Why Chinese tech stocks were destroyed this week

What happened

Chinese regulators got to work over the (US) public holiday weekend, and the results of their work became clear as soon as US markets reopened on Monday. Simply put, Chinese tech stocks listed in the United States are destroyed.

Here is a list of this week’s walking casualties:

Image source: Getty Images.

So what

The bad news started with another company, which isn’t on this list – the recent IPO and China’s response to Uber, the ridesharing app. DiDi Global (NYSE: DIDI). The company came under fire over the holiday weekend with a Chinese order to suspend registration of new users while local regulators review its data security practices. But while the bad news started with DiDi, it didn’t end there.

China announced on Monday that it was investigating data collection and security practices at a set of Chinese companies listed overseas. China also announced a series of anti-monopoly fines on Wednesday. Digging into the details of the mergers and acquisitions that were finalized a decade ago, regulators have started imposing fines for failing to obtain prior approval of the merger from the government.

Granted, these fines are relatively low – only 500,000 yuan per incident, or about $ 77,000 each. On the other hand, however, it is the maximum fine authorized by applicable law. And when we consider that China is retroactively sanctioning these business combinations, we have to wonder if the next step would not be to change the Cut retroactively also authorized penalties. This could open the possibility of announcing more severe fines or more severe penalties, up to and including forcing companies to unwind their past acquisitions.

Now what

Indeed, China already seems to be moving towards stricter enforcement, announcing Thursday that it plans to institute “more regulation of Chinese payment companies”, for example.

Combined with independent US actions threatening to restrict trade in Chinese stocks, even as other sanctions continue to affect Chinese exports to the United States, investors in Chinese tech stocks appear to be caught between Scylla and Charybdis. . At the risk of mixing up metaphors, wherever they turn, this or that government seems to want to bite the invisible hand of the market that feeds it!

So what should an investor do in a situation like this? Recognizing that there are currently serious risks involved in investing in Chinese tech stocks, market giant BlackRock believes that while the risks are real, “investors are compensated for these risks” by the fact that some Chinese stocks are trading at reduced prices. To cite just one obvious example, after its liquidation, Baidu stock which is currently trading below 9 times earnings appears to be a real bargain based on analysts’ expectations of 14% annualized earnings growth. over the next five years.

Of course, that assumes that China allows Baidu and other tech companies to grow – and right now, that’s precisely what worries investors so much.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

About Alexander Estrada

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