Submitted by QTR's Fringe Finance
The story two weeks ago was China reportedly starting to ease up its scrutiny on ridesharing company Didi (DIDI), marking what could be the beginning of the end of several years of Beijing clamping down on its own technology sector.
It was a clamp down that resulted in U.S. listed China based technology stocks getting pummeled over the last year.
As a result of the news on Monday, Didi shares scorched higher by about 50% as investors considered the idea of whether or not Chinese ADRs were once again investable.
“Experts” are once again suggesting it’s okay to pile into China:
Which raises the question of whether or not these investments are an oasis in a volatile ocean of investing right now, or simply a mirage.
First off, I’d love to sit back and claim that I saw this coming and that I was right when I dabbled in Chinese stocks over the last year, but the fact is that I wasn’t right. Though I predicted that China would eventually loosen its grip on its technology companies and Didi, I owned it at much higher prices and took a loss on it, along with other Chinese stocks, like Tencent Music (TME), that I liked.
I look at the sector now completely differently than I did a year ago and thought this would be a great time to update my readers as to why.
A year or two ago, when China threw a wet blanket over its own technology companies and U.S. listed Chinese stocks started to plunge, I thought the volatility may only be temporary and that these stocks would eventually revert to some type of historical mean, despite the requisite discount Chinese ADRs trade with.
I have always been a strident critic of U.S. listed China based companies, but my goal last year was to pick the “best in show” names and strategically try to place bets on the least worst of the worst. It was a speculative idea when it happened and one that didn’t really pan out.
Now, with China loosening its grip on Didi, it seems like an opportune time to once again reassess investing in the sector. After all, many Chinese names are still well off their highs and, despite Monday’s rally, trade far lower than their historical valuations.
But while the Chinese government's attitude on these companies may have changed, the macroeconomic picture has also changed profoundly over the last six months.
As I have been writing about on my blog, Russia’s invasion of Ukraine has resulted in China and Russia strengthening their friendship and, in my opinion, gearing up to take on the US dollar and potentially back their currencies with gold.
Read more on China and Russia’s growing economic friendship here:
At the very least, the two countries are in the process of splitting off from the West when it comes to the global economy.
This shift in stance on the world stage has me looking at investments in China through a completely different lens.
The idea of rank speculation, even for major reward in Chinese names, doesn’t seem reasonable anymore. After U.S. regulators and brokerage houses shut down trading in all Russian assets, China feels like they could be next to get similar treatment.
Russian assets were another learning experience for me: at the precipice of the invasion of Ukraine, I tried to catch a bottom in several Russian ETFs, only to find them suspended for trading days later. That was a mistake I do not want to make twice and, if it can happen again to anybody, it can happen to China.
It also sets the precedent that the U.S. can and will shut down financial assets when it simply doesn’t like the politics or actions your country is taking. If China were to start considering trying to re-take Taiwan, that would be an instance where, in my opinion, almost all Chinese ADRs could wind up losing 90%+ of their value.
It’s also worth noting that new auditing regulations regarding U.S. listed China based companies are still in the process of being implemented, and are likely going to be a big headwind for Chinese companies looking for access to U.S. capital.
I would love nothing more than to be stuffed to the gills with China-based assets and be claiming this week’s move is a victory, but that simply isn’t the case. I got the initial trade wrong, the macroeconomic picture has shifted, and now that China is signaling the “all clear”, I’m far more cautious than I’ve been.
For me, the idea of trying to jump into a momentum trade and play this developing trend of Chinese technology stocks just doesn’t seem worth it. With the market pulling back and dislocations getting slightly bigger in some industries, there are just too many high-quality U.S. based cash generating assets for me to be worrying about what kind of nonsense Beijing will pull this week – and maybe more importantly, how the U.S. government will react to it.
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Disclaimer: I own nominal positions in KWEB, DIDI and DIDI calls. This is not a recommendation to buy or sell any stocks or securities. I own or may own all crypto/stocks I mentioned or linked to in this piece. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I get shit wrong a lot.