By Hugo Pan

It is possible that 2021 marked an important turning point for markets. While covid continued but was not as prominent as the inflation threat in investors’ minds and crypto rebounded, meme stocks were still a thing and stock prices continued to rise, this may be a sign of a new market era. Inflation, Central Bank tightenings, increased capital investment and wage pressure could all be signs of a new market era in 2022.

To prepare for the year ahead, we’ve assembled Investing.com’s global team of journalists and writers to give you a global take on what’s to come. Over the holiday period, we’ll publish outlooks from our team about the markets across the board – from currencies to stocks, cryptos to commodities, Europe to Asia to the Americas, and beyond. Our aim is to give you a broad perspective on how 2021 wrapped up and where that leaves traders and investors entering 2022, whether it’s a new market regime or more of the same. Our complete series is available. here.

The year 2021 marked a milestone for Chinese stock trading in the U.S. according to Investing.com. There were both positive and negative aspects. One hand, Chinese companies achieved a new record in terms of IPOs. However, regulatory challenges and difficulties in the IPO process led to a significant sell-off in China and Hong Kong indices, and some stocks reaching multi-year highs. Are we able to anticipate a shift as 2022 approaches?

Chinese Stocks: From Gimmicks to Value Investments

The so-called “China Concept Stocks” is a collective term for all Chinese stocks listed overseas.

Chinese companies were beginning to explore listing in the U.S. in the 1990s. Shanghai Petrochemical, (NYSE:), was the first Chinese state-owned entity to become officially listed on the NYSE and trade there as a pilot. It happened in July 1993.

China has transformed from being a scam to become a viable investment in the 20 years that it’s been experiencing economic growth. Many Chinese companies went public in the U.S., and their value has risen substantially. Alibaba (NYSE:) is currently the biggest Chinese company in the U.S. stock exchange. The company was worth $21.8 billion before it went public, which was 40 times more than its current value.

Over the last 15 years, the U.S. stock market has seen a rapid increase in Chinese companies. China’s share of U.S. stocks was 1% in 2005 when only 36 Chinese companies were publicly listed. They had a combined market value between $260 billion and $360 billion. There were 600 Chinese-owned companies in America by the year 2020. Their market capitalization was $6 trillion. This accounts for almost 9%.

The tailwind of encouraging data and buoyancy in U.S. markets led to a surge of Chinese companies IPOing here in 2021. Refinitiv data reportedThis is a significant increase on the previous record of 34 U.S.IPOs by Chinese firms in the first six months.

Chinese companies become Chinese beggars

However, as 2021 approached, the market conditions changed. In February, the reached an all-time high of 20,893.02 and fell to as low as 8275 in March, which is a 60% drop. Alibaba lost 58% to its highest levels, while DidiGlobal Inc ADR(NYSE:), fell 64%. Pinduoduo These are only a few examples of the 73% drop in (NASDAQ:). Numerous Chinese stocks plunged by over 90%. It was not expected that China’s booming stocks would quickly turn from desirable goods into unholdable assets, which cost investors much of their money.

Why did we get to this point?

There was a series of events that led to 2021’s tumultuous trading.

• U.S. introduced the Holding Foreign Companies Accountable Act in March 2019. It set high standards for Chinese stocks to be listed in the U.S. The law mandates that companies provide audit primers within three years after listing, or risk being delisted.

• On April 2, 2020 Luckin Coffee The OTC: admitted to falsifying transactions totalling 2.2 billion. Its share price plunged 80%. The Holding Foreign Companies Accountable Act was unanimously approved by the U.S. Senate in May 2020 following Luckin’s financial fraud trial. It would become effective at the end 2020.

• Didi Global quietly entered the U.S. on July 1, 2021 without any public announcements or ringing of the bell. The market was alarmed by the presence of an anonymous $400 billion market capital giant. On that date, the Nasdaq Golden Dragon China Index fell 2.5%.

• The Chinese Cybersecurity Review Office published a Cybersecurity Review of Didi Global on July 2, 2021. Meanwhile, the Golden Dragon China Index dropped another 1.9%.

• China published “Opinions of Strictly Cracking down on Illegal Securities Activities, in Conformity with the Law” on July 6, 2021. It included strengthening cross-border regulatory cooperation as well as requiring that the principal responsibility for the information security of listed overseas companies be implemented. Golden Dragon China Index dropped another 3.3%. This is 12.7% less than July 1.

• On July 24, 2021, the General Office of the CPC Central Committee and the General Office of the State Council “Opinions on Further Reducing the Burden of Students’ Homework and Off-campus Training in Compulsory Education”, and education stocks took their turn to plunge. That day, New Oriental Education & Technology (NYSE:) fell 54.2%, TAL Education Group (NYSE:) fell 70.8%, and Gaotu Techedu (NYSE:) fell 63.3%. As a result, the Golden Dragon China Index plunged 3 days in a row, dropping 16% and 22% cumulatively for July.

• China Evergrande was expected to be in debt of RMB 2 trillion by September 2021. Rumours of its bankruptcy started to fester. Evergrande also saw its share price plummet. It fell over 60% in that time, after dropping 75% since September. The sell-off of Chinese stocks was exacerbated by the fact that foreign media compared it with the Lehman Brothers’ moment. The Golden Dragon China Index declined by close to 10% during the month.

• SEC approved the Holding Foreign Companies Accountable Act’s final rules on December 2, 2021. This means that if the PCAOB does not review an issuer’s accounting firm within three years, then the stock will no longer be allowed to trade on the national stock exchange. It will also be delisted obligatorily from the U.S stock market in 2025. After the news, the Golden Dragon China Index declined 2.1%.

• Didi Global, a global company that specializes in the distribution of e-commerce products and services announced on December 3, that they had a microblogThe company “will begin the process of delisting the NYSE and prepare for Hong Kong listing with immediate effect.” Although the company has yet to make a formal announcement, Didi’s declaration reflects additional net security regulations. Again, the Golden Dragon China Index fell more than 9 percent.

Through 2021, investors were dumbfounded by the number of negatives that blasted Chinese stocks. Contrast this with the, up 16.2% in the past year through December 20th. This was the difference between day and night.

Chinese Stocks Outlook – Looking Forward to 2022

What happens to Chinese stock markets? There are three possibilities.

1. Listing in Hong Kong

Businesses must be ready for anything, and this includes Hong Kong listings. Even though the U.S. Holding Foreign Companies Accountable Act is only for three years (ends in 2025), we don’t rule out the possibility, should the market be tight next year. If that happens, large numbers of Chinese stocks could move to Hong Kong for another listing.

CITIC Securities thinks that the combination of tightening foreign regulations with gradual liberalization of Hong Kong’s stock market listings rules and index inclusion will increase the chances of Chinese leaders being eligible to list on the Hong Kong Stock Market. It is not necessary to comply with the regulations of the two markets for Hong Kong to allow secondary listing. If eligible Chinese stocks are returned to Hong Kong, secondary listing will soon become a common practice.

Companies that fail to meet Hong Kong’s secondary listing requirements will be subject to privatization or delisting. This is less popular due to high compliance costs and large capital requirements to purchase out public shareholders.

In reality, Chinese stocks that are foreseeing the future have made plans to reverse their fortunes. For secondary listings, stars Chinese stocks including Baidu (NASDAQ) and Bilibili(NASDAQ:), Trip.com.com.com.com.com. Weibo (NASDAQ.com.com.com.com.com.com.au.com.au.com.au.com.au.com.au.com.au.com.au.com.au. Weibo (NASDAQ.com.au.com.au.com.au.com.au.com.au.com.com.

Many opinions exist about the potential impact of these inflows of businesses to Hong Kong. Some think this will increase the volatility of Hong Kong’s capital markets, as it is smaller than those in the United States. At December 31, the Chinese market capitalization was approximately US$1 Trillion. 31 ADRs representing large blue-chips in Hong Kong are traded in America, including Tencent Holdings Ltd ADR, financial real estate stocks, Hong Kong-owned utilities stocks. The return of these stocks will create large-scale financing demand and strain the Hong Kong market. Hong Kong stock markets have struggled since 2021. They will be hard pressed to survive another major fall.

The benefits of big companies relisting at Hong Kong are obvious. The potential for hundreds of billions, or even trillions of dollars to flow back into Hong Kong will only strengthen Hong Kong’s status as Asia’s largest financial centre. People also think that Chinese stocks of the highest quality aren’t afraid to face turbulence because listing a Hong Kong ADR does not impact their prospects.

2. Return to China: A-shares

Chinese stocks now have the option to choose direct stock issuance channels, including the GEM registration pilot and Science and Technology Innovation Board.

Yuekai Securities is of the opinion that, due to the lack of hard technology targets on the A-share Market, Chinese stocks returned will receive a higher valuation premium. This should drive up market liquidity and market value. The local investors who bid on the newly (re)listed businesses could create a positive feedback loop, which will be crucial to promoting Chinese shares returning to A-shares.

3. Value Returns

China’s stock market suffered under the pressure of increasing regulation, anti-monopoly investigations, and increased policy measures through 2021.

Shanghai Securities believes that as it has been nearly a year since the first mention of anti-monopoly by the government, and that the policy’s starting point is to promote and benefit industry rather than wipe out leaders, the market will gradually rationalize and responses to regulatory policies will slow, leading to a bottom for the Internet industry, especially the Hong Kong Internet companies. Parallels can be drawn between regulation of U.S. internet leader and the Hong Kong Internet industry. However, these negative effects tend to be temporary and short-term.

The long-term trend for the Internet industry to be a positive one is unchanged in the light of China’s transformation, strong science and tech and the country’s economy. As regulation normalizes, the market may move its focus back to the companies’ performance and potential quality.

The above chart shows that the macro environment has been dragging down Chinese stock prices as much as any other factor, which is distracting them from their positive outlooks. Many Chinese stocks trade below their potential value as the bear market is over.

For example, Alibaba’s shares have hit a nearly 5-year low and are close to breaking a $100/share price, leaving shares really tempting. The internet company may seem attractive with a 17-year P/E ratio, 2.5 EV/S ratio, and just under $300 billion in market capital.

Safe havens were available on the Chinese market. For example, electric car maker XPeng Inc. only dropped 8% while Li Auto is down only 2%, as its stock hasn’t fallen with the rest of the sector.

Luckin Coffee was another surprising story. It gained 17% in 2020 despite trading on pink sheets. Investors have bought into its efforts to optimize cost control and focus on core business.

JD.com (NASDAQ) has also fallen 17.32% by 2021. However, it was in rebound mode between August and November. Then, the year-end volatility hit Tencent’s news.

It is clear that Chinese stock investors still have a desire to buy them and that they are not losing faith in Chinese stocks.

Global investors may have bought in to what could become the bottom. Warren Buffett’s Partner Charlie Munger, High Tide Capital and Bridgewater Associates have increased Alibaba’s holdings. Capital giants George Soros & Duan Yuongping increased their Alibaba holdings, while Perseverance Asset Management & Greenwood Assets have increased Kanzhun Ltd. (NASDAQ:). Ke Holdings Inc (NYSE:).

ETF flows are increasing as well. Efund China Overseas Net 50 Fund SS (SS) is an excellent example. Since 2021 it has had net subscriptions, which allows it to invest as market prices drop. The combined net subscription shares were 20.998 million shares at December.

Ideal scenario is for China and America to get their trade relations back on track. This and ending the pandemic may provide significant tailwinds to Chinese companies trading at low valuations. Chinese stocks and a more positive macro environment can help to erase the doom and gloom in 2021, and make 2022 a brighter year. If that environment doesn’t emerge, investors may need to keep an eye on the Hong Kong and A-Share markets instead.

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