Since March 2021, Chinese stocks have been at their peak. Everyone's favorite Alibaba, JD.com, Baidu from its highs fell by more than 30%. Shares of educational companies - Tal Education and New Oriental in general collapsed by more than 80%.
The reason for this decline is not only in the latest news on education reform and in huge antitrust fines on technology giants. It all started back in February 2021:
- The People's Bank of China was the first in the world to stop stimulating the economy from the consequences of the pandemic.
- The Chinese government has begun strict antitrust regulation of technology giants. The beginning was laid in April 2021 - Alibaba was fined a record $2.8 billion. This was followed by fines on other tech giants, including Tencent, JD and Baidu. Fines and antitrust regulation do not stop even now - Tencent was fined another 500 thousand yuan, and the car-sharing and taxi service Didi is not only under threat of a fine, but is also blocked throughout the Middle Kingdom.
- The big question is over the Chinese debt market. There is still no clarity on the debt obligations of the largest state-owned company China Huarong. If earlier investors were sure that the government would support the financial conglomerate in a difficult situation, now there is no such confidence.
- The confrontation and trade disputes between China and the United States, which began under Trump, continue. At a meeting in Tianjin this Monday, the parties reproached each other for violating trade agreements, which threatens to aggravate the conflict.
The most important thing is that after all the actions of the Chinese authorities, geopolitical risks have increased. JP Morgan urgently downgraded the ratings of Tal, New Oriental and Gotu, saying that the education reform will make the sector of Chinese educational stocks actually become uninvested.
Fears of a negative situation in the educational sector are automatically transferred to the shares of Chinese technology giants. If the fines continue, international agencies will also lower their investment ratings. This means that international funds will be forced to reduce the share of Chinese stocks in their portfolios.
The risks of trade disputes between China and the United States are added. If the conflict is not resolved, there is a high probability of continuing delisting of Chinese shares from American platforms. For example, in January 2021, the New York Stock Exchange delisted three Chinese companies: China Mobile, China Unicom and China Telecom.
At the same time, the economic situation in China does not give rise to negativity. The composite index of business activity remains above 50 and indicates continued economic growth. GDP growth rates are at doc-like levels, but due to a decrease in liquidity from the Central Bank of China, GDP data are coming out worse than analysts' expectations. The inflation rate in June fell to 1.1% and remains at low levels. Despite all the trade disputes and the risks of a pandemic, Chinese exports to the United States grew at the fastest pace since 2016. And the total PE of Chinese companies according to the Shanghai Stock Exchange now stands at 17.27, which makes Chinese shares very attractive compared to their global counterparts.
In addition, the Chinese yuan against the dollar is at the lows of 2017 - the time of the artificial devaluation of the yuan by the Central Bank of China, which was able to support the export of goods from the country.
If the Fed's rhetoric tightens, the Chinese yuan may weaken against the dollar, which will make Chinese goods more attractive on the international market.
Plus, the country has such reserves of rare earth and industrial metals that it is able to regulate the prices of copper, aluminum and zinc on world markets, selling them from strategic reserves in case of price increases.
In general, despite the geopolitical and domestic risks, the Chinese economy indicates strong prospects for continued economic growth, which will support Chinese stocks, which can show a significant increase in profit and revenue.
The reasons for such pressure on their own companies from the Chinese government are poorly explained. It is believed that the government wants to reorient itself from exports to the domestic economy of the country. To this end, strict antitrust measures are being taken in order to reduce the power of technology giants and tighten competition between companies in the domestic market. there are other theories. Jess Fried, a law professor at Harvard University, believes that the Chinese authorities are trying to reduce the price of Chinese companies traded in the United States to minimum values with the help of various prohibitions, which will allow rich Chinese investors to delist them cheaply and get excellent assets at a significant discount. As an example, the history of Qihoo 360 is given. In 2015, the shares of Qihoo 360 were bought for $9.3 billion by a group of private Chinese investors. delisting was carried out on the US stock exchanges, and in 2017 the company again became public on the Shanghai Stock Exchange and its capitalization was already $56 billion. Most likely, this cannot be done with Alibaba, JD.com and Baidu - they have too much capitalization, but with smaller companies such actions are quite likely.
Opinion
It is worth considering that in the market, a decline of more than 20% is considered as the beginning of a bearish trend. The negative situation on the Chinese market continues and the news on Chinese stocks recently does not please investors at all. Given that there has not yet been a corrective movement on the world markets, that the Fed and the ECB may tighten their ultra-soft monetary policy, and therefore the Central Bank of China will also raise the rate, and antitrust regulation in the Chinese market can be continued-investments in the Chinese market are now subject to high risks. But on the other hand, high risks are high profits. If you invest, then you should look at companies with high capitalization, without debts and with high cache generation. There are not many of them, vivid examples are Alibaba and JD.com. Otherwise, now investing in Chinese stocks on a broad front can lead to sad consequences - remember Tal and New Oriental.