China: The Contrarian Bet of the Year.

It has been a world wind for Chinese equities. First it was the Didi fiasco (stay tuned for my article on this fiasco) leading the popular Chinese ride hailing app to be taken off app stores in China. This lead to the ride hailing stock to fall a whopping 25% six days after its IPO in the NYSE. Many activist investors like famous short seller Carson Block of Muddy Waters Research and macro investor Kyle Bass have called out the NYSE and investment banks involved in the Didi IPO process for letting investors astray without alerting them about the risks involved in investing in a Chinese ride-hailing company. Many are also expecting class action law suites to take place from frustrated investors.

Then came the second gauntlet. China laid down the law on education technology companies. Some of these companies like TAL Education and New Oriental Education and Technology are listed here in the NYSE. Beijing came up with new rules where companies that teach the Chinese curriculum cannot make profits, raise capital from domestic or overseas capital markets, or receive investment from overseas investors. Basically these companies should operate like Chinese non-profits if they are teaching Chinese kids the Chinese school curriculum. Furthermore these companies are not allowed to provide tutoring during the weekend, public holidays, and school vacations. The goal of these reforms is to reduce educational costs so that there can be more equity where rich kids don’t get an unfair advantage over underprivileged kids and also that Chinese citizens can invest more in childcare and thus increase child births. Right after China announced these major reforms educational companies like TAL Education Group, Goatu Techedu Inc., and New Oriental Education & Technology Inc all saw their shares tumble by more than half their value, making more than $18 billion worth of value to disappear. Just to give you some context Larry Chen, founder and CEO of Goatu Techedu was worth $15 billion after his company went public in New York. But after these reforms were announced from the Chinese government thanks to his stock tanking his net worth fell to a “humble” $235 million. Some of these firms received investment from renowned investment firms like Tiger Global, Singapore sovereign wealth fund Temasek and Softbank.

The came many technology regulations. The biggest tech companies in China like Alibaba, JD.com, Meituan, Tencent, Pinduoduo, Kanzhun, and Full Truck Alliance all came under heavy scrutiny. All these Chinese companies have seen their stocks tumble since the Chinese government announced these tech reforms. The main goal of these tech reforms are to better regulate antitrust laws, enforce data security laws, and redirect investment to more strategic part of the Chinese economy like manufacturing.

My take is that these laws are nothing to be feared. Many financial pundits are calling this the “end of Chinese investment” and that no money will ever come to China. But this is actually not the case. Just after the crackdowns Chinese stocks saw $3.6 billion of inflows. Many fund managers like Dennis Hong of ShawSpring Capital and Ram Parameswaram of Octahedron Capital (both Altimeter alumni interestingly) have both expressed positive view of the CCP’s crackdown on Chinese investments. Going back in time, after President Teddy Roosevelt broke down monopolies like Standard Oil, the US economy, ingenuity, and prosperity began to flourish and thus creating the American Century. These reforms can be painful now but the end result will be a good one. This is a great time to snatch some top Chinese equity names like Pinduoduo (pioneer of social e-commerce), Alibaba, and Tencent. These are few of many names that will give you access to the world’s largest e-commerce, streaming, entertainment, and gaming market. Like Warren Buffet said “be fearful when others are greedy and be greedy when others are fearful”. Now is a great time to get your greed on some Chinese stocks.

But always do your research and understand the political risks of investing in China. Obviously avoid names in Ed Tech but it would be foolish to ignore big names that serve the world’s largest population and one of the world’s ever-growing middle and upper-middle class with enough money to spend.

What I say here is not investment advice. I write these for informational and educational purposes. Investing involves risk. Please consult a professional before investing.