2020-11-14

Why This Blog Seldom Discusses Chinese Stocks

About 15 years ago I learned a lesson about investing in Chinese stocks: at any moment the government can change the rules and turn a very promising company or sector into the equivalent of a utility. Profit centers created by new markets can be banned. In the long run, any company built in China exists to serve the Communist Party and eventually, if it is large enough, it will merge into the Communist Party.

CNBC: China’s tech giants have lost more than $280 billion in market value as regulatory concerns mount

Shares of China’s top technology giants were battered on Wednesday as regulatory concerns continue to mount.

By the Wednesday market close in Hong Kong shares of Alibaba listed in the city plunged 9.8% while Tencent dropped 7.39%. Smartphone maker Xiaomi also declined 8.18% and China’s biggest on-demand delivery services firm Meituan fell 9.67%. E-commerce giant JD.com also saw its stocks plummet 9.2%.

The broader Hang Seng Tech index was also hammered and fell 6.23% on the day to 7,465.44.

The combined losses of the five tech heavyweights since their Monday’s close has contributed to more than $280 billion being wiped off in terms of market cap at the close of the trading day in Hong Kong, based on CNBC’s calculations.

Chinese regulator — the State Administration for Market Regulation — on Tuesday announced a set of draft rules aimed at curbing monopolistic behavior on internet platforms.

Many in the U.S. focused on the good: reigning in tech giants. In the U.S., Silicon Valley plays the role of the CCP. BigTech does the censorship, deplatforming and social credit. If China can hobble their tech giants, America can too goes this line of thinking.

For investors, the takeaway is the companies in China are not going to be run for the benefit of shareholders. At some point, the CCP will either strike from without (regulations) or within (turning the company into a hybrid of private and SOE) when the company grows too large or starts eating into SOE profits. As for geopolitics, debates over whether companies such as Huawei are tied to the government are easily solved. In the long-run, all Chinese companies will serve the CCP.

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