Chinese tech shares surged a second day Tuesday, bolstering global risk sentiment and (finally) rewarding battered dip-buyers burned repeatedly by Xi’s capricious regulatory crackdown.
The Hang Seng Tech Index, which fell nearly 50% from its February peak amid the never-ending deluge of new decrees from Beijing, surged 7% in a single session, bringing its two-day advance to nearly 10% (figure below).
Predictably, the despondency and fatalism on display last week has now morphed into an entirely different narrative. I suggested that might happen. People are now marking their emotions to market. “We are seeing lots of bottom-fishing,” one asset manager mused, citing apparently voracious buying of Tencent and Alibaba.
Tencent rose nearly 9% Tuesday, mechanically boosting Naspers and Prosus and the entire EM equities complex in the process. (Remember: You probably own Tencent, even if you don’t realize it.)
It helped that MSCI CEO Henry Fernandez told Bloomberg that Chinese shares will likely rebound. Fernandez noted that this is hardly the first time market participants have claimed a developing nation’s shares are “uninvestable,” and he also suggested that western investors may be trying to have it both ways, imploring Beijing to crack down, only to decry regulatory action as anti-capitalist.
I suppose I’d just note that what we’ve seen over the past several months isn’t quite what US investors had in mind when it comes to regulatory reform in China. But then again, it’s not up to Wall Street to dictate how another country regulates its own industries. It is, however, up to the SEC to determine what the listing rules are stateside and that’s another part of this story which isn’t resolved. In any event, Fernandez’s pseudo-endorsement was helpful at the margins.
But the bigger story was JD.com, which soared 15% (figure below) after reporting better-than-expected revenue in what Bloomberg amusingly described as “defiance” of Xi’s internet sector crackdown. The company obviously didn’t couch its results in those terms. “JD has always paid great importance to data security and personal information, so the arrival of the new regulations are not making a big impact on us in terms of our advertising business,” CEO Xu Lei said, on the call.
JD’s results prompted Cathie Wood to jump back into Chinese shares, which she abandoned just weeks ago. Apparently, Ark bought 164,889 of JD’s ADRs Monday.
But this is hardly an “all’s well that ends well” story. Obviously, China’s tech titans are still severely beset. Didi halted European expansion plans on data concerns, adding to the ride-hailing giant’s list of recent stumbles, for example.
And Alibaba, which jumped more than 9% Tuesday after falling to a record low in Hong Kong, is trading on a forward multiple of just 17X. That doesn’t sound cheap until you consider it was nearly 30X on the day Jack Ma inadvertently kicked off the regulatory blitz late last year (figure below).
Speaking of Alibaba, news that Xi is investigating the top official in Hangzhou, home of Ant Group, seemed to bode especially ill.
Rumors circulated online that Hangzhou Municipal Party Committee Secretary Zhou Jiangyong may have bought up shares of Ant just before its IPO was iced by Beijing last November following Ma’s criticism of regulators. Ant denied the rumors.
Whatever the case, Zhou is “suspected of serious violations of discipline and law.” I suppose I don’t have to say this, but “serious violations” of Party discipline can result in punishment that is wholly disproportionate to the alleged infraction.
Whatever the case, Zhou is “suspected of serious violations of discipline and law.” I suppose I don’t have to say this, but “serious violations” of Party discipline can result in punishment that is wholly disproportionate to the alleged infraction
… especially as the crime being recorded has nothing to do with the real crime being prosecuted – defiance or threat to Xi’s vision/goals/political ambitions…
One more reason why these stocks are ‘uninvestable’ (per H) for the run of the mill investor like myself. I learned the same lesson the hard way with Russian fossil fuels in 2003.
I looked into this a bit, because I am definitely a girl who likes a bargain. I will share some of my additional due diligence that led me to “no way, never”.
The US-China Economic and Security Review Commission was established in 2000 by Congress and the US Dept of Treasury. There are 12 appointed members and the purpose is to review the national security implications of trade and economic ties between US and China.
Their last report, dated May, 2021 states that there were 248 Chinese companies listed on US exchanges with a value of $2.1T. There are also 8 national level Chinese state owned enterprises (SOEs) traded on 3 US exchanges.
The Commission report lists 3 risks associated with investments in Chinese companies.
First, lack of transparency. The Public Company Accounting Oversight Board (PCAOB) established by Congress to work with the SEC to oversee accounting, auditing and reporting standards of public companies has been and is currently unable to inspect working papers of auditors based in China or Hong Kong due to the China government prohibiting this to occur. LOL because I am a retired CPA.
Second, the legal standing of variable interest entities (VIEs) is unclear. The PRC prohibits direct investment in many industries and to get around that rule, Chinese companies set up offshore, foreign subsidiaries to raise capital. Based upon multiple studies, the VIEs have questionable status under Chinese law. See report for more detail- but if you are buying an interest in a Chinese company, you are likely not buying a “legal interest”. Therefore, no protection in mergers, taking private or bankruptcy transactions. Again, LOL.
Third, national security risk. Investors in Chinese companies may support activities that are contrary to US national interests. Censorship, surveillance, military. Wow- greed really can trump putting America first!
GLTA.
Interesting and informative comment. Thanks for posting.
I think when anyone uses the term uninvestable, one should immediately look to buy some calls, which look very cheap as you have pointed out. Jim Cramer set off quite a nice rally when he said that about energy stocks. Obviously, you can’t overstay your welcome…