Depending on your perspective, Chinese stocks like Alibaba, Tencent, JD.com, NIO and Xpeng, are either tenacious super-growers or worrying adversaries. These super Sino equities have followed the lead of US ecommerce, media and EV titans, but all gained scale at frightening speed. The wind appears to have been temporarily knocked out of their sails, though, by a combination of Chinese and US political challenges.
In the longer term, big Chinese tech stocks are nurtured, and constrained, by the ‘Great Firewall’. This expression, catchy and apt as it is, describes the conditions under which Sino tech companies have been insulated from the challenges of overseas competitors – and allowed to flourish within the domestic market, on two conditions. First, they must do what they are told, and second, they don’t become too powerful.
Alibaba taken down a peg
While these conditions may help growth-stage companies in some ways, they pose major risks for the strategic autonomy of companies who have made a name for themselves. For instance, the world’s third largest ecommerce site, Alibaba (HKG:9988), has (for now) had its fintech moment in the sun snuffed out by the Chinese state.
Alibaba wanted to list its sister company, Ant Group, on the Shanghai Exchange, in an IPO expected to be worth around $310 billion – the largest in history. But on the brink of listing its online payments service, Alibaba was denied by Beijing officials. One of the reasons cited for suspending the IPO was that its CreditTech service accounts for about 40% of its revenues, and Beijing was unhappy that state-owned banks had to underwrite the loans that Ant facilitated between consumers and banks. Further, Chinese officials were concerned about the macro-economic implications of adding greater debt load to an already highly leveraged economy, with the state-run Financial News publication saying any problems faced by Ant Group could prompt “serious risk contagion” in the Chinese economy.
Another explanation for the IPO being cancelled, are set out by reasonable speculations of Alibaba threatening Chinese state interests. Indeed, Kaiyunn Capital CIO, Brock Silvers, said that the IPO posed a “real challenge” to banking and brokerage interests. He added: “We don’t know how much of the regulatory pushback was instigated by banking interests, but it wouldn’t be an unreasonable supposition”. Back in 2008, Jack Ma compared Chinese state-owned banks to “pawn shops”, and said he wanted to make them “feel unwell”. Overall, then, they were due a pushback – because they heavily overstepped.
Hardly electric growth for EV entrants?
More recently, budding Electric Vehicle superstars, NIO (NYSE:NIO) and Xpeng (NYSE:XPEV), have been hampered by Chinese authorities’ decision to probe the investments and land use of EV contender, Evergrande Auto. While not directly concerning either company, the move is a stiff reminder that the Chinese state are proactive in their enforcement of the law, especially in strategically significant sectors – and those who have received state subsidies.
In the fast-rising EV sector, in which China looks set to have a considerable stake, it looks as though the state doesn’t just want growth, but growth on their terms. Between a surge of new entrants into the EV industry, and state interference, manoeuvrability and short-term upside could be quite limited for Xpeng and NIO – both of whom have enjoyed stratospheric growth until the latter stages of November.
Tencent has the state’s favour, for now
Looking ahead, Tencent (HKG:0700) may regret getting as cosy as it has done with the Xi Xinping cabal. Seen by many as the Chinese state’s gestapo with a cute logo, Tencent messaging platforms are infamous for passing on messaging data to the Chinese state – which have been used by police to identify religious minority groups. Far from fearing retribution from international authorities for their actions, Tencent’s main worry should be their current competitive advantage.
Not only are more middle-class, minority and pro-democracy citizens becoming increasingly wary of using the company’s QQ and WeChat platforms, but its strategic flexibility is highly constrained. For instance, its film and media offerings are very limited by censorship laws, which mean that any non-Chinese content being shown on the platform is often spliced and muddled beyond recognition or coherence (see: The Game of Thrones finale in China).
Further, their political friend may well be their undoing. While the company’s Founder, Pony Ma, currently sits on the National People’s Congress, one can’t imagine Tencent’s contribution to issues such as gaming and mobile addiction, will continue to go unchecked by Beijing authorities. With a focus on high productivity from a young age, encouraging China’s next generation to enjoy the myriad ideas of the online world, and extensive leisure time, puts at least some of Tencent’s products at odds with the Chinese state’s grand plan. As one blogger amusingly put it: “They’re like the Chinese who turned to growing opium in the late Qing [Dynasty].”
Sino stocks aren’t shown much love overseas
The main problem with instances of domestic hostility towards Chinese companies, is that many Sino equities have sought to base themselves in China due to the hostility they face in foreign markets – especially in the US. This hostility, heightened as it has been under the Trump administration, has reached a fever pitch at the end of November, with the Wall Street Journal reporting that the US House of Representatives will vote on legislation on Wednesday that could see Chinese stocks delisted from US indexes, should they fail to comply with audit regulations. Should the legislation pass, Chinese companies and their auditors would have three years to comply with inspection conditions, or face expulsion from exchanges such as the NYSE.
Over the last six years, more than 170 Chinese and Hong Kong companies have completed IPOs in the US, raising almost $60 billion between them. With China condemning any non-Sino oversight or regulation of its companies – even rules which all other countries comply with – this legislation could be a painful sucker punch, and Donald Trump’s dream goodbye kiss.
Following the vote, and Trump’s departure, the overseas outlook is hardly peachy for Chinese equities. Though the Joe Biden presidency is expected to herald a return to more ‘predictable’ trade and foreign policy, and a resurgence in emerging markets, BlackRock analysis suggests that stiff Sino-US competition will continue regarding tech, trade and investment. Similarly, US optics might demand that Biden maintains at least a modicum of Trump’s highly suspicious handling of Chinese affairs.
In light of recent Chinese state interference, and news the seminal US legislation vote, China’s most popular stocks have all shed value over the past few weeks. Down 7.99% from its post-pandemic high on November 16, JD.com stock is now 4.02% below its weekly high. Following suit, NIO and Tencent shares are now 9.50% and 9.92% below their recent, respective highs. Alibaba has fallen 14.9% since its high at the end of October, and 4.87% from its weekly high-point. Taking the crown for biggest drop, though, is Xpeng, with the volatile young EV stock now 21.76% short of its all-time-high, posted last Monday.
