What You Need To Know
In the past two weeks, China stocks have been decimated across the world, in particular, their education stocks and their technology stocks.
Gaotu Group (NYSE:GOTU) has seen its shares plunge from US $149 to US $2.50 in the past 6 months. Other popular tutoring businesses like TAL Education (NYSE: TAL) and New Oriental Education and Technology (HKG: 9901) have also seen a flee of money.
Not too long ago, Alibaba’s (NYSE:BABA) founder Jack Ma disappeared from the media for a period and returned with a conviction to trim Ant Financial’s ambition.
And not long after that, DIDI (NYSE:DIDI) was heavily penalised for a premature IPO, when the company had yet to completely assuage Chinese regulators of their data protection standards.
To top it off all, Tencent music was given 30 days to unwind their exclusive global licensing agreements with Universal Music, Sony Music and Warner Music.
So is this an attack on China Big Tech stocks?
If you read the headlines of many of the financial portals, that would seem the case. The headlines go as such “China launches 6-month intensive campaign to set Big Tech straight – Nikkei Asia“, “The China Model: What the Country’s Tech Crackdown Is Really About – Bloomberg Businessweek“, “Beijing launches fresh crackdown on internet industry misconduct as Hong Kong tech stocks sink – SCMP“. Granted, these headlines may be only for the 48 hour news cycle, but it still gives the lay investor a frightful day with all these headlines.
Let’s instead take each issue one by one:
- Education and Tutoring stocks – The government essentially bans all these companies from IPO-ing, or taking overseas venture funding. In essence, they have turned it into a protected industry, not different from the media industry in most countries. This is to support their childbirth policy, which in turn leads to future population and productivity goals.
- Ant Financial (and other similars) – Ecosystem players were issuing their own loans and insurance products without passing any part of the chain through through the central banking system, and in effect, bypassing all the safeguards in the legislation. In fairness, this crackdown is probably a little late.
- DIDI – Just a whole mess of data protection gaps. ‘Enuff said. Why they went ahead for an IPO despite all these, signals desperation or arrogance by the management and board. It is no secret that the Chinese government does not work on a multi-decade lobbying system like some other countries. If you want to take them on, you need to be able to run with your feet. Thats a tad hard to do when half your income is from Mainland China.
- Music Mafia – Erm, this is a good thing, and something all anti monopoly supporters should be delighted. In fact, the government has clearly said that tencent music can still do exclusive licensing for indie musicians with a 3 year limit.
Is it still a buy?
In a utopian world, a stock price would continually go upwards, and everyone gets on the train, but then again, is that not called inflation?
The Chinese government is unlike other liberal governments where capitalist lobbies have strong sway and can drag legislation on good and bad issues across decades. In China, when it is decided, it is done. It is usually done with the long term good in mind as well.
Honestly, no one really knows if buying now is catching a falling knife; but i would collect a bit if I wanted to open a position, or if I already have a position, then i would collect at least at 20% to discount to my previous price.
Personally, I like the trimming done now, the price pullback could also be a function of bubbling optimism fleeing. The stable price should be a bit higher, after the bubble froth leaves.