It may seem risky to hold Chinese stocks as Beijing steps up its regulatory crackdown on tech and education companies, but investors should know that many high-growth names could be insulated from policy risk, Wall Street analysts said. Many Chinese stocks are in free fall as Beijing has stepped up its oversight of industries from tech to education and gaming. Tutoring companies became the latest victims as China unveiled a ban that prevents companies that teach school curriculums from making profits, raising capital or going public. Beijing may also target the online gaming industry after Chinese state media branded the sector "opium" and likened it to a drug, calling for further restrictions to prevent addiction and other negative impacts on children. Shares of Tencent and NetEase plunged Tuesday. Meanwhile, the government is clamping down on the flood of Chinese listings in the U.S., which are overwhelmingly tech companies, while also tightening restrictions on cross-border data flows and security. Ride-hailing app Didi's shares dropped about 35% over the past month after Beijing launched a cybersecurity investigation and suspended new user registrations. Still, there are plenty of industries in China worth investing in, from electric vehicles to gaming, and Beijing should ease the regulatory pressure soon to ensure economic growth, analysts said. "Chinese authorities will likely balance their regulatory agenda against a desire for economic stability, and the intensity of the regulatory crackdown may ease amid slower growth and market volatility," Jean Boivin, head of BlackRock Investment Institute, said in a note. China EV The Chinese electric vehicle market is a secular growth safe haven after the recent regulatory crackdown by the central government, according to Deutsche Bank. The Wall Street firm believes that the Chinese government is making a clear push for hardware tech such as EVs, batteries, semiconductors and aerospace, while raising scrutiny of the software and internet industry. "China EV stocks could be one of the best relative safe havens for growth investors, and we would expect increasing fund flows, further supported by Hong Kong listings and future inclusion to SH-HK Connect mechanism," Deutsche Bank analysts said in a note. Nio, Xpeng and Li Auto are some of the key players in the market, the bank said. "The stocks (NIO, XPEV, LI) have all held in better than other U.S.-listed ADRs since the DIDI IPO ... [we] continue to believe EV companies are operationally safe from the regulatory scrutiny," the analysts said. Macao gaming Another Chinese industry that would be insulated from the latest bout of crackdowns is gaming, which investors can bet on for a coronavirus pandemic rebound, AB Bernstein said. "China wants an economically viable and politically healthy Macau and the gaming industry plays a role in allowing that to continue," Bernstein's gaming analyst Vitaly Umansky said in a note. "Gambling-related problems have been addressed for a long period of time already and do not have systemic risk implications." Casino stocks Las Vegas Sands, Wynn Resorts and Melco Resorts & Entertainment have all tumbled about 20% in the past month on regulatory risks. MGM Resorts International fell around 15% in the same period. However, Umansky said the fear is overblown and the gaming industry is set to benefit from the economic recovery in China. "The concerns are over-hyped in our view, and the risk/reward trade-off today is very skewed in light of an eventual visitation and revenue recovery in Macau in the future and our view on actual risk of regulatory crackdown in Macau," Umansky said. Homecoming plays Beijing is reportedly considering harsh penalties against Didi, from a massive fine to even a forced delisting after its IPO in June. In light of the risk of being delisted from U.S. exchanges, U.S.-traded Chinese companies are seeking so-called homecoming listings in Hong Kong. Li Auto said Monday it is planning to raise as much as 15 billion Hong Kong dollars ($1.9 billion) in its Hong Kong listing. One stock to buy to capitalize on the potential boom in homecoming listings is the Hong Kong Exchanges and Clearing ADR and other Chinese brokers, JPMorgan analysts said. Elsewhere, Chinese large-cap banks are poised to benefit from the shift in policy stance and a likely value rally, JPMorgan said. — CNBC's Michael Bloom contributed reporting.
An electric vehicle charging station is seen at Nio's headquarters on Jan. 31, 2021 in Hefei, Anhui Province of China.
Ruan Xuefeng | Visual China Group | Getty Images
It may seem risky to hold Chinese stocks as Beijing steps up its regulatory crackdown on tech and education companies, but investors should know that many high-growth names could be insulated from policy risk, Wall Street analysts said.