Full takeover of Beijing and risk on Chinese equities listed in the US

We have been recommending avoiding Chinese stocks listed in the US for a few months now, not for reasons of company quality, but for reasons of political, commercial and technological wars between China and the United States. Joe Biden crossed the red line by attacking China on democratic and human rights. Here we are!

But not only. The Chinese Communist Party (CCP) is taking everything back in firm hands. Probably the CCP would have given Hong Kong more “freedom”, but the democratic DNA was too powerful for Hong Kong citizens, forcing Beijing to institute a national security law, suppressing all democratic rights and banning pro newspapers. democracy. The other trigger was the attempt to emancipate Alibaba boss Jack Ma and his speech in Shanghai in October 2020, a month before the IPO of the financial activity of his galaxy, Ant Group, with a strong criticism of the Chinese banking system. President Xi Jinping’s response was swift: Ant Group’s IPO was abandoned and Jack Ma was shelved for 2 months. Since that day, the CCP has taken over all the big groups and billionaire bosses that have become too powerful for the CCP. The Tencent, ByteDance and Meituan stand in check. The ban on cryptocurrency mining in China is part of this logic of a return to total control of the CCP.

Today, the CCP is attacking Chinese companies listed in the US.

With the example of Didi Chuxing (the Chinese Uber) and a few others, Beijing seeks to push Chinese tech companies to get listed in Hong Kong, Shanghai / Shenzhen or the Star 50, a Chinese index that wants to compete with the Nasdaq. With Didi Chuxing, Beijing highlights the risk to national security with the collection and management of private data. Like most Chinese companies listed in the US, Didi has almost all of its revenue in China. The State Council of the People’s Republic of China, the government’s watchdog, announced that the rules of the overseas listing system for domestic companies will be updated, while also tightening restrictions on the flow of cross-border data and cybersecurity.

It will become very complicated for Chinese internet companies or those which manage private data or information to be listed abroad.

Second, the new US SEC regulations, which mainly target Chinese companies, impose the choice of SEC-approved auditors and demand more transparency, which is contrary to Chinese laws. The problem of incompatibility between the new SEC regulations and Chinese laws was obvious; we had underlined it.

Two senators from the Banking Commission ask the SEC to investigate whether Didi Chuxing’s IPO deceived American investors. Didi Chuxing had raised $ 4.4 billion. It is recalled that the blocking of Didi Chuxing’s activities by Beijing happened a week after the 1time quotation. It must be examined whether Didi Chuxing was already in contact with the Chinese regulator before the IPO.

The US administration will add 19 Chinese companies linked to forced labor by Uyghurs in Xinjiang province and China’s military modernization programs to its blacklist. Joe Biden warned that there would be legal consequences for US companies and individuals who work directly or indirectly in Xinjiang province. Created by Donald Trump, this blacklist already includes some sixty Chinese companies linked to the People’s Army of China or which pose risks to the national security of the United States.

The Chinese Minister of Commerce has just announced that he will further verify foreign investment in China on the basis of national security, referring to the Measures for Security Review of Foreign Investment, focusing on the military, agricultural, energy and technological sectors.

The stock market interest in large Chinese groups should diminish with the control of the CCP and the virtual obligation to validate any expansion initiative abroad. Their growth will be restrained. The new dual economy circulation strategy will favor domestic Chinese companies listed in Shanghai / Shenzhen. The CCP is also taking control over the impact of technology on society such as the ban on people under the age of 18 from playing on PCs, consoles and smartphones between 10 p.m. and 8 a.m., affecting Tencent. The stock market performance of Alibaba and Tencent reflects this unfavorable situation.

Chute du Nasdaq Dragon China
Source: Bloomberg

The market capitalization of Nasdaq Dragon China (Chinese companies listed in the US) is $ 1.8 trillion. There is therefore a real risk for the current quotes of Nasdaq Dragon China companies, future IPOs and therefore for American and foreign investors.

The heyday of Chinese companies listed in the US is over.

And this is only the beginning before the heightened tensions on Taiwan; in his speech for the 100th anniversary of the CCP, Xi Jinping referred to reunification with Taiwan as an unwavering historical mission and common aspiration of the Chinese people.

Heravest SA is an independent boutique in investment advice, from top-down to bottom-up, and a provider of investment solutions.

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