Chinese stocks sell off a second day. Investment pros warn against buying at these lower prices

Published Mon, Jul 26 20216:27 PM EDTUpdated Tue, Jul 27 20217:32 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Chinese companies trading in the U.S. came under more pressure Tuesday, and investment officers say it's too early to shop for bargains among the battered companies. Regulators in Beijing have been cracking down on Chinese internet companies, and the result has been a sweeping loss in market value in the nation's home markets and stocks trading overseas. On July 24, China's antitrust regulator ordered Tencent to relinquish its exclusive music licensing rights and hit the company with a fine. Chinese authorities have also sought to rein in the country's booming after-school tutoring business. "They want to compete with us. They're not going to kill their economy and private sector. I think this is going to pass," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "But I think we need to wait for the dust to settle." Hong Kong's Hang Seng Tech index lost 8% Tuesday in a third day of losses. The broader Hang Seng index lost 4.2% and is down more than 8% this week. The Chinese yuan weakened against the U.S. dollar. U.S.-traded shares of Chinese companies fell broadly Tuesday after sharp declines Monday. ETFs holding Chinese stocks fell in U.S. trading. IShares China Large-Cap ETF was down 3.2% and iShares MSCI China ETF slumped about 4%. The KraneShares CSI China Internet ETF fell 4.6% for a two-day loss of more than 13%. Shares of internet retailer Alibaba lost more than 2.9%. Tencent Music dropped 4.7%. TAL Education and other education stocks recovered. TAL gained 25% Tuesday after a loss of 26.6% Monday, and Gaotu Techedu was up about 15% after dropping 28.9% a day earlier. "I think there's this recognition that the regulatory risk, the political risks are far more elevated than the market originally anticipated," said Jimmy Chang, chief investment officer at Rockefeller Global Family Office. "Many people were holding out hope that the Chinese government would not hurt their own golden goose, going after their more successful companies." Beware the bargain Chang said investors should still beware even though valuations of Chinese companies are much cheaper than their U.S. counterparts. Alibaba, for instance has a trailing price-earnings ratio of 23, compared with a 70 ratio for Amazon. "I think we are waking up to the reality that the Chinese government is very determined to carry out their vision, as to how they want to manage the economy and how these companies fit into their picture. I think the Didi IPO gave the Chinese regulators an excuse to come down harder on companies and use it as an example," Chang said. Ride-hailing company Didi reportedly ignored warnings by Chinese regulators to delay its U.S. public listing and conduct an examination of its network security. Didi is now trading at less than half the price it was at when it went public last month. Atlantic Equities downgraded that stock Monday because of regulatory uncertainty in China and the fact the company is the target of active investigations. On Monday, China's Ministry of Industry and Information Technology said its new six-month rectification program was aimed at fixing a number of issues , such as the mishandling of user data, infringing on users' rights and disrupting market order, according to The Wall Street Journal. No specific businesses were named. Chinese authorities earlier cracked down on Jack Ma's Ant Group. Last fall, financial tech giant Ant was forced to stop its much anticipated share sale . The company is refocusing and is expected to be more regulated and limited in scope. A change of venue for IPOs? "I think the market will stabilize, but the reality in the near term is you don't want to catch a falling knife," said Chang. "If it's not overly draconian, people at some point will read the tea leaves and say this has to come to a close. It's hurting some of the private equity investors in some of the planned IPOs that were going to be listed in the U.S." He said these IPOs could ultimately shift to Chinese listings. "I think it was by design. The Chinese regulators want these IPOs to list in Hong Kong," he said. Gary Dvorchak, managing director at The Blueshirt Group, has told CNBC some companies were warned previously not to list in the U.S. and they pulled their IPOs. Now, he said there are likely to be dual listings in China and the U.S. because China wants its national champions to list on its home exchanges. "The tide is definitely receding," Dvorchak said Monday on CNBC. "We had a few IPOs get out the door of course, but I think in the near term, the possibility that any Chinese company doing an IPO or SPAC even is pretty remote, just because of the uncertainty, valuations, and the heightened risk awareness." A special purpose acquisition company raises capital from investors to merge with a private company and take it public. "We're continuing to see investors buy the dip," said Brendan Ahern, chief investment officer of KraneShares. "We've had very significant inflows. ... We're seeing this disparity between the fundamentals versus the sentiment continue to widen." He said companies are still expected to have strong earnings, and that could help the stocks of companies. "Hopefully that gives us a catalyst to get these KWEB [KraneShares Chinese Internet ETF] companies going again," he said. The hit to China's education companies was stinging, and China is attempting to address its new push to have families have multiple children. "Upwards of 25% of urban family income has been dedicated to after-school tutoring by removing the for-profit companies from the equation. That role will be taken on by public schools going forward," said Ahern. Goldman Sachs analysts estimate the new rules on education companies will shrink the after-school tutoring market by more than 75%, bringing it from $106 billion last year to $24 billion. --CNBC's Evelyn Cheng contributed to this story

Chinese technology firm Tencent against the backdrop of China's flag.

Budrul Chukrut | SOPA Images | LightRocket | Getty Images

Chinese companies trading in the U.S. came under more pressure Tuesday, and investment officers say it's too early to shop for bargains among the battered companies.