When I added Alibaba (BABA) to my Jubak’s Picks Portfolio on April 29, 2022, and Tencent Holdings (TCEHY) to my Volatility Portfolio on my subscription site JubakAM.com on January 3, 2022, I thought two things were about to happen in China.
First, I thought that the People’s Bank would unleash enough stimulus to more than compensate for the slowdown in China’s economy.
And, second, I thought that we’d seen the end of the regulatory crackdown on China’s big entrepreneurial technology companies.
I got both trends wrong.
China’s economy has slowed to a degree that the People’s Bank alone hasn’t been able to reverse. Part of that is that the slump is deeper than expected due to the continued effects of China’s No-Covid shutdowns on the country’s economy. China’s economy barely escaped dipping into negative territory in the second quarter But a big part is that the central bank is constrained in how much cash it can dump into the economy without making inflation worse. The official year-over-year inflation rate hit 2.7% in July. That’s getting dangerously close to the official 3% target. Climbing inflation is one of the last problems China’s financial system, plagued with bad loans and a real estate crisis needs right now.
And regulators haven’t backed off as much as I projected. For example, Tencent has been hit hard by delays in getting government approval for new games. Chinese regulators paused approvals for new games in July 2021, as they sought to align the industry with Communist party views that children were spending too much time online. While it restarted gaming approvals in April, Beijing is yet to publicly sign off on any from Tencent. Under pressure from regulators, Alibaba has recently changed its secondary listing on the Hong Kong Sock Exchange to the primary listing for the company’s stock. In addition, Alibaba and Tencent have been forced to submit details of some of the algorithms used in their products to regulars investigating the potential abuse of these algorithms to invade user privacy (quite a mindboggling stance from officials of one of the world’s most intrusive surveillance states) and manipulate consumer choices.
At the moment I can find any upside to convince me to own Chinese stocks.
I’m selling Alibaba with a 6.64% loss since I added it to the portfolio on April 29, 2022. And I’m selling Tencent out of my Volatility Portfolio with a 30.81% loss since January 3, 2022.