The Chinese market
The Chinese government’s snowballing crackdown is unlikely to end anytime soon, and more industries may be swept up in the Chinese government’s efforts to reform the relationship between public companies and the state.
“The backdrop for investing in them obviously begins… last year, when Jack Ma criticized the Chinese government. “I think China decided enough was enough at that point, and they stepped in and blocked the Ant Financial IPO,” said Dan Niles, founder of Satori Fund. “People thought it was a one-time thing,” but the government has increased the pressure. Ant Group was ordered by Beijing to restructure its operations. In April, its sister company, Alibaba, was fined $2.8 billion for violating anti-monopoly regulations.
According to David Bianco, chief investment strategist at DWS Group, China is too important a market to avoid, even with the crackdown. “We are not abandoning the Chinese tech titans. We’re sticking with them,” he said, adding that he, too, is wary. “It is a risk that is not completely priced in, but I believe it is significantly priced in and appropriately reflected. We’re nibbling on these.” According to Bianco, there are some opportunities among the big tech names, as China emphasizes its desire to dominate all aspects of technology.
“I’m not promising a bottom here. I’m not telling you to back up the truck. “We see it as underlying businesses of high quality,” he said.
Of course, investors are keeping an eye on the pandemic’s risks.
China’s stock markets rose on Monday, despite Beijing tightening travel restrictions in response to the spread of the Coronavirus delta variant, which raised concerns. The oil market reacted negatively to that report, as well as a sharp drop in Chinese demand for oil in July. Shanghai stocks were up 1%, while Hong Kong stocks were up 0.4 percent.
Macquarie Capital economist Larry Hu stated that the government’s regulatory drive will continue, but it has toned down its rhetoric and sounds less hawkish.
“For example, the Politburo meeting last [December] mentioned ‘anti-monopoly’ and ‘curbing disorderly capital expansion,’ portending a regulatory storm that would crush China’s tech stocks in the coming months,” he wrote in a note.
“However, the latest Politburo meeting, held on July 30, noticeably toned down the words on regulation,” Hu said. “It does not mean that the regulatory storm is over, but it does, to a large extent, reduce the political risk.” China has warned companies against going public in other countries. Didi Global, a ride-sharing company, became the target of government investigations in July, shortly after going public in New York. Other overseas IPOs are expected to come to a halt.
I still believe it is too soon to catch a falling knife. Allow the dust to settle. What I’m interested in is what the penalty will be for Didi.
Jimmy Chang CHIEF INVESTMENT OFFICER AT ROCKEFELLER GLOBAL FAMILY OFFICE According to the Financial Times, ByteDance, the owner of the popular TikTok social media video app, is now planning to go public on the Hong Kong Stock Exchange in September after withdrawing from an overseas offering. The company has prioritized addressing China’s security concerns, including how it manages consumer data.
The government raised the stakes even higher in July, when it issued new rules governing how publicly traded education companies can operate and raise funds.
According to Bloomberg, a state media commentary on Monday focused on regulators’ concerns about speculators in the chip market. Semiconductor Manufacturing International Corp shares fell 5% on the Hong Kong Stock Exchange, while Hua Hong Semiconductor shares fell 5.7 percent.
Gaming has also come under fire. Last week, state media slammed online gaming, referring to it as “opium” in an article that was later removed. Tencent stock suffered as a result of concerns that it would face tighter regulatory restrictions, and the company quickly announced new rules governing how long minors can play online games.
Beijing has also announced new food delivery regulations, which have impacted the stock of online shopping platform Meituan.
“The government is pursuing socialism over shareholder policy. They are attempting to do things that will benefit the 90 percent of the population that does not own stock. If an industry hasn’t been targeted, you have to be concerned,” Niles said in an interview last week.
“I believe it varies by industry,” he said. “We have a collection of over 50 internet domain names that we began to acquire last Wednesday. We dispersed it. You don’t want to be in the one name they’re going after.” How to invest According to Niles, investors should look at companies that have already been under fire and have taken steps to address the issues.
“In 2018, they restricted the approval of new video games for ten months, so certain parts of the Chinese internet industry have already gone through this,” Niles explained.
Recently, Alibaba’s stock did not fall significantly, despite the fact that its earnings report in July fell short of expectations, with the company’s revenue falling short of expectations. The stock fell on Monday after the company fired a manager in China accused of sexual assault and disciplined others in an effort to limit the company’s reputational damage. Alibaba’s stock is trading above its recent low of $179.67, but it is still well below its 52-week high of $319.32 in U.S. trading at around $194.
The fact that Chinese regulators have met with global banks, according to Niles, is encouraging. He believes it is critical to monitor not only the behavior of government officials, but also the trading activity in individual stock names for signs of a bottom.
Tencent Holdings was up about 4% on Monday, following overnight gains in Chinese markets.
“Tencent and Alibaba account for 25% of Chinese ETFs. I wouldn’t call it a washout. They’ve been badly beaten. We believe that a significant amount of additional risk has been priced into these stocks in terms of profit caps, profit redirection, and ownership restructuring,” Bianco said.
“fallen angels” to consider among some of the first sectors and companies hit by the government crackdown.
Analysts believe the health care and housing sectors will be among the next to be scrutinized, putting stocks in those industries at risk. They emphasize that the government has stated that housing should not be a target for speculators.
“I still believe it is too soon to catch a falling knife. Allow the dust to settle. “What I’m interested in is what the penalty will be for Didi,” Chang explained. “That will be a signal to me… If the penalty is not as severe as expected, that is, if it does not harm the company’s long-term prospects, that will be a positive signal.” In the larger picture, China watchers say the government’s actions may have an impact on future growth if they restrict companies too much.
“Alibaba and Tencent have been significant drivers of productivity growth in recent years,” said Capital Group’s chief Asia economist Mark Williams. “If you kill the companies that are generating productivity growth, you have to accept that growth will slow in the future,” Williams said, citing changes in the Chinese business environment. “A Chinese company is freewheeling and pushing the boundaries,” he said. “But now they realize that things have changed and that they must do what the party wants them to do. If you’re unhappy in the United States, you send a lobbyist there, and if you’re Tencent, you say, ‘I’ll do whatever you want.'”