Does Chinese tech tell bearish tale?

Price action in key Chinese stocks is cautious as the country faces a stream of increasingly bearish news.

The KraneShares CSI China Internet Fund, which has stakes in high-profile companies such as Tencent, Alibaba, and Baidu, is down 14 percent in the last three months, contrasted with a 2 percent gain for the Nasdaq-100 in the same period. That's noteworthy because KWEB has mostly tracked NDX since its inception in 2013. (Both have exposure to e-commerce and technology firms.)

The divergence began in mid-October after China set its currency at a six-year low, and subsequently widened as economic news showed weakness in the Asian giant:

• Oct. 19 : Q3 gross domestic product game in at +6.7% in Q3, matching estimates. But September industrial production rose 6.1%, missing the 6.4% forecast.
• Oct. 27 : Industrial profits rose 7.7% in September, down sharply from August's 19.5% surge.
• Nov. 7 : China reported foreign reserves of $3.12 trillion for October. It was the smallest nest egg since March 2011 and missed projections by $10 billion.
• Nov. 8 : Chinese exports and imports for October missed estimates. The trade surplus of $49.1 billion lagged the expected $51.7bln reading.

KWEB vs NDX, 1yr

Rectangle on right shows period of sharp divergence.

Chart Courtesy OptionsHouse

Chinese Tech stocks took another hit on Nov. 9 after Donald Trump was elected US President, partially on a promise to curb Chinese imports. But the real-estate mogul's victory may have been less of an immediate culprit because even California-based technology/Nasdaq stocks lagged amid an historic post-vote rotation .

China faced other bearish headlines in November: Continued currency depreciation and foreign-exchange losses, weak manufacturing data, retail sales and industrial production.

ResearchLab's China Tech group shows similar deterioration in the same period:

KWEB fell more sharply this week following more negative headlines. This time it ran against a bounce in NDX, which suggests the bearishness is focused specifically on China.

• Dec. 11 : Trump suggested his administration may recognize Taiwan. Such a move would jeopardize decades of careful diplomacy between Washington and Beijing.
• Dec. 13 : A Wall Street Journal article argued that stimulus was boosting Chinese growth this year, but risked a hard landing in 2017.
• Dec. 14 : The US Federal Reserve was surprisingly hawkish, raises interest rates 25 basis points and telegraphing three more hikes next year. The US dollar surged on the news, drawing money away from China. Chinese bonds crashed, and their regulators were forced to halt trading for the first time ever.
• Dec. 15 : Ruchir Sharma, head of emerging markets at Morgan Stanley, tells CNBC that China is at risk of capital flight after the Fed's move.
• Dec. 15 : The Wall Street Journal reports unusual spikes in overnight lending rates for the yuan. (Similar anomalies preceded the 2008 financial crisis in the U.S.)
• Dec. 15 : Outgoing U.S. President Barack Obama sued China in the World Trade Organization, alleging illegal barriers to gain imports.

There were some positive events thrown in the mix during this time, but it's worth remembering that analysts have warned of a debt bubble in China for more than a decade. Now that its economy is slowing, those bad loans might actually start to matter. Business sentiment will probably worsen as well given the White House's toughening stance on trade. Throw a Fed-inspired capital flight into the mix, things could get worse before they get better.

Casino stocks exposed to China have also struggled of late:

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.