China Tech Stock Rally Fades as Regulatory Concerns Linger

Chinese technology stocks struggled to extend their rally into a third day, as bargain hunters retreated amid lingering concerns about how far Beijing may push ahead with its clampdown on private enterprise.

The Hang Seng Tech Index trimmed its gain to 0.2% at the close, after jumping as much as 3.5% earlier. New Oriental Education & Technology Group also pared its surge to 13% after rising as much as 22%.

The weakening momentum is a fresh reminder of just how fragile investor mood remains about industries that had suffered an unprecedented regulatory assault in recent months. Hesitance among investors has reemerged despite earlier enthusiasm induced by strong corporate earnings, Cathie Wood’s return to the sector and favorable technical indicators.

“It was a technical rebound earlier this morning,” said Daniel So, strategist at CMB International Securities Ltd. in Hong Kong “The market is still observing due to regulatory overhang, while investors have already digested companies’ earnings and any new guidance.”

Weighing on the broader market, Alibaba Group Holding Ltd. fell 1.4% after rising 3.5% earlier, while Tencent Holdings Ltd. cut its advance to 0.6% after earlier rising as much as 4.2%.

China’s crackdown on its tech behemoths had caused the Hang Seng Tech Index to tumble more than 45% from a peak in February before enjoying a meaningful rebound over the last two sessions.

“We believe uncertainty will remain high across the internet and other related sectors and, by extension, toward Chinese equity in general,” Vincent Mortier, deputy group chief investment officer at Amundi SA, commented via an email on Monday. “We know that cyber security and data protection remain a firm focus for regulators in the short term.”

Still, some investors remain hopeful that the nascent rally may pick up its pace again, encouraged by signs of renewed interest among prominent fund managers such as Cathie Wood.

Wood’s Ark Investment Management has bought shares of JD.com, JD Logistics Inc. and Pinduoduo Inc. this week, when the companies released strong financial results. The fact that Chinese private tutoring firms, led by New Oriental, have managed to held on to their sizable gains also helps cushion the broader weakness.

In addition, there are signs that the U.S. and China are engaged in efforts to start remedying frayed relations, as a contingent of Wall Street veterans and high-level Chinese officials are preparing a new round of meetings before the end of the year.

Some optimism about bottom fishing efforts, the U.S.-China discussions and the recent gains in the broader tech sector are aiding education stocks as well, said Bloomberg Intelligence analyst Marvin Chen. “But there is still long ways to go” for the sector, he added.