Investors are keeping an eye on Tencent Holdings (OTCMKTS:TCEHY) and other Chinese stocks following reports that regulators there called the various shares “spiritual opium.” TCEHY stock fell in Hong Kong on Tuesday ahead of U.S. markets open.
Some of that reaction is already evident in Chinese stock-themed exchange-traded funds. The KraneShares CSI China Internet ETF (NYSEARCA:KWEB) was off as much as 2.4% in premarket trading. The iShares Trust – MSCI China ETF (NASDAQ:MCHI) slipped less than 1%. Tencent’s Chinese-traded shares are among the top holdings of both funds.
A story in Chinese state media compared internet gaming — TCEHY’s bread and butter — to drugs amid a torrent of scrutiny aimed at the country’s foreign-traded companies. The article was later altered to remove the opium reference, Reuters reported.
China’s most powerful companies, including Alibaba (NYSE:BABA), have come under pressure as bureaucrats in Beijing crack down on companies that list on American exchanges. Earlier this month, the powerful State Council said that “the overseas listing system for domestic enterprises” will be revised, promising it will also tighten restrictions on cross-border data flows and security.
Kicking TCEHY Stock While It’s Down
If Tencent is in regulators’ sights, the timing couldn’t be worse for investors. TCEHY stock has lost more than 23% of its value in the last three months. That’s double the decline in the same period in shares of ETF MCHI.
China’s securities regulator met last week with foreign brokerages to soothe fears, promising a steadier reform rollout. Concerns about watchdog scrutiny of fellow dual-traded stock DiDi Global (NYSE:DIDI) roiled those shares in recent weeks following its New York initial public offering in late June.
The report also comes as clouds are gathering on the economic horizon in the world’s second-largest economy. The country’s manufacturing activity expanded in July at the slowest pace in 17 months as higher raw material costs, equipment maintenance and extreme weather weighed on business activity.
China’s official manufacturing Purchasing Manager’s Index (PMI) dropped to 50.4 in July from 50.9 in June, according to data from Beijing’s National Bureau of Statistics. However, it stayed above the 50-point mark, which separates growth from contraction.
On the date of publication, Robert Lakin did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
InvestorPlace contributor Robert Lakin is a veteran financial writer and editor, including previous stints with Bloomberg News and as a buyside equity research editor.
