Remember when back on March 14, JPMorgan - easily the staunchest bull on US stocks - stunned Wall Street when its analyst Alex Yao told the truth about Chinese tech stocks, saying they were "uninvestable"? For those who have forgotten, this is what the bank said:
As risk management becomes the most important consideration for global investors in relation to their China Internet investment strategy as they price in China’s geopolitical risks and incremental concerns about regulatory risks, we find China Internet uninvestable on a 6-12 month view with an unpredictable share price outlook, depending on the market perception of China’s geopolitical risks, macro recovery and Internet regulation risk. The sector-wide sell-off might continue given lack of valuation support in the near term, in our view. We downgrade 28 coverage stocks to Neutral or Underweight. The only name with an OW rating in our coverage universe is Kuaishou.
Well, just two days later JPM was fed a horse dose of humiliation when a rally sparked by PBOC jawboning sent all these "uninvestable" stocks soaring as much as 40% (a move which we had predicted just hours earlier, when we said that the JPM downgrade "confirms the price action and if anything suggests that with the bottom having fallen out of the sector, now is the time to buy China internet stocks").
Of course, while JPMorgan was ultimately right and Chinese tech stocks did continue to crater, China decided to punish JPM and its clients, and as the PBOC's jawboning sent stocks surging days after the JPM record, all those who listened to the bank got stopped out of their short positions.
JPMorgan's humiliation was not done yet, however, and China continued to dole out punishment to Jamie Dimon's bank for daring to bash its tech stocks - something Beijing has been doing with impunity for the past two years as it seeks to teach the country's home grown start up billionaires a lesson - and back in April, Bloomberg reported that JPMorgan was removed as the most senior underwriter for Kingsoft Cloud Holdings' Hong Kong stock offering after one of the bank’s analysts cut the share-price target for the Chinese technology company by half. The bank remains a sponsor of the IPO, but is now ranked behind UBS Group AG and China International Capital Corp on the deal.
The New York-based bank lost the so-called lead-left role in arranging Kingsoft Cloud’s listing, the people said, asking not to be identified discussing private information. JPMorgan is still a sponsor of the offering, but is now ranked behind UBS Group AG and China International Capital Corp., the people said.
The demotion could cut fees for JPMorgan and underscores the tricky path banks must sometimes navigate when their research departments issue downbeat calls on investment-banking clients. JPMorgan is among a slew of global banks seeking to expand in China at a time when the nation’s stock market is tumbling on worries about slowing economic growth, strict Covid Zero policies and a government crackdown on tech companies.
But the humiliation wasn't done, and today an even more embarrassing moment has emerged: namely that JPMorgan's harshly written "uninvestable" note was never meant to be published in the first place.
According to Bloomberg, "JPMorgan editorial staff in charge of vetting the bank’s research asked for “uninvestable” to be removed from 28 reports penned by technology analyst Alex Yao and his team before they were published on March 14."
But while the word was cut from most of the reports - in some cases replaced with “unattractive” - it appeared in the published version of four, including one on JD.Com Inc.:
“As risk management becomes the most important consideration among global investors in relation to their China investment strategy, as they price in China’s geopolitical risks, we view China Internet as uninvestable on a six-12-month view with a binary share price outlook.”
According to Bloomberg, JPMorgan has concluded that it was an editorial error that allowed the word to slip through even though the editors, analysts and supervisors involved had all agreed before publication that it wasn’t the best choice of word. And indeed, while Yao’s team was undoubtedly turning more cautious on Chinese Internet companies, its prediction of share-price gains for at least 10 of them by year-end suggested the sector wasn’t entirely “uninvestable.”
However, the problem is that as part of his research blast, Yao published not only a bigger, industry piece but also dozens of individual company reports (most of which were bearish), and due to the sheer volume of verbiage, it was almost certain that a mistake would take place somewhere in the publication process. It did.
As Bloomberg notes, "the previously unreported episode highlights the fierce debate across Wall Street over the attractiveness of Chinese assets at a time when crackdowns on the tech sector and Covid Zero lockdowns are roiling the world’s second-largest economy." It also underscores "the tightrope act" global banks such as JPMorgan face as they try to ramp up their businesses in China while still giving clients access to candid research on the country’s turbulent financial markets.
Which is remarkable, because while JPMorgan was willing to be honest about Chinese tech stocks - as we said earlier, the bank's reco has been largely on the money, with Chinese tech stocks resuming their plunge after the brief short squeeze - the bank has continued to press on with unprecedented permabullish propaganda when it comes to the US, where as we noted last night, the bank's chief US stock preacher, Marko Kolanovic has repeated his call to "BTFD" in US stock approximately 19 weeks in a row, despite a relentless plunge in the US stock market, one which has cost Marko all his remaining credibility.
Of course, JPMorgan is already the biggest bank in the US, and as such losing a little more credibility here is hardly gamechanging. The same can not be said for China, however, where the stakes are the highest as the country is gradually opening up to foreign banks to allow access to its vast financial system and billions of dollars in potential profits (not to mention access to its laughable digital yuan).
Few firms understand the promise and perils of the market better than JPMorgan. CEO Jamie Dimon, who has pledged to bring his firm’s “full force” into China, said he regretted a quip that his bank would outlast the country’s ruling Communist Party last year.