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Stock Report No. 80 from 11.03.2022
China shares Xiaomi and JD.com: Between total loss and opportunity of the century
China has been one of the global growth giants for decades and thanks to the opening of the country for Western products and companies, it is the most important growth market for many companies from the USA and Europe. And in some cases, it is already the corporate focus, as is the case with the Volkswagen Group.
In Chinese, the word crisis consists of two characters: Weiji and Jihui, meaning opportunity and risk. This does not go back to the communist rulers, but rather recalls the wisdom of a Confucius. The counterplay of forces that nevertheless belong together, Jing and Jang. Every end means a new beginning, every risk brings opportunities.
And when looking at China, there are always two sides. The country is politically stable, but civil rights according to Western standards are not granted. Private economic activity is encouraged, but the state regulates everywhere. Separation of powers and the rule of law hardly exist. And yet the Chinese have many more freedoms and opportunities than they did 50, 30 or 20 years ago.
Yet China’s self-image is that China is the natural navel of the world, that China is naturally chosen to rule the world. That the Mongols overran China and ruled for centuries – a freak of history. That the Europeans, especially the British, brought the country to its knees militarily several times in the 19th century and were able to impose their will on the country with a handful of soldiers and merchants (who today would rather be called opium smugglers and pirates) – a brief period of irritation. And that the United States and the Soviet Union were the only two superpowers for 50 years – a historical interlude of no consequence.
China sees itself as a global power, a global center. And the West, led by the United States, has supported China’s resurgence. On the one hand, as an antithesis to the Soviet Union, because their common border, thousands of kilometers long, has always been good for conflicts and quarrels, and on the other hand, of course, because there was a lot of money to be made from it. Vladimir Ilyich Lenin once put it this way: “The capitalists will sell us the rope with which we will hang them. And as is so often the case, every statement, even if it sounds outrageous, contains a kernel of truth.
China’s rise as a world power was accompanied by the fall of the Soviet Union and later Russia. But the rising China thus also became the biggest rival of the world power USA, and it was not only under President Trump that the conflict increasingly intensified. A real economic war broke out between the U.S. and China. And under President Joe Biden, only the tone has changed; the U.S. continues to be tough on the substance.
4> Read Sunzi!
Part of this conflict is also about the sovereignty over the data. The Chinese philosopher and general Sunzi wrote “The Art of War” over 2,500 years ago, and the thirteenth chapter is about the use of spies, i.e., data acquisition. Sunzi wrote,“Spies are an extremely important element of war, for on them depends the ability of the army to move.”
Sunzi’s teachings are timeless. Napoleon had a copy that accompanied him on his campaigns, and at the Frunse Academy, the Soviet counterpart to West Point, “The Art of War” was required reading for every prospective officer.
The basic ideas are as relevant and correct today as they were 2,500 years ago. Even though today information is collected via drones, satellites and networks and analyzed by computers and artificial intelligence. Control over data is the key element in war, in business and on the battlefield.
That’s why more and more nations are demanding that global companies store and manage data locally. Microsoft was one of the first companies to set up such local data centers, including in Germany. So that the data of German citizens can no longer be sent around the world and stored in the U.S. or elsewhere and filtered and analyzed along the way by every intelligence agency in the world and every other halfway capable hacker.
The fight over the data caused the greatest tension, especially between the U.S. and China. Trump threatened to ban TikTok in the US. China is forcing its companies operating in the U.S. or listed on exchanges there not to give U.S. authorities any access to data. And the U.S., in a counterattack, is working to ban Chinese companies that don’t provide them access from U.S. exchanges.
And the companies? They’re caught between a rock and a hard place, with almost no choice but to get it wrong. Not a good climate for them.
China’s regulatory crackdown
Freedom of expression is one of the highest goods. In totalitarian systems, it is suppressed because it is also a powerful weapon against the oppressors. Propaganda is the antithesis, i.e. manipulated truths.
For a long time, China has dared the balancing act between more and more freedoms for its citizens, and therefore increasing prosperity, and at the same time holding on to a totalitarian regime. The Communist Party holds the reins tightly, and its power has been increasingly threatened. By increasingly self-confident citizens who enjoyed and used their new freedoms, as well as their increasing prosperity. There were more and more billionaires and companies with enormous power and the CP reacted. It put a short leash on entrepreneurs, enacted laws, and curtailed businesses. The impact was enormous, as Western investors withdrew more and more of their money, and as companies had their freedoms and growth opportunities curtailed, their stock prices continued to fall since last summer. After years of above-average returns, China stocks became money-losing machines.
And now Russia
In February 2022, Putin’s army attacked Ukraine. The West responded with unprecedented economic sanctions against Russia and Putin’s confidants, and while the war is still ongoing a new world order is crystallizing that is reminiscent of the Cold War. A new bloc will be formed between the USA and its allies, above all the Europeans and the Russians. Militarily and economically.
Putin as Russia’s ruler has proven to be absolutely unreliable and has gambled away all trust. Western corporations are turning their backs on the country in droves, the sanctions are excluding Russia from the world financial system and the country must now go its own way and do so with new cooperation partners. Supermarket shelves are empty, the ruble is plummeting, and the economy is plummeting by double digits. Bad for Russia’s citizens and the companies affected, but Russia’s economy hardly carries any weight globally. If it weren’t for its high energy reserves and the resulting exports of oil, gas and coal, Russia would hardly matter.
China is dithering. Understandably so. It rejoices as a “laughing third” over the tensions between Russia and the West and tries to extract maximum advantages from this situation. Thus, China does not publicly condemn Russia for its war of aggression against Ukraine and even admonishingly raises its finger in the direction of Washington. But it is also trying at all costs to avoid being drawn into the war and thus being targeted by the U.S. sanctions bazooka.
China is desperate to get cheap Russian oil and natural gas; the necessary pipelines have long been in operation. And it is also interested in taking a financial stake in Russian companies and projects in the energy sector where Western companies have just pulled the plug.
On the other hand, the U.S. and the EU are much more important to China than Russia. China depends on its economic relations with the U.S. and the EU, without which it cannot offer its citizens prosperity and prospects. And these are the (only) cornerstones that support the Communist Party’s claim to power.
Therefore, China does not openly side with Russia. But neither does it turn its back completely on the Russians or participate in Western sanctions against Russia. The danger of the West imposing sanctions on China as well, thus pushing it into an economic ice age, is omnipresent. And this comes at a time when new Corona outbreaks in China are leading to renewed hard lockdowns and stunting an already suffering economy.
JPMorgan, out of this mix, branded China “uninvestable
” in a study. On March 14, it advised clients to avoid China at all costs over the next 6 to 12 months. And they massively downgraded 28 leading Chinese Internet companies, including Alibaba, Tencent, Pinduoduo, Baozun, Meituan, Netease, Weibo, Dingdong or JD.com.
A hammer. After all, JPMorgan had seen “clear business opportunities
” here just a little less than a month earlier. Lousy timing. In both cases. After the positive commentary, the share prices continued to fall sharply, while after the negative commentary, the prices of Chinese shares rose rapidly. In some cases by 50% in one day.
However, this was not due to JPMorgan’s recent about-face, but to the about-face of China’s government.
End of the regulatory crackdown?
According to media reports, China’s government wants to loosen the reins on regulation again and thus give companies more leeway.
Furthermore, Chinese and U.S. authorities are said to be working on a joint solution to give Chinese companies listed on U.S. stock exchanges a new perspective on U.S. stock markets.
Both factors have caused great uncertainty among foreign investors in recent months and have led to massive outflows of funds from the shares of Chinese companies. The share price losses have also led to large losses of wealth among Chinese shareholders and thus increased resentment against the government.
Furthermore, China is facing a speculative bubble in the real estate market, where a lot of money from Western creditors is also on fire. Defaults on interest payments on bonds are accumulating, and China can hardly avert the impending collapse on its own and by its own efforts without the backing of the global financial system. The threat of Western sanctions against China alone could lead to a meltdown here. In this respect, any signal of easing is welcome and can lead to recovery rallies.
However, they do not change the fundamental problem. Putin’s war of annihilation in Ukraine continues, China cannot and will not distance itself too much from Russia, and therefore the sanctions sword continues to hover over China and Chinese companies. Even with regard to regulatory intervention, so far there is only lip service and the concrete implementation of the new “laissez-faire” remains to be seen.
Similarly, the negative impacts of the new Corona outbreaks persist, with bottlenecks in semiconductors and chips and disruptions in global supply chains. All factors that also have a massive negative impact on Chinese companies.
Beware of value traps!
On the other hand, the valuations are considerably lower than those of U.S. stocks and European companies. However, there is a reason for this. Their causes lie in the increased risks. And only if you as an investor are prepared to accept these risks and also assume that the supposed undervaluation will also decrease, only then should you invest in these stocks.
And we are talking here about the maximum risk, a total loss.
“A bargain that remains a bargain is not a bargain. “
On the other hand, there are no absolute certainties. Benjamin Graham once said that, in essence, investment and risk are synonyms. There is simply no return without risk.
“Investing is a game of probabilities, not certainties. “
So before seriously considering stock investment in China, you have to be completely clear about the risks. One must know what one is doing. You have to weigh the opportunities and the risks. And if, at the end of these considerations, you think the risks are justifiable, then of course you have to pick the right stocks, because not every China stock that has crashed is a good investment opportunity just because its price used to be significantly higher.
Therefore, we will now take a closer look at two China stocks and see how they have performed recently.
Xiaomi is an incredible success story. Founded in April 2010, Xiaomi Corporation is a smartphone manufacturer focused on affordable high-end smartphones and the development of MIUI, its own highly customized operating system based on Android. The core of the company consists of smartphones, IoT,…
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