuations and China’s long-term economic prospects on the one hand, and on the other the difficulty of predicting how much much further the government will go in its crackdown on private enterprise.

Thursday’s pullback was triggered by regulators summoning officials from companies including Tencent and NetEase to remind them of their social obligations and the harm caused by putting profits first. 

“This demonstrates the risk for those attempting to call the bottom with so much uncertainty still hanging,” said Bloomberg Intelligence analyst Matthew Kanterman. “I don’t think the overnight news is a big departure from that which we already knew, but the reaction clearly signifies the skittishness of investors around any regulatory news.”

The declines in Chinese stocks come after weeks of buying by bargain hunters, which had delivered a tentative rebound in the tech sector. The Hang Seng Tech Index has jumped about 11% from its Aug. 20 low, though it is still around 40% below its February peak.

“We can see the negative news on the gaming sector also dragging down other tech names, with investors starting to consider the regulatory risks again rather than bottom fishing,” said Bu Jiajie, an analyst at China Galaxy International Securities. “Some tech stocks have had a good rebound in recent days and there is profit taking at the moment.”

The risks and rewards of investing in Chinese stocks is dividing global investors, with billionaire George Soros penning an op-ed in a Wall Street Journal with warnings of a “tragic mistake” while huge money managers like BlackRock Inc. push to scale up their mutual fund businesses in China. 

Onshore, China’s CSI 300 Index closed little changed while the Shanghai Composite gained 0.5%.