"Chinese Stocks Not Investable" - JP Morgan

Banish Fear of Markets - Issue 10/2022 - 23 March 2022 - Market Period 7-18 March 2022

What a rollercoaster for Chinese stocks. In the last 2 weeks, it got hit with threats of sanction after sanction, causing one of the steepest falls in their value. Then on Wednesday last week, the assurances of China’s vice-premier propelled them vigorously upwards. In markets, you can’t get more drama than this.

It started Thursday 10 March, when the US Securities Commission said it plans to delist 5 Chinese firms listed in the US if they do not comply with accounting rules. Then last Monday,? the People’s Bank of China (PBOC) dropped a bomb on Tencent finding that it had allowed illegal money transfers through its WeChat Pay service, exposing it to a record fine. The next day, JP Morgan declared Chinese tech stocks uninvestable in the next 6-12 months, and proceeded to downgrade 28 Chinese stocks.?

The impact of Chinese tech stocks was immediate and furious. The Nasdaq Golden Dragon China Index, which tracks Chinese companies traded on Wall Street, fell more than 10% for two consecutive days after the threat of delisting by the US Securities Commission. The PBOC findings of illegal money transfers caused the Hang Seng Tech Index to drop 11%. Then the JP Morgan “uninvestable” report caused Nasdaq Golden Dragon China Index to drop a further 12% overnight.

Net effect of all this? As of Tuesday last week, the year to date losses on the Nasdaq Golden Dragon China Index was 34%. This was on top of a 43% decline in 2021.

The massive declines must have spurred the Chinese government to action. On Wednesday last week, Vice Premier Liu He sought to calm markets by saying there should be predictable regulation of internet “platform companies” and that China’s SEC will strive to reach an agreement with the US SEC on audit supervision as soon as possible.

This assurance propelled China tech shares vigorously in the other direction. The Hang Seng Tech Index high jumped 22%, its biggest daily gain ever, with Alibaba posting 27%, Tencent 23% and Meituan 32% gains in one day.

So are Chinese tech stocks non-investable?

In my view, they still are. China is the second largest economy in the world and Chinese companies will continue to benefit from rising incomes and wealth of Chinese consumers.

The problem though is the sensitivity of Chinese tech companies to the policy whims of the Chinese government. I choose the words “whims” deliberately, as policy changes are not phased in or calibrated. For example, overnight, a whole industry was obliterated (for-profit education sector), restricted (online games, fintech) or halted (approvals of new gaming apps).

So if we want to participate in the growth of the Chinese economy by investing in Chinese stocks, especially in the tech sector, we need to be able to stomach an added layer of volatility: the Chinese government. In other words, Chinese stocks are still investable, but their risk profile is higher because of the policy volatility of the Chinese government.

The good news is that the Chinese government, through the pronouncements of Vice-Premier Liu He, has recognised that policy certainty is important. In his words, there should be “standard, transparent and predictable regulation (of platform companies)”.

My Chinese tech portfolio suffered wild gyrations last week where Alibaba went below my average cost price of US$81 and Tencent approached my average cost price of HK$272, both of which I started buying about 7-8 years ago.? At US$115 and HK$400 respectively today, both are now comfortably above? my average cost prices. However, my more recent purchase, Meituan at HK$164,? is 37% down from my average cost price of HK$257.

To hopefully less volatile times for Chinese tech.

Happy investing!

Malek Ali ?- Founder,?BFM 89.9 - The Business Station . CFP professional.

Disclaimer:

This column is to help people who fear investing to experience the investment rationale of a long term investor in global stock markets. It is for informational purposes only and not intended as advice or recommendation to buy any stocks. Please consult a licensed professional adviser before making any investment decisions.