The Chinese Tech Stock Enigma
$BABA $DIDI. You name it and you will have it all there. Before tonight’s market opening, we see nearly a 30% plunge in Didi Chuxing’s share price. And that is just days after IPO. Very disheartening indeed.
What gives? You ask. Why is it that whenever investors want to move on with their Chinese tech investments and get it to grow, such unnecessary macro pieces come into play that cause the investment to dive?
Well, this is where being astute and cognisant come in.
As an investor, you will need to develop a place of being sagacious in assessing the macro situation and perform either a discounting effect on the share price or price upwards because of the potential and the likely positive narrative that will develop from it.
For the Chinese tech stocks, there have been two fundamental factors weighing stock prices down.
One – transparency in practices.
The usual problem has been for that of transparency. About 10 years ago, companies like Muddy Waters have analysed the Chinese IPOs coming into America, and when they went digging into the company’s profile, they found that there were just too many red flags. For one of the companies that listed on the stock exchange, it was reported to have hundreds of millions of dollars in production/inventory. But when the analyst went down to the factory, the set up looked like a very scaled down version expected for a company boasting that figure. In short, the prospectus is not telling the truth and the audit firm that gave their green light failed to also do due diligence. Each one signing off on the dotted line to push the company into the public stock exchange!
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Two – the Chinese government’s style in running the affairs of the country.
It is all about the need for control. This is how the centralised economy system works. EVERYTHING needs to be under its order. The tech companies have been seen of late (thanks to Jack Ma) as taking a chunk of control for themselves through their data acquisition of customers’ information. And for these tech companies, their real competitive advantage lies in the monetisation of that data that they collect. To keep these companies in check, the Chinese government has put in regulations to ensure that they abide by them. This is their way of letting the people know who’s still BOSS.
Cryptocurrency and Bitcoin
This is no surprise therefore, that crypto falls under the radar of the Chinese government. Simply because – it is DECENTRALISED. This also means – NO CONTROL. Both these two terms are a blasphemy and will create issues going forward. So the recent move has been to prevent or curtail its spread and also the introduction of the digital yuan.
CONCLUSION
How should you approach this as an investor?
The general approach that errs on the safe side is to avoid Chinese tech altogether, given that so much uncertainty lies in them and substantial discounting is required.
But the real question should be – will these storms blow over? Will they emerge out of this crisis stronger than before? Will you miss out on such an opportunity?
A side point here - While we would like to use the Chinese word for “danger” which comprises the word for “opportunity”, it was correctly pointed out by a Professor of Chinese Language at UPenn that
[The word] “crisis” (wēijī) consists of two syllables that are written with two separate characters, wēi and jī. . . . While it is true that wēijī does indeed mean “crisis” and that the wēi syllable of wēijī does convey the notion of “danger,” the jī syllable of wēijī most definitely does not (italics added for emphasis) signify “opportunity.”
The jī of wēijī, in fact, means something like “incipient moment; crucial point (when something begins or changes).” Thus, a wēijī is indeed a genuine crisis, a dangerous moment, a time when things start to go awry. A wēijī indicates a perilous situation when one should be especially wary.
(https://workplacepsychology.net/2014/08/10/in-chinese-crisis-does-not-mean-danger-and-opportunity/)
When danger lurks, how will you respond as an investor?
Yours,
Chief Editor
BBA Market Perspectives
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