For all the China lovers out there who think buying Chinese tech after the dip is a good idea – I have bad news for you – it’s just a dead cat bounce.
Don’t be fooled into thinking just because Chinese tech stocks became cheap, it’s a good entry point into corporate China.
It’s not.
The truth is that this isn’t your father’s China.
The situation has dramatically changed in the last 10 days so much so that I will say with conviction to stay away from Chinese technology stocks perhaps forever, almost, like it’s the black plague.
The place is totally done after China’s Chairman Xi Jing Ping was “re-elected” for his 3rd successive five-year term as the authoritarian leader of the East Asian nation.
Investors have also listened to my advice as Chinese tech shares have been thrown out with the bath water from Hong Kong to mainland China.
Many investors want no more part of China Inc. which is ironic since this was the place they couldn’t get enough of just a few years ago.
Why have investors been so jittery anyway?
Essentially, Chairman Xi packed the Politburo standing committee, the core circle of power in the ruling Communist Party of China, with his friends, poker buddies, and allies.
It was only just recently when China was tightening the tech environment before with examples littered around the country such as putting the shackles on the founder of ecommerce firm Alibaba (BABA) Jack Ma.
The Chinese communist party blocked his IPO of Alibaba’s finance arm Ant Group resulting in mass shareholder losses.
The backdrop has only soured significantly since then.
Under Xi’s leadership, China has implemented a raft of policies that have tightened regulation on the tech sector in areas from data protection to governing the way in which algorithms can be used.
JD.com (JD), Alibaba, and Tencent laid off thousands of employees in April due to tightened regulations and a slowing economy.
What are the rest of the unintended consequences?
A stronger dollar and weaker Chinese yuan just for starters.
It’s no secret that China hoovers up as many dollars as it can find, but in the meantime, the Chinese yuan is under relentless pressure from its underperforming economy, poor government policies, and gargantuan federal debt load.
Tech innovation will drop off a cliff.
Before, Chinese tech innovation meant stealing ideas and IP from Americans, but it will be harder now that this is a bipartisan issue in the US Congress.
China will also slow down the rollout of new tech products simply because they can’t acquire the advanced chips they need to build their products.
Just look at Huawei that was once counted as one of the most popular smartphones in Europe. Nobody buys their phones anymore because Google-based apps are banned on Huawei phones.
Most chilling of all, Chinese tech workers won’t be incentivized to take any risk in an environment that will penalize them by who knows what at this point.
That means many of these firms will be playing it safe yet be pushed by boss, CEO, and the communist party to beat America in the tech race for global hegemony.
In short, America has won and China faces a stark future of mediocrity in the tech space. They churn out a high volume of tech employees but industry can only develop so far by copying. It’s impossible to out-copy oneself or others into the lead.
It’s getting so bad in China that even investor Ray Dalio has stopped cheerleading for the Mandarins.
