Hey There Income Hunters,
During a July 1 speech marking 100 years of the Chinese Communist Party, President Xi Jinping said …
Cue foreboding music…
“(China) will never allow any foreign force to bully, oppress, or enslave us …
Anyone who tries to do so shall be battered and bloodied from colliding with a Great Wall of Steel forged by more than 1.4 billion Chinese people using flesh and blood.”
Talk about throwing down the gauntlet.
Opinion polls worldwide immediately showed negative views of China spike.
Xi’s speech marked a major shift in tone and behavior that could be especially bad for Wall Street …
Take, for instance, the reaction to the DIDI Global Inc. (Ticker: DIDI) initial public offering.
Two days after the June 30 IPO, the Chinese government announced “anti-monopoly” regulatory moves against DIDI — the Uber of China — that will severely restrict growth.
That went over as you might expect …
Xi’s speech may just end up being the official start of a US-China Cold War …
And the end of a Wall Street love affair with the Middle Kingdom.
Power Shift in Foreign Direct Investment
In 2020, China passed the US in inflows by drawing $163 billion from outside its borders.
The US finished No. 2 globally with $134 billion.
Here are just a few high profile flows over the Great Wall …
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- JP Morgan (Ticker: JPM) spent $1 billion buying full ownership of its joint venture.
- Goldman Sachs (Ticker: GS) and Morgan Stanley (Ticker: MS) also became controlling owners of its Chinese securities ventures.
- PepsiCo (Ticker: PEP) spent $705mn on a Chinese snack brand.
- Tesla Inc. (Ticker: TSLA) ramped up its Chinese production.
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On top of that, Americans have been buying up Chinese bonds and the equities of cheap designers and fast growing tech companies for many years…
Well, China has different ideas about direct investment today.
A change in psychology was revealed when Xi appointed the Cyberspace Administration of China to act as a Chinese internet regulator in the mid 2010s.
Tech Is in the Crosshairs in the East and West
Once China announced the regulatory issue on DIDI, the Biden administration called on the SEC to investigate whether DIDI misled US investors ahead of the IPO.
The following week, US tech companies including, Facebook (Ticker: FB), Twitter (Ticker: TWTR) and Alphabet’s (Ticker: GOOGL) Google came under pressure from Hong Kong over doxxing, which is the publishing of private information on the internet.
The consequences of a regulatory battle are obvious — Chinese firms listed in the US will face regulatory pressure from both sides.
Risks to American Depository Receipts (ADRs)
China is serious about their anti-monopoly policy …
They created an anti-monopoly committee that recently issued guidelines increasing risks to foreign investors holding ADRs in tech companies’ wholly foreign-owned enterprises.
Beijing could theoretically force variable interest entities (VIE), who are recognized as legal entities subject to anti-monopoly policies, to breach their contracts with foreign-owned entities.
An example is what happened to Ant Group, the fintech firm spun out of Alibaba (Ticker: BABA). Last year, the company’s IPO was quashed and new oversights put in place in the wake of co-founder Jack public criticism of Chinese regulators.
There are currently 244 US-listed Chinese firms with a total market capitalization of around $1.8 trillion, or 4% of the market cap in the US stock market.
Investors may need to think twice about holding stock in companies that may not be allowed to grow….
The Tech Regulatory War Begins
An early skirmish is shaping up.
In December, the US passed the Holding Foreign Companies Accountable Act.
That legislation empowers the SEC to require foreign companies to disclose shareholder information and auditing records to the Public Company Accounting Oversight Board.
Meanwhile, China has enacted Article 177 of the Revised China Securities Law, which “prohibits foreign regulators from directly conducting investigations and collecting evidence” in China …and restricts Chinese firms from releasing documents related to their securities outside of China without approval from the China Securities Regulatory Commission.
Something has to give.
And Tesla (Ticker: TSLA) may be tested next …
TSLA: Political Pawn
There has been an increase recently in criticism of TSLA in mainland China newspapers and social media regarding quality and safety issues.
And China has already banned employees of state-owned enterprises and the military from using TSLA vehicles.
Now TSLA vehicles may also be prohibited from entering other “sensitive” areas of the economy.
Last month the government ordered a recall of almost all 285,000 TSLA cars sold in China to address an alleged software flaw…
Meanwhile, TSLA’s share of the Chinese market for electric vehicles fell from 23% in Q1 20 to 11% in Q2 21.
Is the State of China’s Economy Moving Far Left?
Let’s think …
With China’s economy carrying 180% private debt-to-GDP and wage growth and household income declining, why would they risk losing Western capital investment?
This is really important to watch for because this shift would be a global growth killer if they are inserting communist — or even socialistic — policies into their domestic economy…
Just a few years ago China was on the fast track to competing with the big boys in Big Tech.
Why did they abort the mission?
There’s only one answer …
The Communist party’s mission is to preserve its own power domestically.
When Jack Ma started criticising Chinese
regulations, it was over for him.
That was the real China staying with their game plan of wealth generation coming from state-owned cash cows.
Bring It Home
Here’s the bottom line:
Xi is taking total control of the economy, and his watchdog is the Cyberspace Administration of China.
The CAC is making a huge push to strengthen internal oversight of companies listed overseas, especially in the U.S., and to tighten rules for future foreign listings.
This is a geopolitical issue that needs to be monitored closely …
Regulations crush productivity and growth.
Stay tuned.
Live and Trade With Passion My Friends,
Griff