Last Wednesday, July 28, Chinese financial regulators told big investors–banks and investment groups heavily exposed to China’s stock market–not to worry. China’s financial markets were sound and despite the fears engendered by the government’s crackdown on the country’s private, for-profit, education companies, the government was not looking to reverse decades of growth by companies in China’s private sector.
The meeting worked. Stocks of companies like Meituan (MPNGF), China’s dominant food delivery company (with ambitions to become a full-range e-shopping competitor) rose to $30.07 on the day from $26.00 the day before.
But the reassurance worked for only a few days. Today, August 3, for example, Meituan was back in the red, falling 4.48% to $26.95 to erase almost all of its “re-assurance” bounce.
Today, I’m selling Meitun and Naspers (NPSNY), a South African company with a huge position in China’s Tencent Holding (TCEHY) out of my Volatility (on my subscription JubakAM>con site) and Jubak Picks Portfolios, respectively.
Why?
Most obviously, because the Chinese government isn’t done. Today we have news of a media attack on the country’s video game producers, which means most prominently, Tencent Holding, down another 7.32% today. An article in the official Economic Information Daily, linked to China’s official Xinhua news agency, called out video games as “spiritual opium,” a particularly loaded piece of rhetoric given the Xi Jinping government’s focus on the “humiliation” of China by Western countries in the Opium wars that forced China to accept imports of opium from India. The article called for more regulation of the industry and specifically mentioned Tencent and its popular “Honor of Kings” game, as a waste of students’ time. Tencent, in an effort to catch up with the constantly moving goal line vowed to curb playing time for younger games and to bar in-game purchases for gamers under 12.
And because, from a more wide angle view, I think what we’re witnessing is something like a replay of the Cultural Revolution launched by Chairman Mao Zedong in 1966 (and that continued until his death in 1976.) The current campaign looks to be aimed at attacking huge problems in today’s China such as rising social inequality, a falling work ethic among the young (in the eyes of Communist Party officials, anyway), the potential growth of any competing voices to the Party (among entrepreneurs like Alibaba’s Jack Ma), discontent over the lack of marriage partners for young Chinese man due to decades of one-child directives, and the fear of future social unrest due to a slowdown in the country’s growth machine.
If this is the case, then it becomes very hard to figure out where the crack down will end. If Didi Global (DIDI) can be forced to reverse its U.S. IPO, then, for example, what about all the other Chinese stocks that trade in New York based on a fictional participation structure based on a holding company in the Cayman’s? If regulators can destroyed Meituan’s business model by requiring the company to pay its gig workers a minimum wage and to provide health insurance, what other business models are about to come unglued? (If you own U.S. companies where the business model depends on paying “independent contractors” a sub-minimum wage and no benefits, you might want to ask “Can it happen here?” and then, of course, there’s the related question “Should it happen here?”)
Didi Global was down another 2.89% today. Alibaba (BABA), the crown jewel in most China portfolios was off 1.35%.
At this point, buying a Chinese stock or even holding a Chinese stock isn’t an investment; it’s a speculation. You’re betting that you can predict the dimensions of China’s government policy.
Let’s be clear. There’s always an element of this in buying stocks in China. Investors and traders always have to ask, What’s the People’s Bank doing to do? Are regulators about to come down on mortgage lending? Are local government to be prevented (on paper at least) from doing real estate deals that trade land at a bargain price for revenue?
It’s just that right now, the speculative element is even larger than usual. So big that I’m selling rather than buying the dip.
Shares of Naspers are down 13.56% since I added them to my Jubak Picks portfolio on October 2, 2010. Shares of Meituan are up 110.05% since I added them to my Volatility Portfolio on February 20, 2020. (Which sounds okay until you remember that the postion was up 200% not all that long ago.)
I will be selling my position in the iShares Large Cap ETF (FXI) out of my Perfect 5 ETF portfolio tomorrow–and replacing it with another ETF that provides non-U.S. exposure without the China-specific risk.
Which, of course, leaves me with the question of what to do about my portfolio positions in Tencent Holding and Alibaba.
Full discosure: I own shares of Tencent Holding in my personal portfolio.
