What is happening?

The Chinese Government has taken extraordinary measures to keep its tech giants in check. It started with Alibaba and has now expanded to Tencent, DiDi, Meituan and many other.

"The spectre of state intervention into controlling the private sector has created a crescendo of panic selling," Sean Darby at Jefferies by Marc Jones for Reuters

Investors saw the value of their China-linked investments go down for a third day on Tuesday as heavy selling hammered China's top tech stocks and began to seep into the currency and debt markets. The recent rise in global indexes in China means money managers are more exposed than ever to Chinese equities.


State control and panic

The sell-off was prompted by a series of measures set up by governing bodies as Beijing seeks to reduce the dominance of some of its e-commerce, ride-hailing and private education companies. The Tuesday losses included a 9% drop in Tencent, as its social network WeChat paused user registrations while it underwent an upgrade "to comply with all relevant laws and regulations".

Whether the correction will last is an open question. Several investment banks and firms have advised their clients to hedge their exposure to China while some funds have liquidated their Chinese investments.

"ARK Invest, headed by celebrity fund manager Cathie Wood, said it had dumped shares of Alibaba , Baidu , Tencent , KE Holdings (BEKE. N) and Byd. The firm has also begun cutting stakes in JD. com and game-streaming company Huya (HUYA. N) since Beijing launched a crackdown on ride-hailing company Didi Global (DIDI. N)" by Marc Jones for Reuters


BENCHMARK'S TAKE

  • China's tech champions have grown at a very fast pace and have amassed an unprecedented amount of power and information through the millions of transaction they process
  • China is at a pivotal moment in its history, as it tries to grow its middle class, increase its GPD per capita past the $ 10.000 mark while preserving control over its economy and limiting the damages of its ageing population and risky loans

"As China’s growth slows, authorities are looking to strike a better balance between maintaining control and allowing some market-driven forces into the economy in order to sustain growth in the long term." by Evelyn Cheng and Weizhen Tan for CNBC

  • We therefor believe that the past, current and future crackdowns will be aimed at preserving control and maintaining social order. This means, limiting the power of its tech giants, restricting the information they can gather and requiring these to act in the best interest of the state (e.g. by paying higher wages)
  • On the brighter side, we do not believe that the state aims to break down its economy and tech champions. It needs them to provide higher paying jobs, train its workforce, compete at a global scale and grow its influence over the world (e.g. the TikTok phenomenon)
  • We therefor believe that patient investors should be rewarded for holding TIER-1 Chinese stocks. However, cautious investors should also closely monitor what is happening in Chinese debt markets, certainly as state owned enterprises are at risk of default

You can find our Chinese equities right here:

Portfolio
We have invested in over 45 stocks throughout North America, Latin America, Europe and Asia. Typically, we target fast-growing companies (U.S. and global) with a market cap between $ 1B and $ 100B.

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Ezreal Zhang on Unsplash.