The Hang Seng fell into a bear market Friday amid another steep decline in Chinese tech shares. Mainland stocks fell more than 1%.
City shares’ 1.8% decline took this week’s losses to nearly 6%. It was the worst week since the onset of the pandemic (figure below).
Alibaba’s Hong Kong-listed shares hit another record low after falling an eighth day.
Meituan’s losses are nothing short of catastrophic. The shares fell 17% this week. Since rising 21% in January, they’ve fallen every month in 2021 except for June. Last month’s decline was 33%.
The passage of a new data security law cast a pall over Friday’s session, although the mood was already grim.
“When pushing business marketing to individuals through automated decision-making, personal information processors should provide options that don’t target personal characteristics at the same time, or offer ways of rejection,” Xinhua said, providing sparse details of the new law, which takes effect on November 1. “It stipulates that individual consent should be obtained when processing sensitive personal information such as biometrics, medical and health data, financial accounts and [the] whereabouts of users.” Apps caught illegally processing personal data will be suspended or “terminated.”
The full text of the law wasn’t immediately released. That’s pretty convenient when you want wide latitude for enforcement. On the flipside, compliance is complicated immeasurably when you can’t read the law you’re supposed to be complying with. (To be fair, there were draft versions and one certainly imagines corporates will be able to review it prior to implementation.)
Bloomberg noted that “the nation’s legislature passed a related law in June that gave Xi the power to shut or fine tech companies that stood in the way of his efforts to control vast reams of data they build.” The Wall Street Journal said the new measures amount to “one of the world’s strictest data-privacy laws.”
The linked article in the Journal dryly noted that “Policy analysts say [the new law] is unlikely to limit the state’s widespread use of surveillance.” Xi can scan your face when you walk down the street. But Jack Ma can’t serve you a targeted ad, apparently.
Friday’s losses were exacerbated by local media reports suggesting online drug sales might be in the crosshairs too. Ping An Healthcare plunged the most ever (figure below) after the People’s Daily emphasized the importance for “strictly guaranteeing” the safety of prescription drugs sold online. Alibaba Health fell double digits, as did JD Health.
At the risk of stating the obvious, this is a total wipeout. Months ago (i.e., long before Cathie Wood or any hedge funds), I called Chinese tech uninvestable. The Party was intent on sending a message and there were no indications that Beijing was satisfied with the damage inflicted since Jack Ma’s “big mistake” (as I’ve called Ma’s public criticism of regulators in October of 2020, just weeks ahead of Ant Group’s star-crossed IPO).
Regular readers have heard it time and again: The fundamentals don’t matter and neither do the technicals. All that matters is the Party.
Now, nearly a year into Xi’s unprecedented regulatory crackdown, there’s nothing left but smoldering ashes. That’s hyperbole, of course. But just barely. Some sectors (e.g., Chinese EdTech) were completely decimated.
“We continue to recommend patience at the broad index level given that the regulatory uncertainties will likely weigh on the entire market as internet platform/gaming companies represent 37% index weight within MSCI China,” Morgan Stanley’s Laura Wang said. “In addition, pressure from the COVID Delta variant situation onshore and a slowdown on multiple macro fronts (export, credit growth, etc.) continue to mount.”
Early last month, I gently suggested Xi should “stop engineering bear markets in Hong Kong.” He wasn’t listening. Certainly not to anyone like me. But not to anyone else either.
A dilemma for investors with a global mandate. You want and/or need exposure to China but all the big online media, gaming, retail, fintech, etc names you’re been owning, are familiar with, and that the street and pundits have been pushing for so long are uninvestable.
You could buy big “old economy” and non-techy names like Moutai, Ping An, Bank of China, etc. Or you could go downcap and pick names directly focused on industries that the CCP is trying to grow into world-beaters and that Xi probably doesn’t blame for the current generation of degenerate laying flat youth. Semiconductors, biotech, renewables, etc. Through ADRs, ETFs, or can you get local shares? Hmm.
I exited virtually all China exposure last year and have been watching agog on the sidelines, as investors keep failing to learn that “BTD” doesn’t work when the government is causing the “D”. But boycotting China exposure seems like not a long-term strategy, so I’m curious what, if anything, folks are doing for China exposure right now?
It just occurred to me that Trump may well have started this bonfire. He complained early in his administration that China was stealing our secrets (for the most part, correctly) and so we had to punish them. I think this started to stimulate XI to look around at his companies and he soon realized that much of what we call “tech” is really the acquisition and sale of (confidential) information. He doesn’t want China’s private info out on the open market, at least until the government has had a chance to figure out just what’s out there and whether it’s worth anything. By definition, information is data that reduces uncertainty about the environment and its behavior. Power flows to those who know more than others, and therefore are less uncertain about their world. The control of information, therefore, is a major driver of power because it creates an imbalance in the levels of uncertainty among various individuals and groups. We in the US are increasingly willing to hand over our personal information to the government and to companies who would wish to profit from that information. An autocratic government like that of the PRC will take your info, but does not wish to allow others to know it and profit from it, hence the current upheaval in China.
I think there’s multiple things going on.
– assert control and primacy of CCP over any and all
– address inequality and economic grievances as potential source of social unrest
– national security and address economic weakness in certain industries: semis, biotech, etc
– stamp out degeneracy in China’s young – less video gaming and mind-rotting social media, more hard work and Xi Jinping Thought
Thus the expanding scope of the CCP’s actions.
If a company or its owners are too rich, too high profile, too vulnerable to the West, too burdensome on ordinary people, or breeds purple-haired laying flat slacker youth, it’s at risk. In my opinion.