"China stocks implode" my inbox screamed this morning. Even our running coach was talking about it ("Did you see the Chinese markets?") at our 5:30 a.m. track session. The Hang Seng in Hong Kong is down almost 10% just since Friday. One of the main China ETFs here in the U.S.--the KWEB--is down 18% since then!
We actually spoke with Brendan Ahern, the CIO of KraneShares, which owns KWEB, about the worsening selloff on Power Lunch yesterday. He was quick to distinguish between China's sudden crackdown on tutoring firms, and its crackdown on big tech.
The tutoring clampdown--which sent shares of Chinese tutoring firms down 50% or more on Monday--is purportedly in response to China's massive demographic problems. Even after the Communist leadership dramatically relaxed the rules, Chinese parents aren't having more children. The high cost of education--including tutoring, which reportedly 70% of Chinese big-city high schoolers pay to receive after school hours--is said to be a huge headwind. So the government responded by forbidding tutoring on weekends and holidays and forcing the firms to become not-for-profits. One such firm, New Oriental, has now lost 90% of its market value this year.
Okay, sure. But this all comes as China has also been frenetically cracking down on tech firms at an accelerating pace since the Jack Ma/Ant IPO fiasco last fall. It seems that part of the issue is that the U.S. has been moving ahead with requiring more disclosure about Chinese listed stocks--hence the CCP's fury at Didi's New York listing last month, on its anniversary no less. (This excellent piece by Bob Pisani from March contains much foreshadowing of the current troubles.)
"Tech is different because it's really a sea change--the Chinese have said we need to control the data. All of you need to fall in line," explained Derek Scissors of AEI on The Exchange yesterday. The concern in China, he said, is that if Chinese companies list abroad they'll start following those countries' rules instead.
Bottom line, what does it mean for Chinese tech stocks? I asked Scissors about Alibaba, perhaps the biggest and most prominent one here in the U.S. He said it remains critically important to the Chinese, "so the downside risk is somewhat limited but so is the upside gain, because regulators don't want it to be that large and profitable." In other words, "it's too big to fail," he said, "but in China, you can also be too big to succeed."
Sounds...like a possible strategic advantage for the U.S., which is perhaps why today, the selloff in Chinese stocks hasn't bled through as much into our markets. The Nasdaq is most affected, down 1.4%, but the Dow and S&P are only off about half a percent. In fact, all three major averages are basically at record highs, while the KWEB ETF is down 7% today and has plunged almost 60% from its February highs.
Even Cathie Woods isn't sticking around--her firm, Ark Invest, has been quickly exiting its stakes in former highfliers like Tencent and JD.com. The stocks, she said in a webinar earlier this month, "have come down and...from a valuation point of view, probably will remain down."
Has the Chinese leadership gotten overconfident in its ability to both control China's companies and reap the needed rewards of rapid economic growth? I'll be asking Larry Lindsey this question later on today.
See you at 1 p.m!