It’s not just Xi Jinping, the US is just as much an influence – an influence over the valuations of the main China tech stocks. Alibaba (NYSE: BABA) might be thought of as the poster child for this. Jack Ma was becoming much too famous in China for his own good let alone that of the company. So, there was a political clampdown. That’s just what happens in places where it is politics that attempts to run the economy.
The big issue, the one claimed at least, was the likely flotation of Ant, the financial services group. This didn’t happen, as we know. There are arguments about the reason why – maybe it was just to slap down Jack Ma. Another idea is that China’s financial economy – the banking system, etc – works by fiscal repression and Ant was lifting that to the detriment of fiscal control. It tends to be monetary economists who prefer that explanation.
The thing for us as investors is that this is just another damn thing we’ve got to deal with. We can’t just look at the market performance of these Chinese tech stocks anymore. We’ve also got to try and divine what Xi Jinping and his team think should be happening. Further, how they’re going to change regulation to make what they want happen. We’ve an extra layer of risk here, one simply not related to market factors.
This makes any investments – or just trading positions – in those Chinese tech companies fragile. It’s bad enough trying to work out who is gaining customers and who isn’t but predicting what politics is going to do is near impossible.
It’s also true that this isn’t just a function of China’s government. There are moves in the US for the FTC and the like to have more power over the homegrown Big Tech. But that’s going to be a bureaucratic process and we’ll get plenty of signalling – and fightback – of any real decisions. But American regulation can affect Chinese companies too.
Not that any of us are invested in Huawei – it’s a private company – but the American govt decision that no one can sell its advanced chipsets means that it’s pretty much locked out of the 5G market. The Chinese chip industry isn’t advanced enough yet to be producing replacements in quantity.
Yes, agreed, we can’t be invested in Huawei the way some to many have positions in Alibaba but the point should be obvious. Over and above the Chinese regulatory risk there’s American too. Oh, and, of course, that threat that all of the China companies listed in the US might be forced to drop their listings in New York.
This isn’t to say that we should abandon all plans or positions for China Tech companies like Alibaba, Tencent and others. Rather, it’s the obvious point that in 2022, as was true in 2021, it’s going to be politics that is a major determinant of their valuations, not mere market performance. If we are going to play in this sector we need to be aware of that.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.