China’s economic recovery has been remarkable over the past year, attracting investors and witnessing the soaring of Chinese stocks. However, U.S. investors have faced increasing risks, such as Beijing’s intensified scrutiny of its internet giants and a series of U.S. executive orders designed to restrict U.S. investment in certain Chinese companies.
The state of U.S.-China relations under the new Biden administration, along with the fate of recently implemented measures, raises important questions that U.S. investors must address. Despite this, strategists and major investors still advocate for China’s inclusion in long-term investment portfolios.
One recent cause of confusion arises from a November executive order that prohibits U.S. investment in companies affiliated with China’s military, according to the Defense Department. The ban’s extent, including whether it applies to subsidiaries, has left Wall Street perplexed. As a result, stock exchanges, brokers, index providers, and fund managers are rushing to comply with the order, which grants investors until November 11th to divest their shares but imposes restrictions on new purchases starting January 11th.
Notably, internet companies Alibaba Group Holding (BABA), Baidu (BIDU), and Tencent Holdings (700. Hong Kong) were exempted from being added to the list, contrary to the desires of some of the more hawkish members of the Trump administration. Investors anticipate that the Biden administration will maintain a tough stance on China, although they hope for a more consistent and collaborative approach. Consequently, the administration is expected to temporarily halt recently introduced actions for review.
In light of these developments, U.S. investors are faced with important decisions regarding their investment strategies in China. Despite the challenges, many continue to see potential in China’s economic recovery and believe that it should be a consideration for long-term portfolio diversification.
The Regulatory Risk Facing Internet Behemoths in China
Insights from Andrew Mattock, a Veteran Asian Investor
In a recent interview, we spoke with Andrew Mattock, a seasoned Asian investor, about the regulatory risks faced by internet giants like Alibaba in China. Here are the key highlights from our discussion:
Addressing Market Dominance
According to Mattock, there has been ongoing scrutiny on whether internet companies in China are leveraging their market dominance excessively. Complaints from JD.com about Alibaba’s pressure on merchants have persisted for two years. However, it’s important to note that the regulatory focus extends beyond Alibaba.
Regulatory Measures The regulatory landscape may prevent companies like Alibaba from acquiring majority stakes in other lines of business outside their core operations. Additionally, monopolization of payment data and cloud services might also be curtailed. Despite these measures, Mattock believes that the impact won’t be significant due to the entrenched business models of these companies.
Impact on Alibaba’s Growth Prospects While there may be some dampening of Alibaba’s growth prospects as a result of these regulations, Mattock argues that the company wasn’t expensive to begin with. Since experiencing a 25% decline since early November, Alibaba’s cloud and payments services have yet to be fully monetized. However, Mattock emphasizes that despite the setbacks, Alibaba’s valuation is appealing, as it generates similar cash flow as Amazon but trades at a lower price. It’s worth noting that retail investors in mainland China currently face restrictions when it comes to purchasing Alibaba shares.
In conclusion, while there are regulatory risks targeting internet behemoths in China, industry insiders like Andrew Mattock remain optimistic about Alibaba’s investment case. The regulatory impact is expected to be moderate, and investors can still find value in Alibaba’s undervalued position compared to its peers.
Edit: The above conversation has been edited and condensed for clarity.
Valuation Support for Dominant Companies
As a professional copywriter, I understand the concerns raised about the valuation of companies in the market. However, it is important to note that a company with a dominant position and trading at a blended 19 times forward earnings has significant valuation support.
Regulatory Risk for Internet Companies
One of the prominent internet companies facing regulatory risk is Meituan, a popular food-delivery company. While they have faced scrutiny in the past, Meituan operates on a winner-takes-all business model, capturing 80% of a market with exponential growth in smaller tier cities.
Despite the regulations, dislodging Meituan from its position is incredibly difficult. As long as the company focuses on generating productivity improvements rather than engaging in price gouging, they are expected to navigate the regulatory landscape successfully. It is worth noting that these regulations serve as healthy oversight for the industry.
Developing a Healthy Ecosystem
Policy makers are keen on fostering a healthy environment that benefits consumers and merchants alike. One way this is being achieved is through the provision of software tools that empower merchants to gain insights into their clients and digitize their back-end operations. Weimob, a holding company based in Hong Kong (2013), plays a crucial role in enabling small merchants to embrace digitization.
U.S.-China Relations and Restrictions
It is vital to contextualize these opportunities within the broader context of the deteriorating U.S.-China relations and the spate of restrictions imposed by the Trump administration. Despite these challenges, it is crucial to understand the evolving landscape of China and adopt a more pragmatic approach instead of solely relying on headline-driven narratives. In such a dynamic environment, embracing alternative perspectives is essential.
In conclusion, while there are concerns surrounding valuation and regulatory risks, it is imperative to recognize the support available for dominant companies and the importance of fostering a healthy ecosystem. By embracing a pragmatic approach and understanding the evolving dynamics of the market, we can navigate these challenges successfully.
The Drive for Self-Sufficiency in China
The tensions between the United States and China have ignited a sense of urgency in the pursuit of self-sufficiency in China. Huawei, one of China’s major technology companies, has started developing its own operating systems for phones, while other companies are exploring Microsoft-like word processing capabilities. The emergence of these new companies is supported by tax breaks and ample resources, as seen in the business section of the China Daily newspaper.
The Rise of Chinese Players in Industrial Automation
Notably, even in the highly competitive field of industrial automation, Chinese players are now stepping up to challenge their foreign counterparts. The growing talent pool within China has reached a critical mass, supplying innovative solutions that can take significant market share. Estun Automation, the leading robot manufacturer in China, is a prime example of this trend. With changing demographics and rising wages, local companies like Estun Automation can gain an edge through their competitive pricing and improved quality.
Diversified Holdings Defy Assumptions
Contrary to popular belief, Chinese companies are no longer solely funded by the government. Alibaba and Tencent, both widely known for their winner-takes-all business models, have diversified their holdings across various sectors. This diversified approach reflects a more balanced and flexible investment strategy among Chinese competitors.
Navigating Risks in U.S.-China Relations
The escalating tensions between the United States and China present new challenges for U.S. investors. Delisting and other risks have made it more complicated to invest in Chinese companies listed on U.S. exchanges. To address these risks, some investors have chosen to swap their U.S.-listed shares of companies like Alibaba and JD for their Hong Kong shares. This strategic approach helps mitigate potential negative impacts while maintaining exposure to these valuable investments.
Reimagining Chinese Equities and the U.S. Investment Ban
Introduction
The Dominance of Chinese Investors
While a U.S. ban on investing in Chinese stocks would undoubtedly be a major step, it is important to consider the probabilities. Chinese equities, it seems, may not necessarily need U.S. investors to flourish. The driving force behind the Chinese stock market will ultimately be the local investors themselves. With most mainland investors still facing restrictions when it comes to owning shares in Hong Kong, their focus will likely remain on the A-share market at home. Foreign opinions may become secondary as Chinese investors take center stage.
A Vast Market Potential
To fully grasp the scale of the Chinese market, one must comprehend its sheer size. The A-share market alone boasts over 4,000 stocks with a combined market value of $9 trillion. In comparison, Hong Kong’s market comprises around 2,000 stocks and $6 trillion. When considering U.S. American Depositary Receipts (ADRs), which consist of 240 companies with roughly $1.8 trillion, it becomes apparent that both A shares and Hong Kong listings present an opportunity set that dwarfs their American counterparts.
Assessing Risks: Xinjiang Cotton and Tomato Products
The recent announcement of the U.S. banning cotton and tomato products from Xinjiang has raised concerns about potential risks. However, in terms of investment implications, there may not be as much cause for alarm. While sanctions could potentially be imposed, their impact on the market may not be as substantial as one might expect.
The China Recovery: A Pleasant Surprise
Amidst the ongoing pandemic, China has experienced an unforeseen boost on the export front. This has primarily been driven by the surge in online shopping, with China being a major manufacturer of many of these in-demand goods. As a result, migrant workers are toiling day and night, injecting vital funds into the country’s second and third-tier cities. Additionally, the government has implemented a stimulus package aimed at bolstering investment levels. Alongside this, ongoing reforms in healthcare and technology further enhance China’s appeal to investors. It seems that China is ticking all the boxes for those who are considering investment opportunities.
Conclusion
While the potential U.S. ban on investing in Chinese equities may have far-reaching implications, it is important to recognize that Chinese investors hold the key to the market’s success. Their dominance, coupled with the vast opportunity set presented by A shares and Hong Kong listings, ensures that Chinese equities remain an attractive prospect. Furthermore, recent developments in China’s recovery from the pandemic, combined with ongoing reforms, only serve to strengthen its appeal. As we navigate these uncertain times, it is crucial for investors to consider the probabilities and weigh up the risks while keeping a keen eye on China’s ever-evolving investment landscape.
# Hebei Province Under Lockdown Amidst Surge in COVID-19 Cases: Potential Implications for Economic Recovery
Introduction
Hebei province in China has recently been placed under lockdown due to a significant increase in new positive COVID-19 cases, surpassing the alarming mark of 600 cases. This development has raised concerns regarding the potential impact on the ongoing economic recovery efforts.
Ongoing Surveillance and Preparedness
China continues to adopt a stringent approach towards managing new cases, prioritizing swift testing measures. The current situation is being closely monitored, considering the dynamic nature of the pandemic. Businesses, however, have demonstrated enhanced preparedness to tackle sudden interruptions in economic activities, if any, and exhibit improved operational adaptability, even in the event of another wave.
Identifying the Key Risk in the Short-Term
Valuation emerges as a crucial risk factor in the near-term perspective. An evaluation of diverse sectors indicates that the healthcare segment has witnessed a reasonable adjustment after the previous quarter. Conversely, IT exhibits signs of overvaluation, while staples demonstrate higher pricing. Identifying these areas of potential vulnerability, we have strategically adjusted our investment strategies by realizing profits from high-performing sectors and reallocating resources accordingly over the past few months.
Correction: Market Value Update
