The upcoming opinion piece will make several assertions and analyse various important issues surrounding the increase in regulation in the Tech sector in China. If one were familiar with politics in China, this was more or less expected, with the Chinese government prudently (or cunningly) choosing this period of stock market turmoil due to heightened interest rates to make key changes, so that the public finds it hard to dis-entangle the effects, viz: the market's fear of nationalisation and regulation and its impact on the companies' financial growth moving forward, versus the effect of general stock market weakness on the stock movement as a result of higher interest rates.
In the upcoming opinion piece which will more fully examine the issues in greater detail (with the relevant sources) than this executive summary, I will examine several key issues, ad seriatim:
1. The Nationalisation Thesis
The Chinese government is very likely to at least quasi-nationalise - covertly or overtly - the tech giants Tencent and Alibaba, as well as other potential targets like JD and Pinduoduo. Looking at historical precedent (in 2020, there was a spate of nationalisations), and judging by Xi Jinping's (the Chinese Premier) control-focussed character, I will examine why this is very likely as the CCP seeks to stabilise political control over the country (the Internet - and new media - poses the largest threat to the CCP's dominance and they have been cognisant of this since its inception). The CCP wants to nip any potential political threat in its butt (especially when Jack Ma candidly mentioned that the Chinese government is now "weak" as compared with corporate China in the light of these Internet giants' growth). The CCP might also want to accomplish social goals - eg, reduce gaming addiction, reduce debt rates and "bubbles", foster patriotism and love for the country, etc. Parenthetically, could this increased regulation and quasi or semi-nationalisation also be a floated balloon to see how strong the new US President Joe Biden is?
2. The Tango
The Chinese government was likely slapping fines on these technology giants to send a clear message to the public as to who is the boss; the focus here is to retain social control and avoid the destabilisation of Chinese society just like how the USSR collapsed from the inside as China watched in horror. It is important to note that these fines were minuscule in comparison to the Tech giants' revenue. Therefore, they are merely symbolic in nature. Could it be that the Chinese government wants to prevent jeopardising these companies' future and investor confidence because they are looking at - in the short-term - overtly having a large shareholding and/or stake in these companies and building up these companies to be emblems of CCP pride, spreading Chinese culture and Chinese products and services across the world ("the Overt Nationalisation Thesis")? Or could it be that there is some behind-the-scenes friction whereby company executives are displaying signs of resistance (in resisting regulation, however subtly) but the CCP is losing patience (to me this is unlikely, given how Pony Ma, as contrasted with Jack Ma, often toes the party line)? Or could it be that China is in essence nationalising these companies by having immense controls within the company (this is nothing new but perhaps the controls are being stepped up dramatically) but at the same time wants to give the false impression that they are not in-fact nationalising these companies and are - in theory - separate from the corporate governance of such companies? This slightly more moderate approach will not lead to repercussions from America. ("the Covert Nationalisation Thesis")
3. How will the suggested Nationalisation Process impact these Chinese firms' growth?
If nationalisation were to proceed in an overt manner (the Overt Nationalisation Thesis), there is likely to be increased support from the CCP, thus fuelling these companies' growth and also spearheading the country's GDP and economic indicators. Many nationalised companies have done well - better revenue growth than when they were "private" (and many of these new state companies were not doing too badly before the nationalisation decision was taken - ostensibly as a result of national interest). These humungous state-owned companies can then be a clear symbol of how Chinese communism and socialist control can marry capitalism in a symbiotic manner - and that Tech is not an exception. Even if nationalisation proceeds covertly (the Covert Nationalisation Thesis), it is likely that there will be greater support from the CCP in a quid-pro-quo manner since the tech giants fearfully respect Beijing's decisions and receive Beijing's approval at every stage. Nationalisation and greater state controls - whatever its form - can definitely be a win-win process eventually in terms of China's (and the companies' long-term growth within the context of China) and even lead to better corporate governance and less corruption (this is probably one the CCP's chief concerns). Of course, the main worry investors have will be that nationalisation might lead to decreased revenue growth and earnings visibility as a result of the company pursuing ethical and nationalistic agendas (the company often having to perform "national service", thus reducing its revenue as compared to what could be without nationalistic control) and as a result of how the Chinese government seems intent to prevent power being concentrated in a single company.
If one were to re-examine history closely, the ball started rolling when Xi Jinping took over as Premier. However, the key catalyst - which turned this into an avalanche and some would think a total fiasco - was very likely Jack Ma's characteristically blunt comments during the Ant IPO speech which resulted in the cancellation of the IPO the next day as a clear signal to Chinese society who remains in control.
Now that the process of nationalisation is likely to begin anytime soon (assuming that agents within these Chinese companies attending board meetings and giving suggestions, and so on, does not constitute nationalism), existing shareholders will have to patiently wait with bated breath and depending on their risk profile and assessment of the risk-reward ratio of this situation compared to other investments, either:
(1) take defensive measures if necessary (eg, downsizing, disposing or freezing their positions until there is greater clarity);
or (2) offensive measures if one thinks that this is a great buying opportunity and that nationalisation will put an end to poor market sentiment (eg, scaling up on long positions within these tech stocks).
Prospective shareholders who are eyeing investments in the Chinese tech sector are well-advised to thoroughly consider the political risks of such (an) investment(s) especially in light of other lower-risk investments in the Singapore and USA markets, which fully embody laissez-faire democratic principles and the rule of law (as well as (to a large extent as compared with China) non-interference in corporate affairs).
Indeed, with such political risks and uncertain regulatory climate, it is almost impossible to derive a proper forward-looking valuation (Discounted FCF, EPS growth, etc) of such companies and thus, it is no wonder that the market has been in a range for the past few days, waiting for greater clarity.
Disclaimer: The above constitutes the writer's personal view and does not constitute investment or financial advice.
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