Chinese stocks may be looking cheaper, but underneath the surface are some deeper issues. The increasing regulations on Chinese companies over the past few months left foreign investors with massive losses — which also means these stocks are trading at lower prices. Many are now asking: is it time to buy?

You can’t run and you can’t hide

For years, China let entrepreneurs and businesses grow freely with little oversight. But now, its government has different priorities — emphasizing wealth equality and national security — while addressing the high-cost burden of education, healthcare and property.

And global investors are caught in the middle of this change, with new regulations destroying business models and threatening to slow growth — with some sectors being hit especially hard:

• The KraneShares CSI China Internet ETF (NASDAQ:PGJ), a basket of Chinese internet stocks listed on the US exchange — is down 35% in 2021.
• Education companies fell by over 90% from China’s plans to turn for-profit tutoring companies into non-profits.

Yesterday, gaming giant Tencent (OTC:TCEHY) tanked 7% after a Chinese state news article compared online gaming to opium — which was later taken down and revised.

Also on the chopping block: Chinese property management companies and car-chip manufacturers.

The contrarian play of the year

Investor opinions on Chinese stocks are diverging. While institutional investors have been big sellers of Chinese stocks, global investors have also been buying China-focused funds despite the risks.

• The bulls: Funds, like Baillie Gifford, have big bets on China’s tech sector, citing the potential gains are too compelling to ignore.
• The bears: Cathie Wood’s ARK Invest dumped nearly all its Chinese holdings from its ETFs.
• The cautious: Goldman strategists (via BBG) stated the rules likely won’t hit all companies in a sector but cautioned the sell-off may not be over yet.

There’s an old rule when it comes to investing in Chinese stocks: Align with the Chinese government’s priorities. The challenge now is finding which sectors will be hit next — which is rapidly changing. For now, it’s safer to assume that no sector is immune from regulations.

Investors: Nothing beats homemade

China is seen as a high-growth potential economy that could take over the US’ global dominance one day. But with the US economy chugging along and US companies reporting record earnings, the risk/reward is tilting towards US stocks.