Warning: Why the Freefall in China Stocks Will Accelerate

Ahead of Alibaba’s (NYSE:BABA) quarterly report, investors speculated the e-commerce giant would beat expectations and raise its outlook.

The opposite happened. Alibaba posted poor profits and revenue and lowered its revenue guidance.

Alibaba forecast revenue growth as low as around 20%. This is a level not seen since its IPO in 2014. Investors thought they knew what the Chinese Communist Party would do next. Instead of paring regulations, the CCP kept tightening restrictions against Alibaba and tech firms.

The CCP calls its crusade necessary to achieve a common prosperity for all. Underneath its pledge to protect consumers, it is controlling private data flow. Technology firms like Alibaba or DiDi cannot know more about citizens than the CCP. This shift, which accelerated in mid-2021, suggests the freefall for technology China stocks will accelerate.

Tax-loss selling is approaching. BABA investors who averaged down as the stock fell to new lows will have even bigger absolute losses. They will need to realize losses to offset gains in holdings like Nvidia (NASDAQ:NVDA), AMD (NASDAQ:AMD), or Microsoft (NASDAQ:MSFT). The tax-loss selling could spread to DIDI (NYSE:DIDI), Bilibi (NASDAQ:BILI), and Baidu (NASDAQ: BIDU) stock.

Fortunately, NetEase (NYSE:NTES) and JD.com (NASDAQ:JD) rebounded. Should BABA investors buy those stocks, NTES and JD will rise while the rest of the China-based stocks find new lows.