China's Hong Kong-listed tech stocks enter bear market as tax ands AI fears take hold

Hong Kong's technology sector has entered bear market territory, with stocks experiencing a significant downturn on Thursday. This shift comes as investors confront rising tax fears and a broader sense of global risk aversion, shaking their confidence in the market. The Hang Seng Tech Index, heavily influenced by mainland Chinese tech companies, saw a decline of over 1%, marking a drop of more than 20% since its peak in October. This marks the sixth consecutive session of losses for the index. Key concerns for market participants include the potential increase in value-added tax (VAT) on internet services, which has been identified as a major factor driving the recent decline. This anxiety has been exacerbated by a recent VAT hike on certain telecom services, leading to speculation that internet platforms may face similar measures. Fears have also spread to sectors like online gaming and various digital transactions, raising alarms about further regulatory challenges for an industry already affected by years of strict oversight. Investment strategist Qi Wang from UOB Kay Hian noted, "The sell-off in recent days is driven by concerns over possible VAT tax increases on internet services, online gaming, and other online transactions, following the recent VAT hike on telecom services." The downturn in China's tech stocks coincides with heightened volatility in global technology markets, fueled by apprehensions regarding the disruptive impact of artificial intelligence on software companies. Phelix Lee, a senior equity analyst at Morningstar, commented, "It’s a barrage of negative news globally," referencing the introduction of AI tools by companies like Anthropic, which have raised fears among legal technology firms and contributed to a broader sell-off in the software sector. Despite these challenges, some investors view the current decline as a necessary correction rather than the beginning of a prolonged downturn. Morningstar's analysis indicates that the recent weakness is primarily confined to sectors that had previously outperformed their peers. Lorraine Tan, director of equity research for Asia at Morningstar, remarked, "I regard the action as a healthy pullback, largely concentrated in sectors that have probably overshot fair values." Other asset managers maintain that the fundamental outlook for Chinese tech remains intact, despite a lack of immediate positive catalysts. Vey-Sern Ling, managing director at Union Bancaire Privée, stated, "Fundamentally, nothing has changed to derail our positive outlook for Chinese tech stocks. Valuations are still supportive, sector earnings have the potential to rebound, and AI may provide future catalysts."